Australia's Woodside Buys 30% of Leviathan Gas Field for $1.5b

Eran Azran
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Eran Azran

The partners in Israel's Leviathan offshore natural gas field announced yesterday that Australia's Woodside Petroleum would buy a 30% stake in the project, dealing a blow to Gazprom's ambitions to cement its position as Europe's dominant supplier and to expand in the liquefied natural gas market.

Woodside, Australia's biggest oil and gas firm, won the bidding to buy a 30% stake in Leviathan with a $1.5 billion offer in a deal that could be worth $2.5 billion, and that adds a major player to the LNG market in Europe, the Middle East and Africa. The payment of the additional $1 billion will be conditional on the future price of LNG in world markets, said Ratio Oil Exploration, a partner in the U.S.-Israeli consortium currently developing the field, in an announcement to the Tel Aviv Stock Exchange.

Gazprom, Russia's gas export monopoly, which supplies around a third of Europe's natural gas, had also bid for the project, which is expected to eventually export LNG to Europe and Asia. Other bidders included France's Total and China's National Offshore Oil Corporation, sources said.

The initial price values the entire reservoir at some $5 billion, though this could increase to $8.3 billion, based on changes in LNG prices. Initial production for Israel's domestic gas market is targeted for 2016, Woodside said.

"It's tough to overstate the significant effects this move will have on the Israeli energy sector and the economy in general," Ratio Chief Executive Yigal Landau said in a statement.

Analysts say the project could export LNG overseas by the end of the decade, and that it is ideally situated to serve both Europe's and Asia's growing LNG markets due to its location near the Suez Canal and major gas markets such as Italy.

"The Leviathan partners wanted someone with expertise in upstream and LNG marketing. This is an area where Gazprom has some but limited experience," said Catherine Hunter, energy analyst at IHS Global Insight.

Woodside's entry into the region will also add a private player to a market largely dominated by national suppliers such as Russia's Gazprom, Norway's Statoil and Algeria's Sonatrach.

"Strategic issues are likely to have featured in this decision, given that Gazprom is already Europe's primary gas supplier. It may have seemed more attractive to award the stake to a new entrant, which also has marketing expertise in Asia," Hunter said.

In the deal, Noble Energy, which will remain the upstream operator, will sell 9.66% of its 39.66% share in the field. Limited partnerships Delek Drilling and Avner Oil Exploration will each give up 7.67% of their 22.67% stakes. Ratio will sell 5% of its 15% stake.

After the deal is completed, Woodside will hold a 30% share; Noble Energy 30%; Delek Group another 30% via its two subsidiaries, Avner and Delek Drilling; and Ratio will remain with a 10% stake.

Diversification

The Leviathan gas field is located in deep water 130 kilometers off the Mediterranean coast near Hadera, and has estimated gas reserves of 17 trillion cubic feet (481 billion cubic meters ), which is equivalent to almost a year's worth of European gas demand and enough to cover Israel's gas needs for generations. Leviathan was the largest natural gas find of the past decade. It is to the east of Cyprus' Block 12 field, and west of the Tamar field. Until now, Texas-based Noble Energy was the main foreign operator in Israel's energy market.

"The entry of Woodside will bring additional international diversity to the Eastern Mediterranean area," Noble Chairman and CEO Charles Davidson said in a statement.

Leviathan's reserves could redraw the global gas supply map, and the Israeli government is keen to attract energy majors to invest.

"We intend to continue to encourage the entry of giant international corporations into Israel's energy industry in order to realize the potential buried off the country's shores," Israeli Energy and Water Resources Minister Uzi Landau said.

Woodside will be responsible for the export of the gas from the reservoir, while Noble will remain in charge of the local market. "The acquisition price is attractive compared with recent similar transactions, although geopolitical risks are higher," Bernstein Research said in a note.

The Leviathan gas field is not the only big recent finding in the eastern Mediterranean. Some analysts estimate total offshore gas reserves in the region are in excess of 100 trillion cubic feet, prompting interest in exploration in countries including Egypt and Turkey.

Despite the interest, experts say that developing the region's gas fields will be complicated because of border disputes and political conflicts.

Woodside seeks cheaper assets

For Woodside, the deal offers a welcome alternative to its domestic LNG projects, which have been dogged by spiraling costs.

Australia has some of the highest marginal costs in the world, at around $10 per million British thermal units.

"With rampant cost inflation in the face of an increasingly price-sensitive customer base, these large-scale, expensive projects look cumbersome and outdated in the context of intensifying global competition," French Bank Societe Generale said in a recent research note.

Woodside CEO Peter Coleman said the Leviathan deal was a significant step towards realizing an ambition to secure world-class growth opportunities and reflected the firm's LNG development capabilities.

"Acquiring an interest in these permits is an exciting opportunity to grow our portfolio in the emerging Eastern Mediterranean basin," Coleman said in a statement.

In May, Woodside was one of 15 companies, including majors such as Total, to bid on nine offshore gas blocks in Cyprus, which is jointly developing its gas exploration with Israel.

The agreement also allows Woodside to participate in further exploration opportunities in the 349-Rachel and 350-Amit Israeli offshore petroleum licenses, the company said.

The Australian firm's other three major LNG projects, Pluto, Browse and Sunrise, target Asian markets and have total contingent resources of around 25 trillion cubic feet of dry gas reserves and 640 million barrels of condensate, according to data on its website.

The firm has been trying to build its global presence to offset a jump in costs at Australian oil and gas developments, with its Pluto project coming in $940 million over budget.

Woodside said in October it had agreed to explore for oil and gas in Myanmar with South Korea's Daewoo International Corp.Shares in Woodside closed up 0.92% at A$34.11 yesterday, outperforming a 0.57% rise in the broader market.

Shares of Avner, Ratio and Delek Drilling rose 4.5%, 4.9% and 4.4% respectively on the TASE yesterday.

Drilling platform of the Leviathan natural gas field.Credit: Albatross

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