Hamas-Israel War Threatens Major Regional Energy Projects

• The ongoing conflict between Hamas and Israel has so far not disrupted global oil flows.
• Experts are now warning that there could be "a severe degradation of the investment climate" as well as serious energy flow disruptions if war breaks out along Israel's northern border with Lebanon and Iran becomes involved.
• But the NewMed takeover is not the only energy project likely to be disrupted by the Israel-Hamas war.

The ongoing Middle East conflict involving Israel and Gaza-based militant group Hamas has so far not significantly impacted the region’s oil and gas flows, exactly one month after Hamas launched deadly attacks on Israel. However, the risk of the war quickly spilling over and developing into a regional conflict remains high with Lebanon’s Hezbollah repeatedly warning Israel against escalating even as Israel claims to have cut the Gaza Strip into two and surrounded Gaza City. 

Experts are now warning that there could be "a severe degradation of the investment climate" as well as serious energy flow disruptions if war breaks out along Israel's northern border with Lebanon and Iran becomes involved. One such critical energy infrastructure under threat is the Arab Gas Pipeline (AGP). Gas shipments via AGP--which connects Egypt with Jordan--have been disrupted in the past by attacks in the Sinai Peninsula. AGP has a reported capacity of 234 billion cubic feet per year (640 million cubic feet per day).

Disruptions on AGP gas flows would hurt Jordan the most since the country imports more than 90% of its energy needs and relies on gas deliveries via Israel and Egypt. Jordan is home to a large Palestinian population, and strikes on Gaza have worsened tensions and social unrest in the country. AGP currently ships 44 Bcf of natural gas annually from Egypt to Jordan.

But Jordan is hardly the only country that would find itself in trouble if AGP gas flows were interrupted. Egypt relies on Israeli gas imports to meet some of its domestic demand especially in the summer cooling season, as well as for re-exports that have become an important source of scarce foreign currency. Indeed, this is not a hypothetical scenario:  Israel's suspended production at Chevron Corp’s (NYSE:CVX) Tamar gas field on Oct. 9, shortly after its war with Hamas began. Israel redirected supplies through a pipeline in Jordan, rather than a direct subsea pipeline to Egypt. Related: LNG And Offshore Energy Projects Face Delays As Nickel Prices Soar

Obviously, shutting down the Tamar gas field has also been hurting Israel’s coffers. Israel--the second-largest natural gas producer in the Eastern Mediterranean after Egypt–has been exporting 70% less natural gas at a cost of around $200 million a month since the war broke out.

Energy Projects In Limbo

On a more granular level, several energy projects in the region are already facing delays or cancellations as the war grinds on.

Last month, British oil and gas multinational BP Inc. (NYSE:BP) reassured investors that its $2B deal with Abu Dhabi National Oil Co. (Adnoc) to jointly buy a 50% stake in Israeli gas producer NewMed Energy (OTCPK:DKDRF) remains on track, despite Israel’s ongoing war with Hamas in Gaza. BP's head of gas and low-carbon energy Anja-Isabel Dotzenrath told shareholders at the company’s investor day in Denver that they remain "very optimistic" about the deal. The two companies are reportedly weighing on whether to improve their initial offer. NewMed Energy (OTCPK:DKDRF) is the majority shareholder and main operator of the giant Leviathan Natural Gas Field with a 45.3% working interest, while Chevron Corp.(NYSE:CVX) and Ratio Oil Corp. have a 39.7% and 15% stake, respectively.

But that reassurance does not necessarily mean the deal is close to being consummated. 

The deal was thrown into question after an independent panel appointed by NewMed recommended raising the asking price by 10%-12%, or as much as ~$250M, which might seem like stretch considering the company currently has a market cap of $2.9B and $87 million in cash but $1.73B in debt. 

Meanwhile, reports have emerged that executives at BP and Adnoc are anticipating further delays on the deal until the political situation improves. Experts are worried that a surge in civilian casualties could make it politically untenable for the companies to proceed, with the death toll in Gaza reportedly in excess of 10,000. Israeli Prime Minister Benjamin Netanyahu has forged an emergency government to direct war against Hamas, and his defense minister has vowed to wipe the militant group "off the face of the earth."

NewMed and its two partners discovered the Leviathan Natural Gas Field in the Levant Basin Province in 2010. The gas field straddles the sea borders of Israel, Lebanon, Palestine, the Republic of Cyprus and the Turkish Republic of Northern Cyprus. With 22.9 trillion cubic feet of recoverable gas, Leviathan is the largest natural gas reservoir in the Mediterranean, and one of the largest producing assets in the region.

In an ironic twist of fate, BP itself has become the center of takeover speculations with its latest spate of poor results making it seem vulnerable in the current wave of consolidation in the oil and gas sector. However, the company has dismissed the rumors, with interim CEO Murray Auchincloss telling the Financial Times, "I don't feel vulnerable, in fact, I feel quite confident." 

Lebanon’s Gas Quest In Jeopardy

But the NewMed takeover is not the only energy project likely to be disrupted by the Israel-Hamas war. Back in August, French energy group TotalEnergies (NYSE:TTE) set the first drilling rig at its location in the Mediterranean Sea off Lebanon’s coast near Israel’s border with the country looking to commence operations in search for gas. The cash-strapped nation hopes that future gas sales could help the country pull out of its deep financial crisis that has seen the local currency lose more than 98% of its value.

"The arrival of the equipment marks an important step in the preparation of the drilling of the exploration well in Block 9, which will begin towards the end of August 2023," TotalEnergies said in a statement. TotalEnergies leads a consortium of energy companies working on the offshore project, which includes Italian oil and gas giant Eni S.p.A. (NYSE:E) as well as state-owned QatarEnergy.

The drilling operations came after a landmark U.S.-brokered agreement last year that saw Lebanon and Israel establish a maritime border for the first time ever. Back in May, Lebanon’s Energy Minister Walid Fayad said they hope to determine whether the exploratory block has recoverable gas reserves by the end of the current year. 

Unfortunately, the war is very likely to make cooperation between the two countries almost impossible, with Lebanon being home to Israel’s arch-enemy, Hezbollah. Israel has been shelling southern Lebanese towns in response to rocket attacks by Hezbollah.

By Alex Kimani for Oilprice.com

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