Leviathan's moment of truth is imminent

We could know by Friday whether Leviathan has tens of billions of dollars of gas or nothing.

The exploratory well being drilled into the deepwater Leviathan structure west of Haifa since October 18, is due to reach the target strata a depth of 5,095 meters, and the moment of truth about the presence of huge gas reserves is approaching. The partners in the Leviathan leases - Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG), and Ratio Oil Exploration (1992) LP (TASE:RATI.L) - may announce preliminary findings as soon as Friday.

The answer to the question if the strata contain natural gas may be estimated at many billions of dollars, and will have a far-reaching impact.

The immediate answer will come on the Tel Aviv Stock Exchange (TASE). The meteoric rise in the share prices of oil and gas exploration partnerships since the discovery of the Tamar reservoir will not be repeated. Many analysts believe that the share prices of Ratio and Delek Group units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L) (the latter two are also partners in Tamar), already include a scenario that the quantities of gas reported by Noble Energy in June will be found.

A discovery will lift from the companies the threat of a collapse of their share prices. "Oil and gas shares will continue to be risky," says Clal Finance analyst Yaron Zar. "But a discovery at Leviathan will turn the partners' shares into legitimate investments for most investors, subject, of course, to the question of price."

If no signs of gas are found, the companies' shares will collapse, and drag down the entire oil and gas exploration sector, whose aggregate market cap recently peaked at NIS 40 billion.

For the companies, investors, and analysts, an announcement of a gas discovery is only one question, however important it may be. There are two other questions, just as important, for establishing the economic value of a Leviathan discovery: one is its effect on the Sheshinski committee, and the other is on the business model for the sale of gas from the reservoir. In other words, how much will be exported, to which markets and at what price, how will the gas be transported, will the companies prefer laying an undersea pipeline to Europe, or will they invest in building a liquid natural gas terminal for shipping gas to Far Eastern markets. All these questions will remain open only if the Leviathan structure shows signs of gas.

If no gas is found, all these questions will become irrelevant.

The Ministry of Finance, in contrast to the TASE, will receive an announcement of a gas discovery with conflicting feelings. Ministry officials see the gas reserves as a mixed blessing. They see the threat of infection with the Dutch disease, i.e. they fear the effect of expected income from gas exports, or from gas sales on the domestic market instead of importing fuel, on the shekel's exchange rate.

Whereas the Ministry of Finance estimates relative weight of Tamar's income on the current balance of payments is estimated at 10%, it estimates that the weight of Leviathan could reach 25%, which could result in the shekel appreciating to $2-2.50/$.

Under this scenario, Ministry of Finance officials warn against a death knell to export industries and high-tech, and of massive unemployment among Israel's highest educated and most skilled workers.

For Minister of Finance Yuval Steinitz, the heavy taxes proposed by the Sheshinski committee is the initial vaccination against the Dutch disease. The second dose is what to do with the revenues. There are several models around the world for sophisticated use of oil and gas revenues: one is to invest directly in transportation and education infrastructures in order to improve competitiveness; a second is to encourage exporters through tax cuts and other breaks; a third is to improve the national debt ratio and cut interest payments; and a fourth is a sovereign wealth fund, which will invest the revenues in acceptable channels outside Israel.

The tendency of the Ministry of Finance and Steinitz at the moment is to distribute the revenues among all four channels.

Published by Globes [online], Israel business news - www.globes-online.com - on November 24, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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