Gas Shares Rally as Leviathan Partners Strike First Gas Deal

Agreement with private power venture could be worth up to $1.3 billion, but gas framework foes dismiss deal as spin.

Offshore Leviathan natural gas drilling site.
Albatross

Israeli energy shares rallied Sunday after the partners in the Leviathan offshore natural gas field said they had signed their first agreement to sell gas from the field. In addition, Noble Energy said an agreement with its partners to develop Leviathan could be in place by the end of 2016.

The partners said Edeltech Group and Zorlu Enerji, its Turkish partner, agreed in principle to buy about $1.3-billion worth of gas over 18 years, or a total of 6 billion cubic meters of gas.

However, the sale is contingent on the Leviathan partners committing to make their final investment decision on Leviathan – which is not yet in production – by the end of this year.

Keeping to that deadline was the crux of the message Noble issued earlier in the day, when it said it would meet the year-end deadline as long as all regulatory approvals are in place. That would enable the first natural gas from the field to reach markets by the last quarter of 2019, said Bini Zomer, Israel Country Manager of Noble Energy.

“There’s no doubt that the gas and oil industry is facing many challenges,” Zomer said in a statement. “Despite those challenges, Noble believes the Leviathan project can move forward based on domestic and export opportunities, and because of the positive climate created by the natural gas framework.”

Energy shares soared on the Tel Aviv Stock Exchange, with Leviathan’s Israel partners leading the way: Delek Drilling was up 5.55% to close at 11.80 shekels ($2.99), Avner ahead 5.4% to 2.31 shekels and Ratio up 5.7% to 26 agorot.

The news comes at a sensitive time for the gas partners. Noble said last week it was slashing global capital spending as oil prices are at their lowest in years, cutting revenues and profits. That has cast doubt about the Texas-based company’s ability to cover its share of Leviathan’s approximately $6 billion development budget.

Meanwhile, Israel’s High Court is due to hear four petitions filed by groups seeking to block the gas framework agreement the energy companies reached with the government last year. The controversial agreement puts into place the final elements of Israel’s regulatory regime for the industry and was supposed to clear the way for Leviathan to be developed.

Also Sunday, energy activists dismissed the news of the agreement with Edeltech and Zorlu Enerji as a public relations maneuver designed to influence the court.

“It seems the season of spin is at its peak, seemingly ahead of the High Court deliberations that are taking place this week over the gas framework. The gas monopoly companies have very loudly issued a statement about an historic agreement – which clearly doesn’t include any commitment,” said the Gas Campaign, which opposes the framework. Another protester, Erez Zadok, agreed, warning that investors were being misled by the announcement.

In fact, Edeltech and Zorlu Enerji will be able to adjust the quantity they buy until the date they begin to receive gas, in accordance with the size of the plants they build. The price to be paid will be linked to the cost of electricity generation as set by Israeli regulators.

Thus, the $1.3-billion estimate is based on Edeltech and Zorlu acquiring the maximum amount set out in the contract, the Leviathan partners said.

Edeltech and Zorlu are planning to build two plants and are partners in a plant operated by Dorad Energy as well as the Ashdod and Ramat Negev cogeneration plants.

With estimated reserves of 622 billion cubic meters, Leviathan is slated to begin production in 2018-2020 – although that timetable looks ambitious – and supply billions of dollars’ worth of gas to Egypt and Jordan, and possibly Turkey and Europe.

The partners have memorandums of understanding with the BG Group to ship gas to it to Egypt and with Jordan’s electric power company. An agreement with a Palestinian utility that was planning to build a plant near Jenin was canceled.