Analysts and Tel Aviv Stock Exchange (TASE) investors were indifferent to the announcement by Australia's Woodside Petroleum Ltd. (ASX: WPL) that it had pulled out of the Leviathan deal. The share prices of Leviathan partners Delek Group Ltd. (TASE: DLEKG) and its energy units Avner Oil and Gas LP (TASE: AVNR.L), and Ratio Oil Exploration (1992) LP (TASE:RATI.L) all fell in response to the cancellation of the farm-out deal. It can be assumed that had this announcement come a year ago, the impact on the shares would have been devastating.
Cancellation of the Woodside deal finds Delek with pretty good alternatives for the sale of natural gas and with enough capital to finance its share of Leviathan's development, due to the successful bond issue early this month and the sale of non-gas assets. The condition of Ratio, which owns 15% of Leviathan, is far less certain.
"We're continuing as usual," said Noble Energy chairman and CEO Charles Davidson, but the repercussions of the cancellation could be severe and painful, even if Leviathan's development goes ahead as planned in the short term. The gas field's marketing risks have shot up. The chances of closing a long-term gas supply contract in Asia at high prices have plummeted without the abilities and customers that Woodside would have brought to a deal.
Without the Woodside option, the Leviathan partners have a weaker hand in negotiations with customers and governments in Turkey and Egypt. It is enough for one more channel to fall apart to undermine confidence in Leviathan's development model. For the Israeli market, this is not just a blow to its image caused by the walkout of a foreign investor, but it is also the loss of the only company that could replace Noble Energy. It seems that Israel's total dependence on Noble Energy will only deepen.
The cancellation was no surprise given discord over the deal lately, topped by Woodside CEO Peter Coleman's theatrical walkout from the signing ceremony at the Sherover Promenade in Jerusalem.
A brief reminder: Delek controlling shareholder Yitzhak Tshuva and his partners brought Woodside to Israel in the belief that they lacked the capabilities to develop Leviathan on their own. They sought an energy major to inject capital and expertise and to bring Far Eastern customers who were prepared to pay top dollar for Israeli gas. Two years ago, everyone was talking about the need to build a huge liquefied natural gas (LNG) plant. The Tzemach Committee on gas exports recommendations were tailored to the size of this plant, which is now irrelevant.
In retrospect, it seems that the seeds of separation were sowed when the memorandum of understanding was signed in December 2012. Tshuva and his Israeli partners at Ratio were not pleased by the deal that Woodside offered, and it seems that the deal was forced on them by their American partner. This dissatisfaction was translated into the creation of an alternative market for Leviathan's gas.
Contacts with large customers in Turkey, Egypt, and Jordan were originally intended to assist in the effort to secure from Woodside a better deal. But this effort, handled by Delek Drilling CEO Yossi Abu, was so successful that Tshuva fell in love with the new option and set aside the dream of selling LNG to China and Japan. The turnaround was completed when Noble Energy also came on board and announced that the sale of gas via pipeline to regional markets was its preferred option.
Personal relations also contributed the failure of the deal. Delek executives' refusal to meet Woodside representatives for six months deeply insulted the Australians. Tshuva felt their response in his exchange with Coleman on the balcony of the King David Hotel in Jerusalem. Coleman told Tshuva to stay out of his business, and left the partners in Leviathan in the lurch.
Published by Globes [online], Israel business news - www.globes-online.com - on May 21, 2014
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