Gazprom bids highest for Leviathan partnership

Delek's Yitzhak Tshuva prefers Gazprom because of its geopolitical power, but Nobel Energy wants a Western partner.

Russia's national gas giant Gazprom JSC (RTS: GAZP; LSE: GAZD; DAX: GAZ) is a leading candidate to acquire a stake in the Leviathan gas field. Sources inform ''Globes'' that Gazprom submitted the highest offer in the process for picking a partner. However, sources connected with the negotiations say that there are differences in attitude between Gazprom and Leviathan's US and Israeli partners, Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG), and Ratio Oil Exploration (1992) LP (TASE:RATI.L).

Although the Israelis, led by Delek Group's Yitzhak Tshuva, are enthusiastic about Gazprom because of its geopolitical power, Nobel Energy prefers a Western partner, even at terms that are not as good as the terms offered by the Russian giant.

"Israelis emphasize the immediate capital gain that will be created by bringing in a partner," a source involved in the talks told "Globes". "The Americans are looking more at the dividends that the shareholders will receive, and prefer a partner which will generate greater value over time."

The process of choosing a strategic partner for Leviathan is the most intriguing and critical business move in Israel's oil and gas industry this year. The current value of the Leviathan reservoir, which is still considered the largest deepwater gas discovery in the world in the past decade, is estimated at $5 billion, but the value of the contingent gas reserves is estimated at tens of billions of dollars.

Last week, Noble Energy raised the geologic probability of success of finding oil in the upper oil-bearing strata, which underlie the gas-bearing strata. Leviathan's partners decided to bring in a strategic partner because they lack the financial wherewithal, know-how, and connections to fully exploit the reservoir's potential as quickly as possible. The financial investment to develop the gas discovery alone, including building a natural gas liquefaction (LNG) plant, is estimated at $10-15 billion.

Extraordinary secrecy

The strategic partner selection process, which is due to be completed within two months, has been handled with extraordinary secrecy, well above the norm in Israel. In a laconic notice to the TASE on September 9, the most up-to-date announcement, Leviathan's Israeli partners merely said, "On September 7, we received offers for the purchase of up to 30% of the rights to the licenses from leading international companies engaged in the exploration and production of natural gas."

Sources inform ''Globes'' that that the partners obtained permission from the Israel Securities Authority not to disclose any information about the identity of the companies participating in the process. The main reason is concern about possible harm to these companies' interests in the Arab world just from a report about their willingness to enter the Israeli market. "Companies are willing to accept the damage only if they become a partner in Leviathan, and they do not want to be left with nothing both here and there," said a source involved in the process.

In recent months, the media has mentioned several the names of European, Australian, Korean, and Chinese energy companies with regard to the process. Some of the names mentioned, such as France's Total SA (NYSE: TOT; LSE: TTA; Euronext: FP), are not taking a direct part. Other companies, whose names have not been mentioned, are in talks with the Leviathan partners through separate channels, including a company with interests in the Persian Gulf. Although the name has been kept confidential, it is reportedly one of the three US oil majors: ExxonMobil Inc. (NYSE: XOM); ConocoPhillips Inc. (NYSE: COP), or Chevron Corporation (NYSE: CVX). However, sources told "Globes" that the talks with the oil major have lost momentum, apparently because the Americans have cooled to the idea.

Moscow's tool

The companies vying to invest in Leviathan are ranked on the basis of four criteria: expertise in developing gas fields and LNG plants for exporting the gas; ability to secure its share of the financing to develop the reservoir; customers (the ability to guarantee an off-taker, or anchor customer) for the gas; and the size of the offer.

The last criterion, the price, apparently puts Gazprom in the lead. The Russian giant has no problem is meeting the other criteria, including expertise and experience in operating LNG facilities; it built and operates an LNG facility on the Russian Far Eastern island of Sakhalin, north of Japan.

But a company like Gazprom cannot be measured solely on the basis of professional criteria. A brief trolling of the Internet will quickly find that it is far more than just a business. It is a geopolitical tool for the Kremlin, and some Russian leaders have held top positions at the company. The most recent scandal starring Gazprom was an investigation last month by the European Commission into allegations of abuse of power to harm competitors. Gazprom supplies a quarter of the EU's natural gas needs.

Israel is well aware of the criticism of Gazprom. Delek Group was initially wary of the company, but relations between the companies have warmed over the summer, in large part because of collaboration on gas exports from the Tamar reservoir. Earlier this year, Gazprom's UK-based subsidiary Gazprom Marketing and Trading Ltd. (GM&T) signed a memorandum of understanding to buy LNG from Tamar.

A chief concern of the Israeli government is that behind Gazprom's interest in Israelis gas reservoirs was to make sure that the gas stays in the ground to prevent competition to Russian gas in European markets. These fears were largely allayed during Russian President Vladimir Putin's visit to Israel in June. He led Israel to understand that Gazprom wanted to become a full partner in Leviathan in order to export gas from it.

One of Gazprom's advantages is its geopolitical ability to develop new markets, and to deter anyone from attacking facilities in which it is a partner.

"Gazprom doesn’t live on the moon," said an Israeli official. "It has no intention of investing billions in a reservoir just to prevent exports from it. It very much wants to develop new markets in addition to the European market. The open EU investigation against Gazprom shows that it isn't a monster to be afraid of."

On the other hand, hopes that Gazprom's entry into Leviathan could be part of a deal to bring Russia into the anti-Iran coalition are no less fantastical. "Russia's relations with Iran are part of Russia's strategic interests against Turkey," says a top political adviser familiar with the subject. "Partnership in the Leviathan reservoir will not cause the tail (Gazprom) to wag the dog (the Kremlin)."

Gazprom's gas reserves exceed 22,000 billion cubic meters - equal to 50 Leviathans, and in 2011 alone, the company exported more natural gas than Leviathan's 17 trillion cubic feet.

The Leviathan reservoir comprises five licenses Amit, David, Eran, Hannah, and Ruth. Noble Energy owns 39.66% of Leviathan, Delek Group units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L) each own 22.67% and Ratio owns 15%. In a presentation Noble Energy presentation last week, Noble Energy raised the geologic probability of success of finding oil in the deep target strata to 25% from 15%, but lowered the amount of oil from an estimated 3 billion barrels to gross unrisked resource potential of 210-1,490 million barrels of oil equivalents.

Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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