Woodside entrance into Leviathan gas field consortium still uncertain

Government releases lease terms prioritizing domestic supply security.

By SHARON UDASIN
Leviathan 311 (photo credit: Courtesy of Albatross)
Leviathan 311
(photo credit: Courtesy of Albatross)
Amid months of doubt and lack of transparency surrounding Leviathan gas reservoir arrangements, the entrance of Australian hydrocarbon firm Woodside Energy into the reservoir’s consortium was still uncertain by Thursday evening.
Woodside was expected to sign the $2.71 billion agreement at the King David Hotel in Jerusalem, to acquire a 25-percent share of the field. Yet by the scheduled time, the company purportedly had not come to terms with the Israeli government over taxation issues, according to a Globes report.
Woodside had requested that Finance Minister Yair Lapid recognize return on capital of between 17 percent and 19% for floating liquefied natural gas (F-LNG) production, yet this clause was not included in an outline of the taxation principles, the Globes report said.
When The Jerusalem Post called Woodside attorney Jack Smith on Thursday night to confirm the information, Smith said he could not address the situation.
The agreement that was supposed to occur Thursday evening would have built upon a memorandum of understanding signed with the reservoir’s partners on February 7 and a previous agreement in principle among the parties in December 2012. Since then, rumors have abounded as to whether Woodside would actually enter into the partnership, as a result of disputes over taxation and antitrust issues within the Israeli government.
Although the agreement did not go as planned Thursday evening, the partners still received the government’s lease terms Thursday, which prioritize domestic supply security.
With ample hydrocarbon supplies for decades of domestic use and export, Leviathan – located about 130 km. west of Haifa – is estimated to contain about 535 billion cubic meters (18.9 trillion cubic feet) of natural gas and 34.1 million barrels of liquid condensate.
As of now, Noble Energy holds 39.66% of the Leviathan field, Delek Group subsidiaries Delek Drilling and Avner Oil Exploration each hold 22.67% and Ratio Oil Exploration owns 15%. If the agreement does eventually go through, Woodside will hold 25%, Noble Energy will own 30%, Delek Drilling and Avner will each own 16.93% and Ratio will hold 11.12%.
Woodside would operate any liquefied natural gas development for the reservoir, but Noble Energy would remain the exploration operator.
Earlier on Thursday afternoon, the National Infrastructures, Energy and Water Ministry released the 30-year lease terms for the rights to licensing blocks 349 (Rachel) and 350 (Amit), which make up the Leviathan reservoir. Each of the two lease areas, called “Leviathan South” and “Leviathan North,” extends about 250 square kilometers.
The partners will be tasked with establishing a production system and a natural gas pipeline that stretches from Leviathan to the coast, enabling the supply of approximately 1.4 million cu.m. per hour, or about 12 billion cu.m. per year, the lease says. The lease particularly emphasizes that export cannot interfere with the supply of at least 1.05 million cu.m.
per hour at least – or the equivalent of 9.2 billion cu.m. per year.
“Exports of natural gas will only be possible after the completion of a production and transmission system to [Israel’s] shore,” the lease stresses.
With the necessity to ensure a supply of 9.2 billion cu.m.
annually to Israel, the developers will be left with only approximately 7 billion cu.m. of gas to export each year – likely forcing them to choose one anchor customer, Globes reported.
Export will not be possible until the implementation of a development plan for supplying 540 billion cu.m. of gas from all of the country’s reservoirs to the local market.
Meanwhile, should a natural gas shortage occur in Israel, the leaseholders will need to grant priority to the needs of the domestic market. In addition, all export contracts will need to include a provision clarifying that export supplies can only begin once a transmission system to Israel’s coast is complete, the lease says.
All systems that are constructed solely for export purposes – excluding F-LNG facilities, which are separate entities – will need to be able to connect to the national transmission system as well, to provide backup in case of emergency or shortage in Israel, the lease mandates.
The National Infrastructures, Energy and Water Ministry stressed that the leases were awarded as part of the ministry’s efforts “to promote energy in Israel” and “to secure the needs of the economy.”
“When formulating the conditions of the lease, the ministry saw before it the economic benefit, the future needs and the transformation into a market that is strong, stable and independent,” said ministry director-general Orna Hozman-Bechor.
Hozman-Bechor also emphasized the importance of advancing the training and employment of Israeli workers within the sector.
In addition to the lease publication, Thursday involved the completion of a plan for the Eastern Mediterranean by Antitrust Authority commissioner David Gilo. While still subject to public scrutiny and the approval of the Antitrust Tribunal, the outline determines that the partners can remain in Leviathan as long as they sell the rights to a total of 70 billion cu.m. of gas – in the form of the small Karish and Tanin reservoirs and an option for 15.2 billion cu.m. of Leviathan at a reduced price. These quantities will be designated for the domestic market only, Gilo said.
On Tuesday, the Finance Ministry published a draft amendment to the Natural Gas Taxation Law, which is based on a “netback” model. A netback price is determined by subtracting the total costs of getting a resource to the market from the total revenue of the product sales.
On Thursday morning, before the state issued the lease terms, MK Shelly Yacimovich (Labor) slammed the government and the partners for not publishing the final lease agreement promptly enough. Yacimovich has been consistently vocal during the proceedings over the past year regarding gas export quantities, arguing that the decisions should be in the hands of the Knesset.
“It is no coincidence that today, at the same moment in which the three companies [plan to] celebrate the agreement among them, the state conveys to them a lease on some 30 years of gas, the Treasury grants them tax breaks and the antitrust commissioner allows them to be a monopoly sponsored by the law,” she said. “This is not appropriate for a Western country, but for a banana republic in which capital and control are combined in a most vitriolic and shameless manner.”