The $2.71 billion deal to bring in Australia's Woodside Petroleum Ltd. (ASX: WPL) as a partner in Leviathan is leading the race for the title of “Deal of the Decade" in Israel's energy market.
Since last Friday, the press has reported extensively on the signing of a Memorandum of Understanding (MOU) in Australia between Yitzhak Tshuva and his partners and the Australians. The market responded coolly to the reports, on the basis of analyses that showed the price was lower than expected. However, the complicated mess of analyses has left several significant questions unanswered.
Was there even a deal?
The surprising answer to this question is: No. There is no deal, at least not yet. The many reports from Australia neglected to mention the key word “Non-binding,” which was after the words “Memorandum of Understanding” in the title of the signed document.
Because of this, at least in a formal, legal sense, Woodside is not bound to the agreement until the final agreement is signed. Analysts in Australia found this necessary to mention, unlike their colleagues in Israel. Generally speaking, the signing of the MOU was received in Australia with more cautiousness and skepticism than in Israel. The MOU only expresses agreements that have so far been reached in the talks regarding the price Woodside will pay (up to $2.71 billion), the license stake it will purchase (25%), the dates and terms of the basic payment, and, yes, also the intention to reach a binding agreement by the end of next month. It is interesting that the agreements on price were mostly reached prior to Tshuva and his partners’ arrival in Australia, so it is not accurate to say that the deal was closed during the visit to Australia. So why did the heads of Delek Group Ltd. (TASE: DLEKG), Ratio Oil Exploration (1992) LP (TASE:RATI.L) and Noble Energy Inc. (NYSE: NBL) undertake the arduous journey to the southern continent? Mostly to lend validity to the commercial agreements with handshakes and signatures.
Will there be a deal?
The likelihood that the deal to bring Woodside in as a Leviathan partner will not be signed seems slight. That said, there is no ignoring the fact that on the road to the signing there are at least three potential pitfalls that could pose significant challenges. The first is taxation. Woodside has said it will not sign any deal before knowing what tax rate Israel plans to impose for gas sold outside of Israel. The answer to this question will be clear over the coming weeks by the joint Ministry of Finance and Tax Authority committee, led by Ministry of Finance director general Yael Andorn. The committee is meant to decide on the principles for setting “transfer prices,” or base prices on which surplus profit taxes will be imposed, better known as “the Sheshinski’ Tax.” “Globes” revealed that the committee is inclined not to set fixed transfer rates, but rather to calculate a normative price for each type of deal, to be based primarily on the expected netback. Market expectations are for transfer rates of $6-7 per thermal unit, a price level that should not cause problems for Woodside.
Another issue that could cause significant problems is the leasing terms that Israel offers the Leviathan developers. The leasing agreement, which should be signed with the Leviathan developers in the coming weeks, is intended to allow for development and operation of the field until its resources have been depleted in several decades. The government may make demands that will be burdensome and expensive for the developers, such as large financial guarantees.
The third and final issue is the settlement agreement with the Antitrust Authority head, which is meant to bring an end to the cartel arrangements issue. Unpleasant surprises could also pop up by the developers, particularly after the agreement is presented for a public hearing prior to its approval in the Antitrust tribunal.
Is the world waiting for Israeli gas?
Recent deals in the global and regional gas market are the main cause for optimism regarding the Woodside deal. The events of the past month have created conditions that dramatically increase the attractiveness of Israel gas for potential buyers in Turkey, Egypt, and the Far East.
The main potential buyer of Leviathan gas in Egypt is British Gas (BG), which operates a huge Liquefied Natural Gas (LNG) facility that was built to export Egyptian gas. BG representatives are in intensive talks with the Leviathan partners to buy Israeli gas for European and Asian customers. Pressure on BG mounts as the gas shortage in Egypt worsens. On January 27, BG’s stock plummeted 14% in London, after the company said it will not meet agreements to provide gas to its customers because the Egyptian government is forcing the company to supply gas to the domestic market. Even before the dramatic announcement, BG had reported that cumulative losses in Egypt had reached $1.3 billion, would cause the British company to report its first loss since 2000. However, the deal to sell gas to Egypt will not be signed before a diplomatic “green light” is received. In this matter, the decision of Field Marshal El-Sisi to run for the presidency of Egypt this summer has tremendous positive implications.
There is also big geo-political question mark looming over the possibility of exporting gas to Turkey. “Bloomberg” has reported that the desire to buy Israeli gas was behind Turkish Minister of Foreign Affairs Ahmet Davutoğlu assertion that Turkey and Israel are "are closer than ever to normalization.” As reported in “Globes,” Leviathan partners began pre-tender processes with Turkish companies interested in buying gas from the field. The third positive development comes from the global LNG market. Prices of liquefied gas have recently begun rising again in East Asia, after a long period of stagnation. The main reason for this is that the fear that the US will enter the market as a leading exporter is receding. US exports, it seems, will be limited, and the impact will be felt only in a few years.
Everything is personal - How will the Israelis manage with the English speakers?
Since the signing of the Woodside deal, analysts have looked at the economic aspects of the deal, and have analyzed and picked apart every number and condition. But no analysis is complete without factoring in the human element, and without recognizing the fact that the Woodside deal will alter internal relationships in the partnership that manages Israel's largest gas field.
Until today, this partnership has operated with a delicate balance of power between Noble Energy, which holds 40% of the rights to Leviathan and the Israeli companies Delek Group Ltd. (TASE: DLEKG), led by Yitzhak Tshuva, and Ratio Oil Exploration (1992) LP (TASE:RATI.L), led by Ligad Rotlevy, which hold 45% and 15%, respectively. Noble was the one to insist on preferring Woodside’s offer to other potentially higher offers, from companies such as Russia’s Gazprom, for example. The semi-official explanation for this was a “DNA match” between the Americans and the Australians. As far as the Americans are concerned, the deal with Woodside was closed already in December 2012, when Noble Energy CEO Chuck Davidson shook hands with Woodside CEO Peter Coleman. In Houston, where Noble corporate headquarters are based, that handshake was given more legal significance than a 300 page agreement. But the Israelis did not see it that way. Delek and Ratio did not hide their dissatisfaction with the offer made by Woodside, and they made sure to convey their dissatisfaction to the Australians unequivocally. Over more than six months, Delek leaders avoided meeting with Woodside representatives, and vetoed any cooperation between Noble and representatives of the Australian company. The Australians eventually blinked first. Last week, they greeted Tshuva and his entourage warmly and enthusiastically, but concerns over the “bad blood” that flowed during the negotiations will be alleviated only after the final agreement has been signed. Following the deal, the English speakers’ share in Leviathan is expected to rise from 40%, to more than 55%. Delek Group did not take any chances. The agreement between the Leviathan partners will be changed in a manner that will leave Yitzhak Tshuva veto rights on significant decisions, even after Delek Group’s share drops to 34%.
Published by Globes [online], Israel business news - www.globes-online.com - on February 12, 2014
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