Leviathan Partners Expect Anchor Sale Agreement

If all goes to plan, Anglo-Dutch major Shell will replace BG as the buyer in a soon-to-be-signed gas supply deal with Israel's Leviathan Partners, according to sources. Shell is widely expected to take over BG following a positive vote on the transaction January 28.

BG and the Leviathan partners signed a memorandum of understanding in the summer of 2014 for 8bn m³/yr -- about half the giant field's output – and the terms have now been fully hammered out. A firm contract will be signed no later than by the end of the first quarter but with Shell as the buyer, the sources said.

The details had already been finalized, according to the sources, but the long delay in approving the natural gas regulatory framework in Israel prevented it from being signed. The final investment decision on Leviathan is now expected late this year.

The project is going to be implemented in two phases: phase 1 in which gas will be transmitted to consumers in Israel, Jordan and BG's LNG facilities in Egypt; and phase 2 when gas will be transmitted to Turkey.

In the first phase, the Leviathan Partnership will drill wells and build a floating production, storage and offtake facility at a cost of $6bn. In parallel, Shell will spend over $1bn laying a 450-km subsea pipeline from the FPSO to Idku, Egypt, where BG's LNG facility is. The subsea pipeline will be financed and owned by Shell.

Other expenses by Leviathan partnership are also expected to be lower than previously estimated as prices of marine rigs declined to $350,000/day.

Noble Energy, the operator with about 40% in the project, is expected to finance its part by bank loans which will be guaranteed by the expected revenues from the long term contracts, one with BG-Shell and the other with the National Electric Power Company of Jordan, which is also yet to be signed.

Sources said that Shell was fully aware of the negotiations and was not going to miss out on its strategic new asset, the LNG facility at Idku, while it aims to become a major player in the global LNG market.

If all goes to plan gas would start to flow to Idku LNG facilities by 2019. Prices would be oil-linked with a floor price at $40/b and a ceiling at $85/b. Leviathan Partnership expects to sell 8bn m³/yr to BG-Shell for $2bn at today’s prices, which represents a price of about $7/MMbtu at the FPSO.

Ya'acov Zalel