Israel's Tamar Partners to Sell $20 Billion of Gas to Europe via Egypt

Letter of intent signed with Spain’s Union Fenosa Gas for 15-year contract.

Reuters

The partners in Israel’s Tamar natural gas field said on Tuesday they had signed a letter of intent with Spain’s Union Fenosa Gas to export up to 4.5 billion cubic meters of gas annually over 15 years to the company’s liquefied natural gas plants in Egypt.

Texas-based Noble Energy, which has a 36% stake in Tamar, said both sides hope to complete a binding agreement within six months, though any deal will require regulatory approvals in Israel and Egypt.

The contract not only adds up to some $20 billion in sales over the 15 years, but also marks a stunning turnaround for Israel and Egypt: Three years ago, Egypt abruptly cut off supplies of natural gas it was exporting to Israel; now Israel will be exporting gas to Egypt.

In fact, the gas will be liquefied at a facility 80% owned by UFG in the Egyptian port city of Damietta for re-export to Europe by ship. A source close to the Israeli partners told Reuters that if a final deal is concluded the gas would be sent through a new subsea pipeline which would have to be built.

“This [letter of intent] with Union Fenosa Gas represents a major milestone for our Tamar asset and is indicative of the strong regional demand for natural gas,” said Keith Elliott, Noble’s senior vice president for the Eastern Mediterranean.

“The associated expansion of the Tamar field facilities, subject to final investment decision of the Tamar partners, will not only enable substantial regional exports, but it will also increase the capacity for natural gas deliveries to Israel’s domestic market,” he said.

The contract is huge. UFG will be buying over the life of the contract 22.5% of the combined estimated reserves at Tamar, Israel’s second-largest field, as well as those of the much larger Leviathan field. Tamar is already in operation while Leviathan is awaiting development.

At 67.5 BCM over 15 years, the contract will make UFG the second-biggest buyer of Israeli gas after Israel Electric Corporation, which is buying 82.5 BCM over the same period at $5 per 1,000 cubic meters.

Although Nobel and its partners in Tamar − Delek Drilling and Anver Oil, two companies controlled by Yitzhak Tshuva’s Delek Group, and Isramco − Nobel signaled in a statement Tuesday that the gas is expected to be sold at a floor price of $6.50 per 1,000 cubic feet linked to the price of Brent crude oil.

The price is similar to that stated in the export contract the Tamar partners have signed with Jordan’s Arab Potash and Jordan Bromine Company. The Jordanians, however, are committed to buying a relatively small 1.8 BCM over 15 years. In addition, Tamar had reached an agreement to sell gas to the Palestinian Power Generation Company, a newly formed Palestinian electric power utility.

Tamar, discovered in the eastern Mediterranean in 2009, holds some 310 BCM of natural gas as well as 13 million barrels of condensate that can be turned into petroleum. It began production in March 2013. The larger Leviathan field was discovered nearby a year later and turned Israel into a potential energy exporter.

UFG has been having production trouble since the Egyptian government began keeping its own natural gas output for domestic use rather than sending it to the plant for export.

Last Thursday, BG Group’s first-quarter net profit fell 8% as the company continues to be dogged by falling output and restrictions on sales from Egypt, one of its key gas-producing assets. Political unrest in Egypt, where a presidential election is planned for later this month, has made it harder for BG to bring in the personnel and equipment needed to drill new wells at its offshore West Delta Deep Marine gas field, where production is declining. 

Egypt, facing its worst energy crunch in years, is scrambling to secure adequate fuel supplies to avoid popular anger over power cuts.

Founded in 1998, UFG is the third-largest gas operator in Spain active in supplying gas to the market, engaging in liquefaction, shipping, regasification and distribution.

Isramco Negev has a 28.8% share of Tamar, Delek Drilling and Avner both have 15.%. Dor Gas Exploration holds the remaining 4%.

Delek Group was unable to comment on the proposed agreement because the companies are engaged in a roadshow with investors to raise some $2 billion in debt. The proceeds will be used to recycle loans of about $1 billion used to develop Tamar, and the rest to help finance Leviathan’s development.