Regulator mulls ordering Delek, Noble to sell Leviathan

Antitrust Authority director general David Gilo is considering ruling that ownership of Tamar and Leviathan constitutes a cartel.

Within weeks Antitrust Authority director general David Gilo will make a dramatic announcement. After more than a year of investigations, Gilo is due to decide if the stakes of Delek Group Ltd. (TASE: DLEKG) and Noble Energy Inc. (NYSE: NBL) in the Leviathan natural gas reservoir constitute a cartel. If he decides that they do constitute a cartel, then Delek controlling shareholder Yitzhak Tshuva and his American partner will be told to say good-bye to their huge natural gas discovery made in December 2010.

How Delek and Noble Energy will respond can only be guessed at, but one thing is clear: development plans for the Leviathan field will be put on hold, along with agreement to sell 30% of the reservoir to Australia's Woodside Petroleum Ltd. (ASX: WPL), and the grandiose plans to build an Israeli liquefied natural gas (LNG) facility for gas exports.

All these issues would have to wait until the identities of Leviathan's new owners become known and they decide what to do. In the interim, wave of uncertainty will hit the market, and Gilo will become the hero of the hour.

Many energy market sources doubt that he will go all the way, and that he will be satisfied with guidelines ordering Leviathan's partners to independently market their relative share of the reservoir's gas. Perhaps the Leviathan partners will be required to commit only to export their gas and not compete with Tamar gas on the domestic market.

However, signs, clues, and decisions aired by Gilo and his aides, especially in the past few weeks, point to a complete separation between the rights owners in Leviathan and the rights owners in Tamar and other reservoirs.

At an energy conference last month, outgoing Antitrust Authority chief economist Shlomi Parizat said, "We would not dream of permitting the conduct in the oil and gas exploration industry in any other sector. All the players in this industry are linked to energy exploration consortia. It is as if Delek, Sonol Israel Ltd. and Paz Oil Company Ltd. (TASE:PZOL) were to decide to sell gasoline together."

Parizat said that Gilo believes that there is no choice but to allow cooperation between companies and partnerships in the high-risk exploration stage, but this relative tolerance ends when the exploration is successful and there is a discovery. Parizat believes that the principal of separation must scrupulously apply for the development and production stages of an oil or gas reservoir.

If anyone thinks that Parizat was only expressing his personal opinion, Gilo went even farther out on a limb. On December 13, 2012, he announced his decision for granting an exemption to restraint on trade for Israel Opportunity Energy Resources LP (TASE: ISOP.L), which signed an agreement to acquire 10% of the Neta and Roy licenses from Ratio Oil Exploration (1992) LP (TASE:RATI.L). Israel Opportunity required the exemption because it also owns 10% stakes in the Pelagic licenses. No oil or gas discoveries have yet been made at any of these licenses.

Gilo granted the exemption, but limited it to the exploration stage. He ruled that the company could keep the licenses "only as a financial investment", but only so long as no oil or gas was found in them. The moment a discovery is declared, Israel Opportunity's rights will be restricted to just one reservoir and that is all.

"No cross holdings" in two or more reservoirs and "no affiliation between licensees in existing gas reservoirs" are the principles that Gilo restricted Israel Opportunity's business. Gilo's position is that one rule applies to everyone: if a small company like Israel Opportunity may not own 10% in two small gas fields, what is the chance that he will allow Delek and Noble Energy to continue controlling Israel's two largest discoveries? Gilo is the last man to fail a test he set up.

Noble Energy owns 39.66% of Leviathan and 36% of Tamar, and Delek owns 45.34% of Leviathan and 31.35% of Tamar.

How will Gilo's decision to force Delek and Noble Energy to sell Leviathan affect the gas production industry? A source unaffiliated with the two companies said this week that such a decision would ignite total war. He said that Delek and Noble Energy would fight the decision with every means at their disposal, including legal action.

Selling Leviathan, if that were to happen, would not be a lethal blow to Tshuva. His main source of revenue in the coming years will be from Tamar, which accounts for two-thirds of the value of Delek's exploration units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L).

Leviathan, because of its huge size, will require massive investments by Delek and Noble Energy on a scale that will jeopardize their stability. Gas deliveries from Tamar are due to begin in April, and this will be the event of the year for Tshuva and Delek. Cash flow from Tamar should supply the critical oxygen for Delek to repay its debts and finance the wells at the Ruth and Alon licenses. Delek and Noble Energy expect gas discoveries at both licenses, but not of a size even close to Leviathan and therefore without the headaches.

Published by Globes [online], Israel business news - - on March 5, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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