Leviathan partners may reduce development plan

Leviathan

With exports to Egypt in doubt, the Leviathan partners are mulling cutting development plans in half.

The Leviathan partners are drawing up a contingency plan for developing the gas field in the event that exports to Egypt do not materialize, sources inform "Globes." The partners are mulling various alternatives including a more limited development of the field. Instead of building a floating production, storage and offloading vessel (FPSO) with a 16 billion cubic meters (BCM) annual natural gas capacity as originally set out in the development plan, a facility half the size might be built, a senior source at the gas developers told "Globes."

In June 2014, the Leviathan partners signed a letter of intent with British Gas (BG), which has a liquid gas terminal in Egypt. The letter of intent said that Leviathan would export 105 BCM to the BG facility over 15 years. The deal would enable finance the first stage of Leviathan's development, which will cost an estimated $7 billion.

However, the sharp fall in oil prices, the acquisition of BG by Shell, the declaration of Egypt's Zohr field as a huge gas discovery, and instructions by the Egyptian government to halt talks on importing Israeli gas following the arbitration ruling that Egyptian national gas companies must pay IEC $1.76 billion compensation have all placed obstacles in the path of potential gas exports to Egypt.

Consequently, the Leviathan partners have begun working in recent months on a Plan B, in the event that it becomes clear that exports are no longer possible. This plan will include a much smaller production facility allowing the supply of gas to the domestic market and to Jordan.

The Ministry of National Infrastructures, Energy and Water Resources has confirmed that it is currently discussing scaled-down plans for Leviathan. A source in the ministry claims that Leviathan can be developed in a similar way to the Tamar field - in other words using a production rig and onshore terminal rather than an FPSO. The source added that in such a situation, the initial cost of developing Leviathan would be cut from $7 billion to $4 billion, and that annual sales of 5 BCM of gas would justify such development costs.

Nevertheless, it should be stressed that as production increases, so costs per mmbtu energy unit are reduced, sometimes by as much as 25%. Gas production companies prefer building larger production installations to ensure optimal flexibility in supplying gas to customers. A senior source with a gas production company told "Globes," "Flexibility of supply is always important for customers, especially since the Fukushima disaster." He added that since supply of gas is larger than demand, customers are in a stronger position and this makes increasing flexibility even more important for natural gas producers.

The senior source continued, "The main thing to be done is that it will be possible to develop on a smaller scale, and to increase demand in the domestic market. In 2020, there will be almost no local market left for Leviathan to supply because Tamar will be supllying everything. There will be about 3 BCM left with three fields Leviathan, Karish and Tanin- competing for it."

Noble Energy Inc. (NYSE: NBL) owns 39.66% of Leviathan, Delek Group Ltd. (TASE: DLEKG) units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L) each own 22.67% and Ratio Oil Exploration (1992) LP (TASE:RATI.L) owns 15%.

Published by Globes [online], Israel business news - www.globes-online.com - on December 14, 2015

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