Alex Brummer

Alex Brummer

By Alex Brummer, City Editor of the Daily Mail

THE PROPOSED £47billion takeover of BG Group (the former exploration arm of British Gas) by Shell may appear to have little to do with Middle East politics. The main debate in the City of London has been about the fall in the oil price (it has tumbled 75 percent over the past 18 months) and whether the deal now makes sense for Shell and BG investors who vote on thedeal later this month.

But it is not just the Shell board and BG that have been anxious to get this deal done. On 17 December, amid political controversy at home, Benjamin Netanyahu’s government in Israel finally signed a deal with an American led oil partnership to develop the offshore Leviathan oilfield. Netanyahu has described the deal with the US explorer Noble Energy and Israel’s Delek Group ‘as a gift from God’ and invoked national security concerns to bypass Israel’s competition rules.

Opponents, who have petitioned the High Court to reverse the contract, argue that the environmental and economic implications of the deal need to be looked at “in the face of the huge monopoly of Delek Group owner Yitzhak Tshuva and Noble Energy”.

The campaign against, led by Meretz, the secular, left-leaning party, does have some weight.

One of the great criticisms of the Israel economy,made by the global monitors such as the International Monetary Fund and OECD, is that Israel’s wealth is too concentrated in the hands of a few wealthy families. The gas deal will, if manything, underpin that wealth and control.

The way the Netanyahu administration has structured the transaction also has strategic implications. The Leviathan field is estimated to contain some 22 trillion cubic feet of natural gas which, even at presently low world prices, has a value of $120bn. The partners in the deal, Noble and Delek, are already producing gas from the smaller Tamar field, which supplies up to half of Israel’s current electricity needs.

The latest transaction reportedly has the full support of the Obama administration in Washington.

In the recent past (notably over the Iran nuclear deal), such considerations have been brushed aside in Jerusalem.

The strategic value of the deal is in the detail.

Most of the output of the Leviathan will be exported via BG International’s gas liquefaction facility in Egypt over 15 years. It will therefore underpin economic relations between Jerusalem and Cairo and create jobs and income for the Idku refinery in Egypt that has been largely idle.

The value of this element of the deal has been estimated at $30billion. Jordan will also be a beneficiary of exports from the Leviathan field.

This is where it all becomes more complicated.

The Egyptian facility, which will handle most of the gas, is owned by BG, which has extensive natural gas facilities across the region. In Shell’s offer document for BG, distributed to shareholders, the new prospective owners make no mention of the Middle East among the countries and regions on which it intends to focus. BG, however, is committed to building a single pipeline to Egypt from Leviathan and the Aphrodite reservoir in Cyprus.

It recently bought Noble Energy out of its 50 percent stake in the Aphrodite discovery.

By pressing ahead with the Leviathan contracts, before the expected Shell takeover of BG, the Netanyahu government may be seeking to insulate itself from further delays caused by the uncertainty of the takeover. It also risks, however, that Shell may decide to dispose of its noncore interests, putting future arrangements for Leviathan in jeopardy again.

The political controversy in Israel is unlikely to go away. Opposition leader Isaac Herzog has described the use of national security provisions to push ahead with the contracts as “a cynical ploy that takes advantage of our security situation”.

The sharp decline in the oil and natural gas prices is having a dramatic effect across the whole Middle East and not just Israel. Among the OPEC oil producers, it has pitted Iran – which wants to pump more oil now that sanctions are being eased – against Saudi Arabia, which would like to restrict production this year, in the hope of putting a floor under the oil price.

If the oil price were to continue to fall to $20-a-barrel, as Goldman Sachs has forecast, then the main Gulf oil producing states would be $494bn poorer and would be required to sell extensive assets to meet budgetary shortfalls.

Israel’s natural gas may be less valuable at present than it once hoped. But it does provide the Jewish state with a degree of energy security that once seemed impossible, at a time when the oil rich states around it are struggling.

Nevertheless, there will still be some anxious days ahead as the proposed Shell-BG deal is settled and the future development of the Leviathan discovery could again be rendered uncertain.