Australia/Israel & Jewish Affairs Council

Woodside-Leviathan deal moves ahead in a milestone for Australia-Israel ties

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AIJAC has previously reported on the proposed purchased by Australia's Woodside Petroleum of a share in Israel's Leviathan gas field development.

Finally after months of protracted negotiations, partners in Leviathan have signed a new memorandum of understanding (MoU) with Woodside last Thursday, making it more likely than ever that the deal will go ahead. If it does, it will be a major milestone in Israeli-Australia relations, backed by governments on both sides.

Here is what you need to know about the deal and its implications.

 

Background

The Leviathan and adjacent Tamar fields are mammoth natural gas reserves located in the Mediterranean Sea, roughly 130kms west of Haifa. The 2010 discovery of Leviathan, which holds roughly 537 billion cubic metres (bcm) of natural gas, represents the largest offshore gas discovery of the past decade. The find is a significant step towards energy independence for Israel, which has hitherto relied heavily on imports for natural gas supplies. The Israeli cabinet recently elucidated plans to export 40% of the gas produced at the plant, while retaining the rest for home use. Considering Leviathan holds enough natural gas to support the whole of Europe for over a year, Israel can easily satisfy domestic demands while also becoming a major player in the international supply market.

 

Terms of the deal

The parties entered into a non-binding MoU, which will see Woodside purchase a 25% interest in the developing gas plant for $US2.71 billion, valuing the plant at $US10.8 billion. Under the original terms of purchase agreed upon in December 2012, Woodside was to pay only $US2.5 billion for a 30% share in Leviathan. While some analysts were initially sceptical about the revised terms, the decreased interest and inflated price in the new deal were intended to reflect a 12% increase in resource size since the original deal was struck. The parties have a March 27 deadline to close the deal.

According to a recent Woodside press release, Woodside would operate the liquefied natural gas (LNG) development of the reserve, while joint venture partner Noble energy would operate the exploration operations and production of any subsequent gas found. A full summary of the terms of the deal can be seen here


Political implications

Woodside's bid for Leviathan comes in stark contrast to attempts by Russian state-run energy goliath, Gazprom, to grab a share of the gas bonanza. The world's biggest natural gas producer, Gazprom supplied nearly a quarter of Europe's energy demands in 2013. Restrictions on fracking as a method of producing natural energy have forced EU states to begrudgingly rely on Gazprom as a predominant provider of their energy needs. Despite the fact that Europeans pay Gazprom 2.5 times what their US counterparts pay for gas, the Russian behemoth still extracts 40% of overall revenues from EU states, highlighting its stranglehold on the natural gas industry. It's no surprise then that Gazprom wanted to maintain their regional dominance with a share of Leviathan, signing an initial agreement with the partners in February 2012. However their pitch was strikingly rebuffed, with the owners electing to deal with Woodside instead.

The decision came after Woodside executives approached former Prime Minister John Howard in 2012 to lobby Israel in support Woodside's bid for Leviathan. Howard wrote a letter to Israeli Prime Minister Binyamin Netanyahu, advocating Woodside's efficacy and proficiency in LNG operations. The Australian reported that:

"The intervention by Mr. Howard, who was not paid for his involvement, was considered critical in sealing the acquisition."

In fact, key Australian figures across the political spectrum lobbied in favour of Woodside;

"Sources close to the Leviathan deal stressed that Julia Gilland, Foreign Minister Bob Carr and Financial Services Minister Bill Shorten also played significant roles in lobbying Israel to secure Woodside's entry into the politically volatile country."

The decision is a significant show of confidence to the Perth-based energy company, which will now utilise its expertise in LNG development to head up the Leviathan export project.


Potential concerns for Woodside

While the deal seems ostensibly positive for Woodside, there are still concerns over the joint venture. A major impediment to the completion of the current agreement was Delek group's demand that Woodside explore other options for exporting gas from the reservoir besides LNG. In fact, the partners are already conducting negotiations to sell gas via pipeline to customers in Egypt, Jordan and Turkey, on top of an already completed deal to supply $US1.2 billion worth of gas to the Palestine Power Generation Company in the West Bank town of Jenin. This seems to suggest that LNG exports are further down on the list of priorities, something that would be directly detrimental to Woodside's investment in Leviathan. However, UBS analysts nonetheless see the deal as "value accretive," words which Woodside CEO Peter Coleman echoed in a recent media release;

"We look forward to the ongoing engagement with the joint venture, government and other stakeholders to move forward with the Leviathan project," Coleman said.

Other concerns included potential security risks and political instability, but these were played down by Coleman in 2012, highlighting the Australian company's trust in Israel as a secure destination for investment.

"We've made our own assessment of security risk. We have spoken not only to Israeli security forces but also reviewed potential sites for onshore facilities and made our own risk assessment around that. We feel that's manageable... Woodside's assessment of political risk for Israel... was no different to any other country, and was based on the stability of the rule of law and the government's willingness to encourage foreign investment."

Assuming the deal goes ahead, it will represent a seldom seen level of commercial co-operation between Australia and Israel. For Australia, allowing Woodside a slice of the Leviathan pie in favour of a much larger and more influential Russian competitor instils confidence in the Australian company's ability to manage a large-scale LNG project. For Israel, it proves that despite political uncertainty, it can still develop viable investment projects for international companies.

"The introduction of Woodside to the partnership reflects the great confidence that the international company has in the State of Israel and in the potential of the Leviathan reservoir, as well as its desire to achieve significant additional value from the basin," the Leviathan partners said.

This is a glowing endorsement of the tiny nation, which with Australia's support can now compete on the world energy stage.

Michael Thurin

 

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