Three years ago, Yitzhak Tshuva took to the stage at the high point of an investors’ conference organized by Phoenix insurance. The principal owner of Delek Group opened his remarks with the sheheheyanu blessing in celebration of a special occasion, telling the audience in a trembling voice: “Today is a holiday: Happy holiday to all the citizens of the State of Israel.”
Noble Energy had recently released its initial estimates on the quantity of gas at the Leviathan site, the natural gas field discovered deep off the coastline of Haifa. “We can say confidently and wholeheartedly that the potential is tremendous,” said Tshuva. “Thanks to courage, sacrifice and willingness, we have attained tremendous achievements that will turn Israel into a powerful and large player in the international market. Full momentum needs to be sustained. This means geopolitical power for Israel, which needs it now more than ever.”
Tshuva based these words on a report issued in mid-2010, when the partners in the gas field – Delek Group (45%), U.S.-based Noble Energy (40%) and Ratio Oil Exploration (15%) – declared that initial forecasts had proved correct and Leviathan was a commercial gas discovery on an international scale. The largest gas field discovered anywhere in the world over the past decade, Leviathan contained 16 trillion cubic feet of natural gas, nearly twice the quantity found in the neighboring Tamar field, plus a potential 600 million barrels of oil.
Tshuva had every reason to celebrate at the time. The Tamar and Leviathan gas discoveries not only cemented his standing in the local economy, but also turned him into an energy player on a global level. They even managed to somewhat obscure the fact that, just two years before, in 2008, Tshuva began a debt-restructuring process for Delek Real Estate, another of his companies, which would result in bondholders taking a 50% haircut on their investments.
The Leviathan discovery was also a momentous occasion for the Rotlevy and Landau families, the principal owners of Ratio. The two families were less known before the discovery, which thrust them onto the exclusive list of Israeli gas barons. Ratio, which until then was mostly built on pipe dreams, climbed to a company value of about 4 billion shekels ($1.14 billion).
Ratio was founded in the early 1990s. In the span of 18 years, the company was a partner in 11 drillings, 10 of them coming out dry. Hundreds of millions of shekels of the public’s money went down the drain before the eagerly anticipated Leviathan discovery.
“It’s a warm, wonderful feeling of satisfaction and, at the same time, a realization that it could have gone otherwise and ended up a bitter failure,” Yigal Landau, chairman of Ratio, told TheMarker shortly after the discovery.
In nature, Leviathans (whales in Hebrew) take eight to 10 years to mature. As things now stand, the Leviathan belonging to Tshuva, Noble CEO Chuck Davidson, and the Landau and Rotlevy families will reach maturity at a similar age. Despite optimistic outlooks, Leviathan’s short life has so far turned out to be fraught with difficulties, and investors must be hoping it will do better in maturity than it has in its infancy.
The field has spawned quite a number of controversies over the past three years, chalking up several impressive triumphs but also some bitter disappointments. Here are a few of them.
Past Sheshinski, but still no plans
The first challenge the Leviathan partners faced was the Sheshinski Committee, which studied the issue of taxing the output of natural gas. The discovery of gas deposits at Tamar and Leviathan apparently taught the partners that the eastern end of the Mediterranean Sea contains gas reserves, and perhaps oil, on a big, global scale.
This realization drove the gas companies into a stubborn and particularly intense battle over maintaining as large a share as possible of future gas revenues. The companies argued that the taxation of gas can’t be changed retroactively, and that increasing the tax rate could harm the development of gas deposits and even prevent other companies from coming to Israel.
Slogging through a campaign drenched in capital, government influence and the social-justice protest, the partners navigated their way to the centers of power. They met with cabinet ministers and Knesset members, engaged lobbyists to appear at Knesset committee sessions, and made use of U.S. administration personnel.
“It is legitimate for businessmen to look after their companies’ interests, but this campaign crossed red lines and, in place of freedom of expression, we had what seemed like an attempt to disrupt the capability for appropriate decision making in the State of Israel,” said then Finance Minister Yuval Steinitz, commenting on the campaign. “We are approaching the red line beyond which our ability to govern will be obstructed.”
Despite the pressures applied to members of the Sheshinski Committee, parliamentarians and government ministers, the Knesset ratified an increase in royalties paid to the state in March 2011. The state’s share, it was determined, would reach 52% to 62% of revenues, similar to the situation in other countries where substantial natural resources have been discovered. The state’s share of Leviathan revenues are estimated to reach about 60%, as opposed to just 25% before the new legislation was adopted.
Although over three years have elapsed since the discovery of gas at Leviathan, no organized plan has ever been completed or revealed for its development. Several open questions, such as an issue with antitrust authorities that was largely resolved last week and the volume slated for export, have prevented the partners from formulating a detailed plan encompassing a schedule, funding sources and operational decisions. The partners also never signed a contract for the sale of gas to the Israel Electric Corporation, so the completion of a development plan seems a long way off.
Last June, the partnership presented the government with a preliminary plan that put the cost of developing the field for domestic purposes only at around $4.5 billion. This would cover the erecting of the drilling rig and laying down a pipeline to the shore, without taking into consideration any export capability. One of the main problems with completing the plan is choosing where to locate the gas terminal, amid protests by local groups against having it built on proposed sites within their vicinity.
Noble Energy presented an updated outline for developing the field in a meeting with analysts last month, at a cost that has ballooned to $8.5 billion.
This included three components: A system for transporting the gas to Israel; systems to transfer the gas to neighboring countries via underwater pipelines; and a sea-based platform for liquefying the gas and exporting it by ship.
But the outline wasn’t detailed enough to include all the implications and costs of developing the field. Delek Group even issued a disclaimer afterward, noting: “A plan and budget for developing Leviathan have not yet been approved, and at this stage a projected timetable for formulating and carrying out the field’s development plan can’t be established.”
Exports still a long way off
Anyone who thought the Sheshinski Committee would be the last time the companies and state came to blows was mistaken. In October 2011, after it became clear that the quantity of gas off Israel’s shoreline will probably exceed the local economy’s needs for the next two generations, the question came up of whether to allow gas exports – and, if so, to what extent. Another committee, this one headed by Energy and Water Resources Ministry director-general Shaul Zemach, was set up to answer this question.
In its final report, presented in August 2012, the committee recommended exporting 53% of Israel’s offshore gas. The cabinet, by a big margin, decided to accept the recommendations, but only after barring exports from the Tamar field – thereby lowering the overall percentage earmarked for export to 40%.
The government’s approval set off a storm of protest. Social organizations and Knesset members went to court to revoke the decision, arguing that the government didn’t have the authority to settle such a fateful question for all of Israel’s citizens for generations to come.
In October 2013, two years after the Zemach Committee was established, the court rejected the petitions, putting an end to one of the main obstacles standing in the way of developing Leviathan.
But immediately afterward, it was the minority partners in the Tamar field – Isramco and Dor Alon – who petitioned the Supreme Court on the basis of wrongful discrimination against Tamar as opposed to Leviathan. The matter is still before the court.
The decision on gas exports has helped the Leviathan partnership, but several key issues still remain unresolved. For example, the destination for exports still hasn’t been determined, or whether the gas will be transported overseas through pipelines or shipped in a liquefied form. Also, no agreements have yet been signed with companies or neighboring countries, except for a small contract signed several weeks ago with the Palestinian Authority.
The Australian energy giant Woodside Petroleum specializes in technology for producing liquefied natural gas (LNG) for export. In December 2012, the Leviathan partnership signed an agreement in principle for Woodside to acquire 30% of the rights to Leviathan for about $1.5 billion. The plan was to build a floating facility for converting the gas into LNG, to be shipped by tanker to remote destinations throughout the world.
But much has changed since that agreement was inked. The thaw in relations between Israel and Turkey, as well as a change of regime in Egypt, presented the Leviathan investors with new possibilities. The primary option now under consideration is exporting the gas through an underwater pipeline directly to Turkey. It can also be exported to Egypt, where gas is urgently needed, or piped to a facility on Cypriot soil that Delek Group and Noble Energy have a hand in building, for export to Europe.
The Leviathan partners are, therefore, trying to amend their understanding with Woodside, asking for a higher price in consideration for the new alternatives that have opened up. At this point they haven’t decided which way to go and will likely choose more than one option. The bottom line is that any significant commercial agreements still seem a long way off.
Aside from the legal and bureaucratic hitches, Leviathan investors have also enjoyed some good news since the discovery. Last May, shortly before the government approved the Zemach Committee recommendations, the estimated quantity of gas in the field was raised from 17 trillion cubic feet to 19 TCF, with the estimated range of general reserves updated to between 15 and 24 TCF.
The new figures were based on analysis of the results for the Leviathan 4 confirmation drilling that was completed two months earlier. Just the increase itself is equivalent to the Tethys Sea deposits that supplied Israel’s gas needs for a decade until 2012, and is considered worth 2 billion shekels.
The estimated condensate – raw material for the production of Brent crude, which sells for around $100 per barrel – also increased from 22 million barrels to 34 million barrels. This factor contributed another potential 3.5 billion shekels boost to the value of the Leviathan field.
And that’s not all. In January 2012, the partnership estimated the potential presence of 600 million barrels of oil in underlying strata at a probability of 24%. Last July, this potential quantity was updated by Noble Energy to 1.5 billion barrels, an amount that could supply Israel’s needs for 15 years.
Early on, while findings from the initial drilling for gas were being analyzed, the partners also decided to check for oil by drilling 6,500 meters under the surface. Noble Energy went to work, building a rig in South Korea capable of reaching a depth of 12 kilometers. Originally planned for the end of 2013, the drilling was put off until well into 2014, after the new rig has performed a two-month test run.
But that was just the first delay. Noble has now rescheduled the drilling, at an estimated cost of $200 million, for the beginning of 2015, due to the prolonged export-approval process and absence of a clear development plan. Furthermore, Woodside had committed to investing $250 million in developing the field, which was meant to go toward covering the exploratory drilling costs, but its agreement to participate in the project hasn’t yet been finalized.
How much is Leviathan actually worth?
Another major problem hanging over the partnership since the Leviathan gas discovery has been with the antitrust authorities. Antitrust Commissioner David Gilo declared that the partnership between Delek Group and Noble Energy constitutes a monopolistic restraint of trade in the natural gas market, due to their parallel holdings in the Tamar field as well as in the smaller Karish and Tanin offshore exploratory sites.
Last Tuesday, Gilo agreed to rescind his earlier ruling on condition that the two companies divest their natural gas interests in Karish and Tanin. The compromise agreement, as well as the resolution of several more minor antitrust issues expected in the coming weeks, should pave the way for Woodside to finally come fully on board and assume its stake in Leviathan, while diluting the other partners.
There is likely no clear-cut answer to the question on many investors’ minds as to how much the Leviathan field is really worth. Last month, IBI Investment House energy analyst Gil Bashan placed its current value at $6.9 billion. At the same time, Bashan put a $13.5 billion value on the neighboring Tamar field already in production. The lower valuation for Leviathan, despite being twice as large, is attributable to the risks involved along the way toward its complete development.
UBS Investment Bank analyst Roni Biron put Leviathan’s value at $6.7 billion last October, explaining that the court’s rejection of petitions asking to ban the export of Israeli natural gas lowered the field’s risk profile. He also stressed that his pricing model took into consideration the risk factors surrounding the field’s development.
Psagot Investment House analyst Noam Pinko provided several possibilities for valuing Leviathan based on various scenarios, rather than specifying a single figure. For example, he put the value of the field at $8 billion in the event of regional exports at $8 per unit, but only $4.5 billion if exports were to be achieved through the process of producing LNG.
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