Leviathan Partners to Compete in Tender to Supply Natural Gas to Cyprus

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Drilling at the Leviathan natural gas field off the Mediterranean shore. Credit: Courtesy Albatross

Avi Bar-Eli and TheMarker Staff

The partners of the Leviathan natural gas field said on Wednesday they would be competing in a tender to supply energy to Cyprus after receiving a go-ahead from Israeli antitrust authorities.

The four companies – Noble Energy of Texas, Yitzhak Tshuva’s Delek Drilling and Avner, and Ratio Oil – said in a joint statement to the Tel Aviv Stock Exchange that the tender being issued by the Cypriot government is for between 700 million and 950 million cubic meters of gas annually in two tracks that begin in 2016 and the second half of 2017, respectively. The contract for the first track runs to the end of 2022, with an option to extend it for three years, while the contract for the second track runs to 2025.

If they win the tender, Cyprus would become the third foreign customer for Israel's gas. In January, Palestine Power Generation Company in the West Bank agreed to buy 4.75 billion cubic meters of gas annually over 15 years from Leviathan, and a month later two Jordanian companies agreed to buy $500 million of gas over 15 years from the Tamar gas field, which is also controlled by Noble and Delek as well as Isramco and Dor Gas.

Nevertheless, the sales are all small relative to the combined reserves of the Leviathan and Tamar fields. The partners have yet to find major customers for the 40% of the Leviathan gas they are permitted to export under the law, with potential buyers being Turkey, Europe and Egypt.

Antitrust Authority Director General David Gilo gave the companies permission to submit a joint bid for the Cyprus tender even though he has declared the Leviathan partnership a cartel. Nevertheless, the Leviathan partners said the Cyprus project hinged on their completing financing of the Leviathan development project by August 21, a reference to the failure so far to recruit Australia’s Woodside Petroleum as a partner in the Leviathan field. While Woodside has agreed in principle to come on, the signing has been held up by disputes with the Israeli government over tax issues.

The Cyprus tender is of interest for two reasons. The first is the timetable the Cypriots have set: The Israeli government has said gas exports cannot begin from the Leviathan field until it is connected to Israel’s coast by pipeline, which means that if they win the tender they will be required to provide gas to the Israeli market even before the current target date for the second half of 2017. Another interesting issue is the relatively small amount of gas called for in the tender, while at the same time requiring that the Leviathan partners lay a long pipeline from the field to the Cypriot coast. That will make it a fairly expensive project to deliver small volumes of natural gas. The Leviathan partners are likely to price this additional cost into the price of the gas they supply, although it is probable that they will build infrastructure to deliver higher volumes of gas later.

Even pricing in the high pipeline costs, the Leviathan partners are expected to win the tender since the other contenders must import liquefied natural gas, which is more expensive.