Natural gas is an abundant and environmentally friendly fuel that’s already revolutionizing key global energy industries such as petrochemicals. And natural gas is a far more viable alternative to oil in the transportation sector than any of the widely hyped alternative energy technologies.
Less than a month ago, Noble Energy (NYSE: NBL), a Texas-based oil & gas producer, issued a press release that shocked the entire energy industry: it had made a HUGE natural gas discovery. According to Noble CEO Charles Davidson, “this latest major discovery for Noble Energy is easily the largest exploration discovery in our history.”
Size of Natural Gas Discovery
How much natural gas had Noble Energy discovered? Combined with an earlier find last year in the same general area, the discovery totals 25 trillion cubic feet (Tcf) of natural gas. To put this in perspective, 25 Tcf of natural gas equals twice the size of the British natural gas fields in the
Furthermore, the total proven natural gas reserves of the
In fact, Noble’s discovery is the world’s largest deepwater natural gas discovery of the past DECADE.
Location of Natural Gas Discovery
Noble Energy made this discovery in the
I don’t blame you for being incredulous. After all, we’re talking about a country that, since its founding more than 62 years ago in 1948, has been forced to spend 5% of its GDP importing virtually all of its energy needs (except for an eleven-year period between the 1967 war and the 1978 peace treaty with Egypt when it controlled oil rigs in the Sinai desert). Making matters worse, all of the Arab states except Egypt boycott Israel and refuse to sell them any oil or gas (at least directly).
The result is that Israel has been forced to scavenge for energy from a multitude of countries outside of the Middle East. For oil and natural gas, Israel has relied on Russia, Kazakhstan, and Azerbaijan and it has bought most of its coal from South Africa. An old joke goes like this:
Question: Why did it take 40 years for Moses to lead the Israelites out of
and into the Promised Land? Egypt
Answer: Because it took that long to find the only place in the entire
Middle Eastthat didn’t possess any oil.
Looking For Oil in All the Wrong Places
Now the LORD had said to Abram:
Get out of your country,
From your family
And from your father’s house,
To a land that I will show you.
I will make you a great nation;
I will bless you
And make your name great;
And you shall be a blessing.
I will bless those who bless you,
And I will curse him who curses you;
And in you all the families of the earth shall be blessed.
The Almighty will bless you
with blessings of heaven above and blessings of the deep that lies beneath
Asher is most blessed of sons;
Let him be favored by his brothers,
And let him dip his foot in oil.
John Brown was right, but unfortunately his company won’t benefit. The bible’s “blessings of the deep” apparently refer to Israeli deepwater, not wells located under Israeli dry land.
Details of Noble Energy’s Natural Gas Discovery
Let’s get back to the real winner in this biblical story, Noble Energy. Noble’s discoveries are located in the Mediterranean sea off of Israel’s coast in what is called the Levant Basin Province, a massive deposit of potentially 122 Tcf of natural gas stretching from the Gaza strip in the south to Cyprus in the west to Lebanon in the north. The specific sites within the Basin where Noble has made its discoveries are the Tamar and Leviathan gas fields, which can be seen by clicking the link to this map. Leviathan is the more recent and larger discovery with 16 Tcf of gas and Tamar has 8.7 Tcf of gas. Noble is partnered with three Israeli companies and their percentage interests in Leviathan are as follows:
Delek Drilling (Tel Aviv: DEDR.TA)
Avner Oil & Gas (Tel Aviv: AVNR.TA)
Ratio Oil Exploration (Tel Aviv: RATI-L-M.TA).
Leviathan is scheduled to begin producing gas in 2016 and Tamar should start earlier in 2013. Full-scale production at both fields probably won’t happen until 2020.
Is Noble Energy Up to the Job?
Some analysts question whether a relatively small independent energy company like Noble has the capital resources and technical expertise necessary to develop its massive Israeli deepwater discoveries. Noble’s market cap is only $15 billion, which is puny next to ExxonMobil’s $396 billion market cap. Gas production from Leviathan could equal 20% of Noble’s entire worldwide production, which might overwhelm the company’s management capabilities. Drilling the gas is only the first step; the next step is what to do with it.
There is enough natural gas in these fields to fulfill all of
Reports are that Noble is leaning toward the LNG option because it would provide exposure to Asian markets and is less vulnerable to sabotage. An LNG plant, however, can cost billions of dollars to construct and it is likely that Noble will need to take on partners to help shoulder the expense. Consequently, before buying Noble Energy, investors should factor into their valuation of the company the fact that Noble will probably not reap the full benefit of its 40% stake.
Tax Rates on Energy Production are Going Up Bigtime
Furthermore, there is uncertainty surrounding the tax rate
Still, higher taxes would make investing in Noble Energy and the other gas firms less attractive than otherwise would have been the case. Despite intense opposition from the energy companies involved, Prime Minister Netanyahu decided to adopt the Sheshinski report unaltered. The battle now moves to the Israeli parliament (Knesset), which is expected to vote on the tax recommendations in mid-April.
Other Ways to Invest in Israel’s Natural Gas Discovery
Besides Noble Energy, the only other U.S.-listed company currently involved in Israel’s deepwater natural gas discoveries is Texas-based Isramco (NasdaqCM: ISRL). The company is only a minor player, however, with less than a 3% stake in the Tamar and Dalit offshore gas fields. A larger potential player is Texas-based ATP Oil and Gas (NYSE: ATP), which is planning to acquire between a 30% and 50% interest in various offshore gas fields.
Effect on the Israeli Economy
Israel is a very small country, about the size of New Jersey. Such a country, which has historically needed to import all of its energy needs and spend 5% of GDP to do it, will obviously benefit greatly from this natural gas discovery. Some economists estimate that the natural gas will add $300 billion to the Israeli economy over time, which is 150% of the country’s entire GDP!
In addition, ending energy imports and possibly beginning energy exports could double Israel’s current account surplus and cause the Israeli currency (New Shekel) to appreciate in value. This currency appreciation will reduce inflation and help consumers, but could hurt the earnings of some Israeli exporters such as technology firms NICE Systems (NasdaqGS: NICE) and AudioCodes (NasdaqGS: AUDC). To reduce this currency risk, both Bank of Israel Governor Stanley Fischer and the left-wing Israel Civic Action Forum have suggested establishing a sovereign wealth fund and using some of the tax revenue from natural gas production to invest overseas, where it may have less effect on the New Shekel.
Lastly, there is fear that Israel’s new-found energy wealth may erode the nation’s entrepreneurial spirit. As the Greek philosopher Plato put it in his book The Republic, “necessity is the mother of invention.” A main reason that the Israeli people have been so innovative over the years is that they have been under constant military threat and economic boycott from their Arab neighbors, as well as suffering from a complete lack of domestic natural resources. The only way Israel has survived and competed in the global economy is by developing its people’s intellectual capital. It’s no accident that Israel has the second highest number of companies listed on the NASDAQ stock exchange (after the U.S. itself).
With its huge natural gas discovery, will Israel continue to be the innovative dynamo described in the books Start-Up Nation and The Israel Test, or will it grow lazy and inefficient like all the other oil states located elsewhere in the Middle East? Only time will tell.
Invest in the Natural Gas Story with the Help of The Energy Strategist
Nobody knows the energy markets better than Elliott and he is rip-roaring bullish on natural gas right now. In fact, natural gas is one of his top investment themes for 2011. In a recent issue of his newsletter, he wrote:
Natural gas is set to become a far more important fuel in the global energy mix in coming years. Gas is cheap, abundant and clean, making it an ideal solution to energy security, price and environmental concerns.
In addition, producing power from gas is a developed and efficient technology; integrating more gas-fired power capacity to the grid is a lot simpler than adding wind or solar capacity, making it an ideal bridge fuel.
To find out the names of Elliott’s favorite natural gas stocks, give The Energy Strategist a try today!