Field off Israel gets an assist from Down Under

Politics may play a greater role than partnerships in determining whether a major deep-water natural gas find in the Middle East gets developed.

But industry observers say Houston-based Noble Energy’s announcement that Australian oil and gas company Woodside Energy has agreed to take a 30 percent stake in the Leviathan field in the eastern Mediterranean Sea off Israel brings the project closer to fruition.

Some of the money to be paid to Noble and its other partners under Woodside’s roughly $2.5 billion purchase of a working interest in the field is contingent on Israel implementing laws to allow for the gas exports. It’s a waiting game to see if that happens.

“It’s unquestionably the deciding factor in this project going forward,” Morningstar analyst Stephen Simko said. “But Israel, despite having prickly politics, really needs this gas.”

The Leviathan field is estimated to contain 17 trillion cubic feet of recoverable natural gas. Analysts say it was the world’s largest gas discovery in 2010, fitting for a field that gets its name from a sea monster mentioned in the Bible.

And while the price of natural gas has fallen domestically, encouraging some producers to pull out of natural gas plays around the U.S., foreign markets continue to pay top dollar for the resource.

Noble Energy plans to sell a 9.66 percent stake in the field to Woodside for an implied price of $802 million, in a combination of cash and revenue-sharing. Noble will retain a 30 percent stake and will continue as upstream operator. Woodside would be the operator of any liquefied natural gas development of the field.

Delek Drilling, Avner Oil Exploration and Ratio Oil Exploration also will sell stakes to Woodside, accounting for the remaining 20.34 percent.

The price Noble is getting implies a total value for the deal of $2.5 billion.

Noble has major operations onshore in the U.S. and offshore in the deep waters of the Gulf of Mexico. It also has operations in the eastern Mediterranean and offshore West Africa.

Lots of experience

Woodside’s involvement adds considerable overseas experience to the project.

The company is the largest oil and gas production operator in Australia, marketing its energy to customers at home and in Japan, China and other Asia-Pacific countries. Woodside, which produces around 800,000 barrels of oil equivalent a day, also has a lot experience in offshore deep-water drilling.

The Leviathan project is located in roughly 5,550 feet of water.

Noble chief Charles Davidson cited that experience as a key to “further unlock value in the world-class Leviathan resource.” Woodside sees the play as a growth opportunity.

Analysts say the Woodside deal is validation that, at the least, the companies involved believe the field will be developed.

Israel ultimately would have to allow a portion of production to be exported via liquefied natural gas.

Simko said Noble has repeatedly stated that the field can’t be developed without exports being permitted because Israel doesn’t need as much natural gas as Leviathan can produce.

“In other words, the project cost can’t be justified unless exports are allowed,” he said.

Political factors

Investors appear focused on the political risks.

Among Israel’s chief concerns is energy security. It has expressed a willingness to allow some natural gas exports but wants to make sure it has enough natural gas for future generations. Israeli leaders are mindful of how instability in the region has caused supply disruptions in the past and could in the future.

Oppenheimer & Co. analyst Fadel Gheit said not many investors are willing to take the additional political risk.

“The economic risk is also high, as most liquefied natural gas projects are running into cost overruns,” Gheit said.

He noted that there are more established supplies from Algeria, Qatar and pipeline gas from Russia.

According to Woodside, Noble Energy targets initial production to the domestic market in 2016.