Woodside exit from Leviathan “disappointing,” but partners will move forward with regional opportunities.

Despite the universal disappointment surrounding Woodside Petroleum’s decision to abandon the Leviathan gas reservoir partnership, Israeli energy analysts are confident in the developers’ ability to move forward, particularly with regional pipeline options.

Following a memorandum of understanding with the Leviathan partners in February, the Australian hydrocarbon firm had been expected to take on a 25 percent, $2.71 billion share of the 535b. cu.m. reservoir at the end of March.

Woodside terminates Leviathan deal

A deal failed to pan out on the scheduled agreement date, and negotiations among the parties were officially terminated overnight on Tuesday.

Without the participation of Woodside – whose focus would have likely been on developing a floating liquefied natural gas (FLNG) facility for export – the first priorities of the Leviathan reservoir partners is to be rooted in regional export opportunities, particularly in pipelines to Turkey and/or Egypt.

“In the gas industry it is standard to start with trying to market the gas by pipeline supplies, and only move to LNG if there is no robust market,” Prof. Brenda Shaffer, an expert on energy policy in the School of Political Science at the University of Haifa and a visiting researcher at Georgetown University, told The Jerusalem Post on Wednesday. “Pipeline gas is potentially more profitable and less risky and capital intensive.”

While negotiations between Woodside and the Leviathan partners – which include Noble Energy, Delek Drilling, Avner Oil Exploration and Ratio Oil Exploration – may have crumbled, Shaffer reiterated the fact that there was never a certain deal in the first place.

“You have to have a deal for a deal to be scrapped. What you had with Woodside was a negotiation,” she said. “And, in fact, if you look at Woodside CEO [Peter] Coleman’s statement, he leaves the door open to further negotiations.”

Shaffer said she finds that in Israel, much confusion seems to exist “between negotiations and actual deals.”

“In natural gas projects, potential partners, both companies and countries, sign lot of memoranda of understanding and other non-binding agreements,” she said.

“These are far from a binding contract.”

That being said, many industry experts and stakeholders expressed their disappointment that the negotiations did not lead to something more fruitful.

“I regret that the deal did not materialize,” Dr. Amit Mor, CEO of the Herzliya- based firm EcoEnergy, told the Post on Tuesday. “Woodside could have been very beneficial for developing LNG export options, especially exporting gas via FLNG.”

Acknowledging that marine pipelines to Turkey or Egypt are the most economic options, Mor cautioned that these projects still fall in the “prospective category” and may encounter certain geopolitical obstacles.

He therefore stressed the importance of diversifying Israel’s export options and simultaneously developing FLNG options.

Shaffer warned, however, that “FLNG cannot serve this stage as a viable commercial option, when the technology is still being tested and there is no way to reliably estimate the production costs.”

Globally, no FLNG facility yet exists, and the first prototype is still under development by Royal Dutch Shell.

Agreeing with Shaffer that the pipeline options are most economical and that FLNG presents challenges, Mor stressed the importance of continuing to pursue FLNG schemes regardless.

“It is very important to develop the FLNG scheme in parallel in case one of the pipeline export options will not materialize,” Mor said.

For the Turkish pipeline option to occur, bilateral negotiations and full diplomatic relations between Israel and Turkey would need to resume, and the consent of Cyprus would also be critical, Mor said.

Consent of the Egyptian and Israeli governments would be required for use of the Spanish-owned Egyptian liquefaction facility as well, he added.

Should the regional pipeline options not materialize, exporting gas for liquefaction in a future Cypriot facility could then be an option, he said.

Evaluating the deal termination from an economic perspective, financial analysts agreed that while Woodside’s entrance would have been highly beneficial to the partners and to Israel, the exit by no means signifies the end to Leviathan’s development.

“To the best of our understanding, the impact is not expected to be dramatic on the partnerships, and the reservoir development schedules are not expected to change,” said Noam Pincu, a top analyst at Psagot, the biggest private investment fund in Israel. “In terms of operations, Woodside had no added value in the development of the reservoir and the issue of regional exports, and only did on FLNG.”

The partners will likely launch a feasibility study in order to evaluate whether FLNG is worthwhile to the partners, Pincu predicted.

In terms of financing, Pincu said that Delek’s last round of fund-raising proved the global market demand for Leviathan’s gas and indicated that the partners will likely receive their funding.

It may, however, be strategic for Delek to sell a small share of its reservoir stake – and do so to a financial rather than a strategic player – in order to achieve a higher price than the partners did with Woodside, Pincu said.

Termination of negotiations now brings regional export options to the forefront of developer interests, Leumi Capital Markets analyst Ella Fried said.

This option could lead to the sale of of natural gas annually by 2017 or 2018, assuming the geopolitical situation allows for this option, Fried said.

Parallel development of the FLNG option could occur if the partners formed cooperated with South Korean firm Daewoo, leading to an additional outflow of about annually prior to 2020, she added.

While Fried said she believes that the Leviathan partners will be able to develop the reservoir without a strategic partner, she said that the clearly preferred scenario would have included Woodside, to provide a security cushion with minimized financial risk.

The risk associated with the project has now increased, but Fried said that Delek seems to be prepared.

Delek Drilling and Avner Oil Exploration will be able to use their raised funds as well as bridge loans, the same way in which they are financing the Tamar project, according to Fried.

Ratio Oil Exploration, whose much smaller investment in the project only amounts to $15m., may face challenges in funding the initial stages of the project, but finding a strategic or financial partner to take over Ratio’s shares would be much easier than selling a quarter stake of the project, Fried said.

Pincu pointed out the possibility of Ratio selling its shares of the reservoir, as economists have long been questioning whether the smaller company is prepared for this scenario.

“Our valuation of Leviathan did not include the Woodside deal for fear that ultimately it would not close,” said Gil Bashan, Israel Brokerage Investment firm’s energy analyst.

Bashan maintained that his firm’s evaluation of Leviathan remains largely the same.

“However, there is no doubt that there is some disappointment here,” he said.

“Woodside brought with it abilities in the fields of reservoir development, proven capabilities in the field of LNG, which are expected to be the second stage of development for Leviathan and connections to LNG markets in the East.”

Unlike the disappointment shown on Wednesday by energy analysts and industry stakeholders, Shelly Yacimovich (Labor), who has long been vocal about minimizing gas export quantities and combating corporate interests, celebrated the termination of the negotiations with Woodside.

She went so far as to say that the failure of the deal to go through as planned “saved the country from continued disgrace.”

“Now the pressure of business and diplomacy has been removed, and the government must take this opportunity to formulate a serious energy policy that serves the public and not a handful of gas tycoons,” she said.

Like Yacimovich, Dov Henin (Hadash) also voiced his satisfaction that an agreement between Woodside and the Leviathan partners did not succeed.

“Now we need to continue to fight for prioritizing needs of the Israeli economy,” Henin said. “We must ensure that gas profits reach the public and do not serve foreign capitalist in producing a quick and easy profit.”