Tamar and Leviathan look to Egypt gas link

Amiram Barkat

An agreement with Union Fenosa could be followed by one with BG.

On Tuesday, the Tamar natural gas field licensees announced the signing of a letter of intent to sell 4.5 billion cubic meters (BCM) of gas a year to Spain's Union Fenosa SA (BMAD: UNF), which operates Egypt's natural gas export facility at Damietta. The deal, worth $1.3 billion annually, has many advantages for Tamar: the customer will be responsible for building the pipeline from Tamar's production platform, and the basic price, at $6.50 per million BTU, is linked to the Brent Crude price, which was the norm in Israel in previous years.

Union Fenosa outbid BG Group plc (NYSE; LSE: BG), which operates Egypt's other gas export facility at Ideko. Both plants are only partly operating, at the order of the Egyptian government, which has banned gas exports because of a severe domestic shortage. The government's decision has cost the two companies billions of dollars in lost income from the violation of long-term contracts with European and Asian customers.

BG Group wanted to buy more gas than Union Fenosa - 7 BCM a year, under a 15-20 year contract, which could have totaled $40 billion. Following its loss, it will now have to rely on gas from Leviathan, which will not begin flowing before late 2017.

However, before Leviathan's gas can flow, its licensees must meet some challenges, the most important of which is financing to develop the gas field. The main way to secure bank financing is with long-term supply contracts. The best thing is a contract like the one with Israel Electric Corporation (IEC) (TASE: ELEC.B22), but such a large and stable customer like IEC is hard to find in the Eastern Mediterranean.

Leviathan needs a contracts for a minimum of 5 BCM of gas a year (at $6 per million BTU) to secure the $5 billion in project financing for the gas field's first stage. The option for such a contract could be either with BG Group, or one of 10 Turkish groups. The partners in Leviathan will choose which party to negotiate with in Turkey within three months.

Weighing on all these agreements is political risk and the pervasive anti-Israel sentiment in the target countries, as well as economic questions. Jordan is a small customer, and it is highly doubtful if it would be willing to commit to buying all the gas it needs from an Israeli supplier. Building a pipeline to Turkey requires Cypriot approval, and negotiations with the Turkish consortium will probably be especially arduous and volatile. Economically, the Egyptian option seems the most logical.

This is where the political risk enters the picture. No agreement can be signed with a company operating in Egypt without the approval of the Egyptian government. Israeli sources believe that General Abdel-Fatah al-Sisi, if he is elected president this summer, will not raise obstacles, but experience has taught that Egypt cannot be relied on.

There is no need to elaborate on the tradition of honoring signed contracts in Egypt. Moreover, agreements signed with companies operating in Egypt are based on Egyptian weakness. At the moment, Israeli gas helps the Egyptian government, which is exposed to huge lawsuits from the energy majors operating in its territory, but, in the future, Israeli gas could become unnecessary.

Egypt has proven natural gas reserves that are twice the size of Israel's reserves, but it cannot develop the fields fast enough to meet domestic demand for gas, which is subsidized. The big question is what will happen if the Egyptians succeed in solving this crisis: will they allow Israel to continue delivering gas at the expense of tax revenues for the Egyptian exchequer? Israeli sources say that even under the most optimistic scenario, the Egyptians will be unable to overcome its gas shortage before the 2020s. They add that the Egyptian government is a partner in the LNG facilities, and should profit from them.

At the moment, BG Group and Union Fenosa's paramount interest is to guarantee a long-term supply of gas, and the Israeli gas companies have exploited this well. "It won't be a walk in the park," an Israeli source told "Globes", "but the letter of intent is a good first step."

Noble Energy Inc. (NYSE: NBL) and Delek Group Ltd. (TASE: DLEKG) are the main partners in both Tamar and Leviathan. Tamar's other partners are Isramco Negev 2 LP (TASE: ISRA.L) and Alon Natural Gas Exploration Ltd. (TASE: ALGS), and Leviathan's third partner in Ratio Oil Exploration (1992) LP (TASE:RATI.L).

Published by Globes [online], Israel business news - www.globes-online.com - on May 8, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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