Woodside and Leviathan Partners Sign MOU
Woodside and the Leviathan partners move one step closer towards finalising a joint venture deal. A Memorandum of Understanding detailing the terms of the deal was signed to this effect. The non binding document opens the negotiations between Woodside on one hand and Noble Energy and Delek on the other for the purpose of Woodside’s acquisition of 25% of the 349/Rachel and 350/Amit licences. A binding agreement is expected by 27 March 2014 if the discussions prove successful.
Should the talks progress into a final deal, Woodside would pay a total of USD 2.5 billion over many years: USD 850 million will be paid upon signing the agreement, another USD 350 million when an export solution is decided (LNG or other) and finally USD 1.3 billion in total after a minimum of 2 tcf of gas have been exported. Woodside will pay 2.5% royalty on commercial oil produced from the Leviathan after payback of development cost and USD 50 million once total reserved exceed 20 tcf, payable once 4 tcf have been delivered. The MOU stipulates that a final agreement will be contingent to “certain policy tax and regulatory approvals from the Israeli Government”.
The MOU marks a progress towards the completion of a deal between the Leviathan partners and Woodside. Previous uncertainties over Israel’s willingness to export its newly found natural gas have contributed in delaying joint ventures aimed at the export and monetisation of Israel’s offshore hydrocarbon riches. On 22 October 2013, Israel’s Supreme Court ratified the cabinet’s decision on gas export and domestic reservation policy. 60% of Israel’s estimated reserves (540 BM) will be reserved for national consumption, 50% of fields containing an excess of 200 bcm will be kept at home, 40% of fields containing 100 to 200 bcm will be reserved for national use and the Tamar field will be reserved for domestic consumption unless new large discoveries are made.
The 60% quota was achieved based on the current discoveries made to date. In other words, 540 bcm represents 60% of the total of 900 bcm discovered and is the minimum reservation target for the Israeli market. Additional discoveries of natural gas are likely to increase the amounts to be exported (currently 360 bcm).
The increase in the price that Woodside will eventually have to pay for a smaller part of the Leviathan (25% of the field) should the discussions come to fruition finds its explanation in the fact the company’s LNG expertise has become less relevant since the Leviathan partners have become more inclined towards the use of ‘pipeline diplomacy’ through exports to immediate neighbours and monetisation of the Leviathan gas via a Turkish pipeline1. Given the reduced cost in the pipeline option and hence the increase in value of the field (as opposed to the LNG scenario), Woodside will have to pay more. The complicated geopolitics of the region remain however considerable complications to the pipeline option that the LNG option avoids in addition to offering great flexibility in terms of the choice of the consumer. The LNG scenario has not yet been dismissed and might be adopted in conjunction to the eventual use of pipelines.
1- Benjamin Wilson and Daniel Butcher, Woodside, Leviathan Update - pipeline deals gather momentum, 21 January 2014, JP Morgan report