IPM to Buy $3 Billion of Natural Gas From Israel's Leviathan

Offshore Leviathan natural gas drilling site.
Albatross

Just days after the cabinet approved the revised framework accord for the natural-gas industry, the partners in the Leviathan field said Monday they had signed a major contract to supply gas to the privately controlled IPM power station, now under construction.

IPM agreed to buy 13 billion cubic meters of natural gas, at an estimated $3 billion, over 18 years.

The accord, which is contingent on the Leviathan partners moving ahead with the field’s development, would be the second big contract for the field. In January the partners agreed to sell up to 6 billion cubic meters to two power stations owned by Edeltech Group, another domestic electricity producer, in an 18-year, $1.3-billion deal.

Together with the revised framework, the two contracts increase prospects that Leviathan’s partners — led by Texas-based Noble Energy and Israel’s Delek Group — will move ahead with plans to put Leviathan into production at a cost of about $5 billion. A final investment decision, however, will only be made at the end of the year.

Observers have expressed concern that low global energy prices and the absence of significant export contracts could deter the partners. But on Sunday, Yossi Abu, CEO of Delek’s Group’s Delek Drilling unit, expressed optimism.

“We are determined and committed to advance development of the Leviathan reserve in order to bring natural gas to the Israeli economy by 2019. We are working to move forward with additional agreements to local power companies, industrial customers and others in the domestic economy as well exporting gas the countries in the region,” Abu said in a statement.

Reaction is the stock market was muted. Ratio, one of the smaller Leviathan partners, ended 2.1% higher at 29 agorot (8 cents), but Avner was up only 0.6% at 2.48 and Delek Drilling by 0.8% to 13.50.

Last week’s cabinet resolution amending the framework aimed to overcome objections by the High Court of Justice to the framework’s “stability clause,” which had guaranteed the gas industry a regulatory freeze of 10 or more years. The new framework effectively eliminates the clause.

Noble Energy’s shares have moved little since the cabinet resolution, possibly reflecting lingering doubts about whether it marks the final chapter in a protracted political and regulatory war over the gas industry. 

The influential financial website TheStreet reported last week that an analyst team at Barclays raised its price target on Noble by 24% to $41. The share closed at $35.88 in New York on Friday. 

But TheStreet quoted Tim Revzan of Sterne Agee CRT as being more skeptical. 

“A partial stability clause is only one bullish piece of progress, and not the final, court-approved solution necessary to drive project sanctioning, it is an important step that shows interested parties are back at the table, committed to finding a reasonable solution,” Revzan wrote, though Sterne Agee raised its rating on Noble to Buy from Neutral.

No price was reported for the IPM deal, although the imputed price works out to about $6 or $7 per million British thermal units. The buyer is required to buy a minimum amount of gas under the contract’s “take or pay” clause, with the price linked to the electricity production index and including a floor price. 

IPM has an option to reduce the amounts bought and instead buy from the tiny Carish and Tanin fields, which Noble and Delek are under government orders to enable to another supplier to compete with them.