Six weeks ago, Woodside CEO Peter Coleman came to Israel and met with Prime Minister Benjamin Netanyahu. The meeting was aimed at dispelling the Australian company's major concerns that the Israeli government would not permit gas exports and would not adopt the conclusions of the Tzemach Committee regarding the quantities of gas that can be exported. The meeting with Netanyahu did the trick. "Don't worry," Netanyahu told Coleman. "They'll be gas exports."
Those two words "don't worry" out of the mouth of an Israeli politician would have lit a red light for any Israeli businessman. Even Noble Energy Inc. (NYSE: NBL), Yitzhak Tshuva's US partner in the Tamar and Leviathan fields has already learned that the promise by Minister of Finance Yuval Steinitz that there won't be any retroactive tax on the Tamar field was not worth anything.
If promises are made then they should at least be in writing. Woodside's innocence perhaps explains the price it offered for a 30% stake in Leviathan. Although the view going around the market today was that the price is disappointing, checking the figures shows that it is the sellers who have profited.
The deal reflects a value of $8.3 billion for Leviathan but the guaranteed value of the deal is around $5 billion without a premium on the value of the field today. However, what most commentators and analysts are not taking into account is the weight of uncertainty around Leviathan's future.
Woodside's offer includes components that cannot currently be measured by money, and first and foremost a royalty payment of up to $1 billion on LNG sales.
Before the Leviathan partners can sell a single molecule of natural gas, the Israeli government must approve the Tzemach Committee recommendations and approve the construction of a LNG project.
The planning committee is facing massive opposition from environmentalist groups and the Ministry of Environmental Protection. The wretched performance demonstrated by the Netanyahu government in promoting vital energy projects does not leave much room for optimism.
The Leviathan partners for their part are supposed to obtain long-term LNG purchase agreements for the gas they produce. To achieve that they must compete with other gas fields worldwide that have better locations, a more secure geopolitical environment, and more supportive regulations. The window of opportunity is narrow because the US and China will soon begin flooding the market with gas from shale.
If the LNG project does get underway the Leviathan partners will be required to raise $10-15 billion to build the LNG terminal - a mega-project that will be too large for Israel by several sizes. In the most optimistic scenario the extra billion dollars from Woodside will only begin to enter the accounts of Noble Energy and Yitzhak Tshuva by 2018 at the earliest. The guaranteed component of the deal will yield only $750 million to $1.5 billion.
While this is a small amount, it contains some immediate advantages that should not be scoffed at. The first is an immediate payment of $700 million, which will greatly alleviate the liquidity problems of Delek and Ratio. The second is that Woodside's $50 million participation in the drilling for oil is above its share of the bill and neutralizes the risk in the oil exploration venture for the Israeli partners.
Published by Globes [online], Israel business news - www.globes-online.com - on December 3, 2012
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