Leviathan Partners Sign Preliminary Deal to Export Gas to Egypt

Agreement with British BG Group could be worth about $30 billion, with deal expected to be signed by end of 2014.

File photo: Drilling platform at the Leviathan natural gas field.
Albatross

The partners in Israel’s giant Leviathan natural gas field say they have signed a preliminary agreement with British oil and gas company BG Group to negotiate a deal to export gas to BG’s liquefied natural gas plant in Idku, Egypt.

Delek Drilling, Avner Oil Exploration, Noble Energy and Ratio Oil Exploration would supply 7 billion cubic meters annually for 15 years via an underwater pipeline, the partners said in a statement Sunday.

This works out to 20% of the gas in the field.

The Leviathan natural gas field, off the Mediterranean coast, was the world’s largest natural gas discovery of the decade.

An energy source in Tel Aviv said such a deal would be worth about $30 billion – providing a windfall to Israel’s coffers from royalties. The source said the pipeline would be built by BG, and a final agreement was expected by the end of 2014.

The gas would be sent to liquefaction facilities in Idku directly via an underwater pipeline, much like the underwater pipe that currently brings gas ashore from Israel’s Tamar natural gas reserve.

The sides have yet to determine who would bear the cost of building the pipeline.

Such a deal would be the largest in Israel’s fledgling energy sector and would help the partners develop Leviathan, which holds an estimated 19 trillion cubic feet of gas (530 bcm) and is expected to go online in 2017.

BG said the Leviathan talks were one of several options it was considering to increase the supply of gas to its Egyptian plant. “While this nonbinding letter of intent with the Leviathan partners is a first step, it is very early days,” said a spokesman.

The company’s liquefaction facilities in Egypt have been dormant since the 2010 revolution, when Cairo decided that locally produced gas would be used only by local industry, and not exported.

The talks with BG – which exports to more than 20 countries – come after Woodside Petroleum, Australia’s top gas producer, in May ditched plans to take a stake worth up to $2.7 billion in Leviathan.

A source close to the partners called the pending deal “a victory of the regional export theory over the Woodside deal.” Woodside backed out after the Leviathan partners shifted their focus to exporting to regional buyers, as opposed to investing in liquefaction in order to reach far-flung markets.

Texas-based Noble Energy is the field’s operator with a 39.66% stake. Avner Oil and Delek Drilling, subsidiaries of Delek Group, hold a combined 45.34%, and Ratio Oil has the remaining 15%.

Delek and Avner last month raised $2 billion in an international bond offering to help fund Leviathan’s development.

The gas unit of Turkish fuel retailer Turcas is holding nonbinding talks with another company to jointly procure natural gas from Leviathan, while Leviathan’s partners have also started looking into selling gas through a pipeline to Cyprus.

BG’s first-quarter exploration and production volumes fell 4%, hit by output problems in Egypt, where the company’s LNG project failed to deliver any cargoes in the quarter.

Production in Egypt fell 35% compared with the fourth quarter, as the reservoir feeding its plant is in decline and the local Egyptian market took more supply, for which BG receives lower payments.

BG said Egypt’s government has not honored its agreements and is diverting more gas for the domestic market.