snapshots

Mar 14, 2019 | 21:31 GMT

4 mins read

Israel: ExxonMobil Mulls an Offshore Bid, Signaling a Shift in the Middle East Business Climate

(Stratfor)
The Big Picture

To say that Israeli-Arab ties have been contentious may be an understatement, but now those ties are beginning to show signs of subtle improvement, even if a full normalization remains far off. But even the current improvements will have business consequences, with opportunities increasing since companies may no longer face Gulf Arab economic retaliation for investing heavily in Israel. ExxonMobil may be on the verge of putting the new reality on display. 

What Happened

ExxonMobil is reportedly exploring whether to bid on blocks in Israel's ongoing second offshore bidding round. The firm, which has held discussions with Israeli Energy Minister Yuval Steinitz regarding a possible bid, has until March 28 to submit a letter of interest and documentation to prequalify as an operator for a block. (Whether it has already done so remains unclear.) ExxonMobil would then have until June 17 to submit a bid on any of the 19 available blocks. Should it win in July, the company would become the first oil and gas supermajor to enter Israel's oil and gas sector.

What It Means

ExxonMobil will not take the decision to invest in Israel's oil and gas sector lightly. Western companies – from the oil and gas sector and others – have long had to balance their relationship with Israel against their relationship with Israel's Arab neighbors, particularly Gulf countries like Bahrain, the United Arab Emirates, Kuwait and, of course, Saudi Arabia. Western energy companies have feared that investing in Israel would limit investment opportunities in much larger, more lucrative Arab markets.

This means ExxonMobil is confident – perhaps due to outright Arab assurances – that entering the Israeli market will not spark such retaliation. ExxonMobil has multibillion-dollar upstream investments in Iraq and the United Arab Emirates, as well as similarly sized midstream and downstream investments in Kuwait, Qatar and Saudi Arabia. Its possible entry to the Israeli market may signal that Western firms in general need no longer fear economic retaliation by Arab countries as the latter seek to attract foreign investment so as to diversify their economies and reduce their reliance on the petroleum sector.

Background to an Ongoing Geopolitical Shift

Although Israel and the Gulf states have cooperated covertly for years, geopolitical forces are drawing them even closer. They share a mutual foe in Iran, and U.S. President Donald Trump is pushing both sides to collaborate on containing Iran. The United States is also leaning heavily on Saudi Crown Prince Mohammed bin Salman and other Gulf Cooperation Council leaders to accept a long-anticipated Palestinian peace proposal and help guarantee Palestinian participation in negotiations. Signs of these developments have emerged publicly in recent months, such as Israeli Prime Minister Benjamin Netanyahu's visit to Oman in October 2018 and the Nov. 26, 2018, reports that an Israeli Cabinet member received an invitation to attend a conference in Bahrain. Reports have also emerged that the United Arab Emirates and Israel have negotiated deals on cyber technologies.

Although Israel and the Gulf states have cooperated covertly for years, geopolitical forces are drawing them even closer.

Still, numerous factors will hamper a productive relationship between Israel and its neighbors in the Gulf Cooperation Council. An Israeli-Palestinian peace plan with realistic chances of success is unlikely to materialize during the Trump administration, meaning improving Gulf-Israel relations could cause political blowback in Arab countries. But less animosity between Saudi Arabia and Israel under Saudi King Salman and his son, Crown Prince Mohammed, may mean Western companies have decided that the business risks of entering the Israeli market have dropped enough to merit going forward.

Israel's Improving Energy Prospects

The entry of ExxonMobil or any other major oil company to Israel's offshore gas sector is a good sign for Israel regarding the long-term health of that sector. Major oil and gas companies have spearheaded a surge in interest in eastern Mediterranean gas in recent years. This has been on display in Egypt and Cyprus, where ExxonMobil and Eni have led the most recent charge. In February, ExxonMobil announced a major discovery in Cypriot waters. Even Israel's rival Lebanon has met with some success, with French supermajor Total entering its oil and gas sector. So far, just a handful of independent companies, like Noble Energy, have dominated Israel's offshore industry, since only they have been willing to take the risk of entering the country's market. Now, however, Israel appears poised to enjoy the same success as its Gulf neighbors in attracting supermajors.

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