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Israeli Leviathan Partners Will Ask Australian Woodside To Up Price

The main reasons for a higher price are the larger estimated natural gas reserves at Leviathan, the greater chance of finding oil, and interest from Turkish buyers.


Negotiations to sell 30% of Leviathan to Woodside Petroleum Ltd. (ASX: WPL) for $1.25 billion will resume, following Monday’s High Court of Justice ruling on natural gas exports, industry sources believe. Leviathan’s partners will reportedly ask Woodside for a much higher price, but this will not wreck a deal.The main reasons for a higher price are the larger estimated natural gas reserves at Leviathan from 16 trillion cubic feet (TCF) to 19 TCF, the greater chance of finding large quantities of oil, and increased competition from Turkish buyers for the gas.

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Noble Energy Inc. (NYSE: NBL) owns 39.66% of Leviathan,  Delek Group Ltd. (TASE: DLEKG) units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L) each own 22.67% and Ratio Oil Exploration (1992) LP (TASE:RATI.L) owns 15%. In December 2012, Woodside signed a non-binding letter of intent to acquire 30% of Leviathan for $1.25 billion in cash. The deal was subject to milestones, including the signing of a final agreement in exchange for a down payment of $696 million, and the obtaining of regulatory permits for gas exports and the construction of liquefied natural gas (LNG) infrastructures. Woodside also agreed to pay up to an additional $1 billion if the price of gas exported from Leviathan was higher than set out in the formula appended to the letter of intent.

Delek and Ratio did not conceal their unhappiness with the size of Woodside’s offer and hinted that they could get higher offers. Russia’s Gazprom JSC (RTS: GAZP; LSE: GAZD; DAX: GAZ), Korea Gas Corporation (Kogas), and other companies were mentioned as interested in Leviathan before the deal with Woodside.

When the letter of intent was signed, Woodside believed that the final deal would be signed by February 2013. But the Israeli elections in January delayed a decision on gas exports recommendations by six months, and, at the insistence of Minister National Infrastructures Silvan Shalom, cut the export quota from 50% to 40%. The talks between Leviathan’s partners and Woodside remained frozen even after the government decision until the High Court of Justice dismissed the petitions against the decision yesterday.

In the meantime, there has been substantial progress in talks between Leviathan’s partners and a Turkish consortium that wants to buy gas from the reservoir and deliver it to customers via pipeline. A Turkish pipeline would jeopardize Woodside’s plans for an LNG plant for exports to its customers in China. The Turkish plan has the support of Israeli government officials and the plan’s return on investment would be much faster than the return on an LNG plant, which would cost $10-15 billion. On the other hand, Israeli-Turkish relations have been unsettled of late. In addition, Woodside gives great weight to Prime Minister Benjamin Netanyahu’s reportedly strong support for its deal.

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