Mubadala Petroleum, a United Arab Emirates energy company, has signed a nonbinding memorandum of understanding to buy Delek Drilling’s 22 percent stake in Israel’s Tamar gas field for $1.1 billion, Delek said on Monday.
The deal, if it is completed, would be by far the biggest between Israel and the UAE since the two established diplomatic relations last year. Mubadala Petroleum, an oil and gas exploration and production company operating in 10 countries, is an Abu Dhabi state-owned company controlled through the emirate’s Mubadala sovereign wealth fund.
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The sides said they hoped to complete the agreement by the end of May and that Energy Minister Yuval Steinitz had been informed of the agreement. Delek Drilling shares closed up 2.7% at 4.87 shekels ($1.49) Monday on the Tel Aviv Stock Exchange. Parent company Delek Group jumped 9.9% to 151.10 in expectation of getting a big dividend payout from the sale.
Delek Drilling, which is controlled by Yitzhak Tshuva, is under government orders to divest its Tamar stake by the end of the year as part of the natural gas framework agreement to bring more competition into Israel’s energy sector.
“The memorandum of understanding, which we hope will become final soon, meets all the criteria we set for ourselves: meeting the gas framework deadlines, bringing value to Delek Drilling shareholders, strengthening Israel’s natural gas sector and deepening regional cooperation,” Yossi Abu, Delek Drilling’s CEO, said in a statement.
Tamar’s other major shareholders are Chevron, which acquired a 25% stake when it bought Noble Energy last year, the Israeli company Isramco with a 28.75% stake, and Tamar Petroleum, which owns 16.75%. Dor Gas Exploration and Everest Infrastructure hold 4% and 3.5%, respectively.
Tamar gas field, Israel’s second-largest after Leviathan, is located 90 kilometers west of Haifa at a depth of 5,000 meters underwater. It began production in 2013 and today sells most of its gas domestically with small quantities of exports to Egypt and Jordan.
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According to the latest estimate produced by the energy consulting firm Netherland, Sewell & Associates in January, Tamar has proven reserves of some 300 billion cubic meters of gas and 14 million barrels of condensate after pumping 69.3 BCM of gas to date.
If the sale to Mubadala is completed, Delek Drilling will still hold a 45.3% stake in Leviathan, which has proven reserves of 649 BCM and 41 million barrels of condensate. Delek Drilling also has a 30% holding in Cyprus’ Aphrodite field
Delek Drilling had been conducting negotiations quietly over the past half year about selling its Tamar stake. In the end, it received several similar offers but opted for the Mubadala bid due to the company’s strategic capabilities.
The deal not only needs shareholder approval from the two sides, but regulatory approvals from Israel’s petroleum commissioner as well. Under the agreement, Mubadala will pay the first $100 million “subject to certain terms and goals” before the deal is completed and the remaining $1 billion is paid.
The deal raises several questions, the first of which is the national security implications of an Arab company holding a stake in an asset like Israel’s second-largest gas reserve.
However, Energy Ministry officials said on Monday they didn’t see any dangers. Mubadala will only hold a minority stake in Tamar and will not be the operating partner, which is the U.S. company Chevron. While Mubadala will be a party to contracts for gas sales to Israeli users, it will be required to follow the terms of the gas framework and pay royalties, taxes and other charges to the Israeli government.
As a result, Israel’s Energy Ministry isn’t expected to raise objections to the deal. Energy Minister Yuval Steinitz came out in favor of the sale on Monday as achieving government goals and advancing Israel’s economic interests.
“The gas monopoly has been broken and major international companies are coming in and expressing interest in our gas sector,” he said in response to the news. “Right now, after the signing of the Abraham agreements, Arab countries are also investing in the Israeli gas industry. I believe that this marks the start of cooperation between our countries in energy and other economic and political realms that will benefit citizens.”
However, because of concerns about such a sensitive asset being sold to a foreign government, Israel may set conditions before it approves it, such as strict supervision on gas contracts Mubadala signs.
Energy Ministry officials said they regarded Mubadala Petroleum as financially strong. It is wholly owned by a sovereign wealth fund with $232 billion invested in multiple sectors and asset classes around the world, including energy.
For Israeli consumers, the big question is whether the deal will enhance competition in the Israeli gas market, as Steinitz said.
In theory, Mubadala can sell its share of Tamar’s gas at any price it wants. That has been the case since January after Israel’s Competition Authority intervened to stop Tamar Petroleum and Chevron from allegedly interfering with talks between IEC and the other Tamar partners on contracts to sell their share of the Tamar gas for $4.30 per million BTUs, compared with prices as high as $6.35.
If Mubadala decides to negotiate gas deals independently, it will certainly bring more competition (IEC, for instance, has said it is seeking to buy gas for under $4 per million BTUs), but it is too early to say how the Emirati company will act.
In any event, Mubadala Petroleum will probably be looking to expand its investment in Israel. It has experience in building facilities that could be used by Israel for gas liquefaction and exports, and it is active in the field of hydrogen, which can be produced from natural gas and used for electricity generation or transportation.