The New York Times - USA (2020-10-10)

THE NEW YORK TIMES BUSINESSSATURDAY, OCTOBER 10, 2020 Y B3

ENERGY | VIRUS FALLOUT

Chevron, the American oil giant,
wrapped up the acquisition on
Monday of a relatively small
Houston-based company called
Noble Energy, paying about $4 bil-
lion.
Until recently, the deal would
have been unlikely, if not unthink-
able — because what distin-
guishes Noble is the large natural
gas business it has built in the
eastern Mediterranean Sea, espe-
cially in Israel, an area that major
oil companies had until now
avoided.
Chevron’s move is the latest
milestone in a remarkable shift in
perceptions about a relatively
new region for the petroleum in-
dustry in the eastern Mediterra-
nean. Once a dead sea for the oil
industry, this area, reaching from
the Nile Delta in Egypt up to Israel
and Lebanon and around Cyprus,
has come alive with exploration
vessels, drilling rigs and produc-
tion platforms in recent years
thanks to a series of large natural
gas discoveries.
Those finds are drawing major
oil companies into the area, at-
tracted not only by the prospect of
further undiscovered resources
but by improving relations be-
tween Israel and its former foes
Egypt and Jordan.
“This is an area that looks as if it
could have the resource quality
and the scale to become a pretty
significant energy province,” said
Mike Wirth, Chevron’s chief exec-
utive, in an interview.
International oil giants previ-
ously steered clear of Israel,
partly, it has been assumed, to
avoid alienating large Arab oil
producers like Saudi Arabia. The
move by Chevron, which this
week edged ahead of Exxon Mobil
to become America’s largest oil
company by market value, indi-
cates that the days when Persian
Gulf states bristle about business
with Israel may be over. Recently,
the United Arab Emirates and
Bahrain established relations
with Israel with apparent Saudi
blessing.
“It is opening up the Israeli
market to the world,” Nati Biren-
boim, a former Israeli energy offi-
cial who is now a consultant, said
of Chevron’s arrival. “Everyone
knows when they bought Noble,
they bought Israel.”
There are no guarantees that
recent progress on energy and
other fronts won’t face setbacks.
Longstanding differences be-
tween Israel and its neighbors are
not forgotten; expansionist
moves by Turkey and its presi-
dent, Recep Tayyip Erdogan, to
claim some of the underwater
riches have alarmed its NATO al-
lies and recently prompted the
United States to deploy a massive
Navy ship at a base it shares with
Greece.
More than 20 years ago, Noble
helped put the region on the ener-
gy industry’s map. Delek Drilling,
an Israeli firm, brought the com-
pany to Israel to hunt for petro-
leum. The partnership, which be-
gan in 1999, has produced major
natural gas finds that not only re-
duced Israel’s dependence on im-
ported coal and oil but turned Is-
rael — with some helpful nudging
from American diplomats — into
an exporter with long-term con-
tracts worth an estimated $25 bil-
lion to help power the neighboring
economies of Jordan and Egypt.
“I think what Chevron sees is
the opportunity” to buy into “mas-
sive natural gas resources located
in the center of a region with a lot
of demand,” said Yossi Abu,
Delek’s chief executive and now
Chevron’s partner, in an interview.
Along with the drilling sites off
the coast of Israel, a major discov-
ery called the Zohr gas field, found
by the Italian energy company
Eni in Egyptian waters in 2015,
has drawn development in the
area. Total, the French oil firm,
and Eni have even extended the
hunt into the sea off strife-torn
Lebanon — although the first well
the partners drilled, this year,
turned out to be a dry hole.
From a geological point of view,
the eastern Mediterranean has
what oil giants like Chevron are
looking for: very large volumes of
gas, which many in the industry
view as likely to have a better fu-
ture than oil as climate change
concerns grow.
“It is a very attractive region,”
said Wayne Ackerman, a former
executive at Royal Dutch Shell
and an adviser on gas to Saudi
Aramco, who has studied the ar-
ea’s geology. “I am convinced
there will be more discoveries
there,” added Mr. Ackerman, who
now heads gas research at Rap-
idan Energy Group, a consulting
firm.
The energy business has been
shaken by plummeting demand
during the coronavirus pandemic
and worries about the viability of
fossil fuels. But the resources that
these big fields hold are unlikely
to be left in the ground, because
they are already earning substan-
tial revenues by powering the

economies of Israel and its neigh-

bors. Some of the fields in the re-

gion, including the largest Israeli

field, in which Chevron now holds

a nearly 40 percent stake, could

also be expanded relatively

cheaply for exports.

“Gas is an important part of any

future energy transition sce-

nario,” Mr. Wirth said. “Proximity

to growing markets with demand

is a real advantage for a gas re-

source.”

What Chevron is buying in No-

ble — very cheaply, because No-

ble’s shares had been pummeled

by the pandemic and worries

about the company’s high debt

and the industry’s future — is a

combination of a profitable re-

gional gas business and the oppor-

tunity to expand to serve markets

farther afield. Noble also has sub-

stantial shale-drilling properties

in the United States and some pro-

duction in Equatorial Guinea in

central West Africa.

Mr. Abu of Delek said he

thought the American company

would bring the capital, technol-

ogy and marketing clout to allow

further expansion of the gas fields

as well as new exploration. Delek

and Noble, along with Royal

Dutch Shell, also share a large find

off Cyprus, called Aphrodite, that

they have so far not succeeded in

developing.

The riches lurking beneath the

region’s waters have brought

their share of problems.

Turkey has so far been unable to

benefit from the prospecting be-

cause the gas fields are in zones

claimed by other countries under

the U.N. Law of the Sea Conven-

tion. It has responded by muscle-

flexing: In recent months, Mr. Er-

dogan has sent vessels to drill in

waters around Cyprus, including

in territory that the island’s gov-

ernment has already awarded to

companies like Eni and Total.

“It’s quite a novel way of apply-

ing pressure,” said Robert Morris,

an analyst at Wood Mackenzie, an

energy research firm.

Tensions rose in August when a

Greek warship collided with a

Turkish warship that was escort-

ing a survey vessel. Greece called

it an accident; Turkey described it

as a provocation. France, Greece,

Cyprus and Italy later took part in

military exercises involving ships

and planes off the Cypriot coast.

Turkey is not a signatory to the

Law of the Sea, and says its neigh-

bors have divided the waters un-

fairly.

“Their aim,” Mr. Erdogan said

in a recent magazine interview,

“was to confine our country —

which has the longest shore in the

Mediterranean — to coastline

where only fishing with a rod is

possible.”

Turkey’s actions have slowed

exploration work around Cyprus

— as has the coronavirus pan-

demic.

The wider region, though, is

likely to continue to attract inter-

est and investment, analysts say.

“There are just a few places in

the world where you can get into

large gas assets,” said Gerald

Kepes, an independent energy

consultant who has worked in

Egypt. “These are what big com-

panies are made for.”

Despite Turkey’s efforts, the

lure of gaining access to relatively

cheap energy has pushed former

foes like Egypt, Israel and Jordan

more toward cooperation than

discord.

Mr. Wirth said recent develop-

ments suggested that the region

was an “area where we can expect

to see regional ties improve in the

coming years,” a trend likely to

promote economic growth and,

consequently, demand for gas.

If such trends continue, there is

even the possibility of exporting

natural gas to countries in the

Persian Gulf, like Saudi Arabia,

that are rich in oil but poor in gas

needed for electric power and in-

dustry. There is also a longer-term

hope: that gas from the region can

help ease Europe’s dependence on

energy imports from Russia.

“I think when you’ve got a large,

low-cost resource base like this

proximate to large economies, we

will find ways to move the gas to

market in a manner that’s compet-

itive,” Mr. Wirth said on a call with

analysts.

Deal Could Unlock Israeli Energy Boom

TAMIR KALIFA FOR THE NEW YORK TIMES

TAMIR KALIFA FOR THE NEW YORK TIMES

A Noble Energy jacket platform

and support vessels off the

northern coast of Israel, above.

A gas facility in Ashdod, Israel,

left. A production platform in

the eastern Mediterranean Sea,

below. The Leviathan natural

gas field has very large

volumes of natural gas which,

as concerns over climate

change grow, is likely to have a

better future than oil.

By STANLEY REED

AMIR COHEN/REUTERS

WASHINGTON — An oversight pan-

el responsible for monitoring $500

billion in federal aid has become

stymied by disagreements about

a program to prop up struggling

state and local governments and

has failed to send a legally man-

dated report to Congress for

weeks.

The standoff over the Municipal

Lending Facility, which is operat-

ed by the Federal Reserve and

supported by the Treasury De-

partment, comes as talks between

Congress and the Trump adminis-

tration over additional stimulus

have stalled. Those talks have run

aground largely because lawmak-

ers disagree about whether the

federal government ought to pro-

vide more money to states and

municipalities, with Democrats

arguing for it and Republicans

against it.

The $2.2 trillion stimulus law

passed in March created a Con-

gressional Oversight Commis-

sion, which includes two Republi-

cans and two Democrats, to keep

tabs on some of that spending. By

law, it must issue a report to Con-

gress each month.

While the passage of the stimu-

lus legislation was overwhelm-

ingly bipartisan, the oversight

commission’s work has become

politically charged. A Democrat

on the commission recently ac-

cused his Republican colleagues

of stonewalling its work.

The dispute centers on whether

the Fed’s lending program could

be doing more to help lower bor-

rowing costs for states, cities and

other local governments.

“The commission has a legal ob-

ligation to issue monthly reports,”

said Bharat Ramamurti, the Dem-

ocratic commissioner and a for-

mer aide to Senator Elizabeth

Warren of Massachusetts. “I’m

disappointed that Republican

foot-dragging has caused us to de-

lay the release of the September

report, which reflects broad sup-

port for expanding the Fed’s state

and local lending program — in-

cluding from one of the Republi-

cans’ own witnesses at our recent

hearing.”

The Fed announced in early

April that it would set up a pro-

gram to buy municipal debt using

its emergency lending powers,

and the Treasury Department

agreed to insure the program

against defaults. The central bank

hired Kent Hiteshew, an expert on

municipal debt, to help devise the

program, which is run on a day-to-

day basis by the Federal Reserve

Bank of New York.

The program was set up as a

last-ditch option for local govern-

ments that could not borrow

money as they usually do by sell-

ing bonds. While it has been ex-

panded several times to make

more borrowers eligible, the pro-

gram offers loans at relatively

high interest rates, making it an

expensive option for all but the

hardest-hit states and localities.

So far, only Illinois and the Metro-

politan Transportation Authority,

which operates New York City’s

subway system, have used it, bor-

rowing a total of $1.65 billion.

Democrats and some econo-

mists have argued that the Fed

and Treasury should be more gen-

erous, offering lower rates and

longer payback terms.

The Fed, for its part, has

pointed out that the mere exist-

ence of the program has helped

calm the market for municipal

debt, so states and localities have

been able to sell bonds at ex-

tremely low interest rates. The

Fed is not supposed to supplant

willing private lenders, according

to the legislation that enabled its

emergency powers.

“Our mandate is to serve as a

backstop lender to accomplish

these objectives — not as a first

stop that replaces private capital,”

Mr. Hiteshew said last month at

the oversight commission’s hear-

ing. The program “has contribut-

ed to a strong and rapid recovery

in municipal securities markets.”

He added that state and local

governments and other municipal

bond issuers could issue securi-

ties with interest rates that are “at

or near historic lows.”

Democrats counter that the Fed

is doing more to help lower the in-

terest rates at which corporations

borrow money than it is for state

and local governments.

One of the Fed’s corporate pro-

grams buys bonds directly and is

akin to the municipal program. It,

too, charges high interest rates,

and, partly as a result, has never

been used. But the central bank

has a second program that buys

corporate debt that has already

been issued, either through ex-

change-traded funds or according

to a preset index.

That program was announced

early in the pandemic, when the

corporate bond market was strug-

gling. But it has bought bonds in

the months since, even after bor-

rowing costs for businesses

dropped sharply — something of-

ficials characterized as follow-

through on their promise. The

purchases have slowed to a trickle

in recent months.

The Fed and Treasury never es-

tablished a similar program to buy

up existing municipal bonds. If

one had been, it might have low-

ered already-low borrowing costs

in the municipal market, but that

might not do much to help govern-

ments that are facing the most

stress because their revenue has

tumbled or they are legally prohi-

bited from running budget

deficits.

According to a summary of a

draft of the September report re-

viewed by The New York Times,

some members of the commission

planned to call for the existing mu-

nicipal program to be broadened,

offering loans with lower interest

rates that can be repaid over long-

er periods. Another proposal

would grant state and local gov-

ernments more flexibility so the

money could be used for capital in-

frastructure projects, not just for

certain cash flow purposes.

The report is expected to be

structured in a way that offers

views of expert witnesses who

testified at last month’s commis-

sion hearing. Republicans in-

tended to offer dissenting views of

many of the recommendations

that called for making the pro-

gram more generous.

The municipal bond program,

like most of the Fed’s facilities, ex-

pires at the end of the year. Treas-

ury Secretary Steven Mnuchin

and the Fed chair, Jerome H. Pow-

ell, could choose to renew any or

all of them, but have not said

whether they intend to do so.

Senator Patrick J. Toomey of

Pennsylvania, one of the Republi-

cans on the commission, has sup-

ported winding down the munici-

pal program, saying that it has

served its purpose.

The unfinished September

oversight report has been lan-

guishing in Mr. Toomey’s office. A

spokesman for Mr. Toomey, Steve

Kelly, said that he hoped the re-

port would be released “soon” but

offered no timeline.

“The reports written by the

oversight commission require sig-

nificant collaboration and com-

promise,” Mr. Kelly said. “Right

now, the members and their staffs

are working through some differ-

ences of opinion.”

Clash on Municipal Loans

Slows Report on Stimulus

By ALAN RAPPEPORT

and JEANNA SMIALEK

‘Our mandate is to

serve as a backstop

lender.’

Kent Hiteshew, hired to help devise

the Municipal Lending Facility.

$1.65B

The amount given out under the

program, to only two entities.

Other points of view

on the Op-Ed page

seven days a week.

The New York Times

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