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Woodside Signs MOU With Leviathan Partners May Pay Up To $2.5 Billion For 25% Interest In Gas Field

OIL gas

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Australian oil company Woodside Petroleum Ltd. has now gone a significant step further towards investing in Israel’s Leviathan offshore gas project. Woodside announced today that it has converted a previous non-binding “agreement in-principle” for “the potential acquisition of an interest” in Israel’s Leviathan off-shore gas field into a much more detailed, but currently still “non-binding”, Memorandum of Understanding, or MOU.

The Woodside announcement is itself a very carefully crafted document, one which is therefore well worth providing a couple of extracts from with some of its details of in order to show just how complicated the negotiations have been, and still likely are, to bring it all to a formal definitive agreement over the next seven weeks.

First there is still plenty of negotiating to be done: Woodside says “The MoU provides a framework for Woodside and its potential new partners Delek and Noble Energy to negotiate in good faith, the acquisition of a 25% participating interest in each of the 349/Rachel and 350/Amit petroleum licences. The parties will negotiate towards executing a fully termed agreement by 27 March 2014”.

In other words Woodside will end up owning a 25% position in Leviathan if the deal is concluded as outlined.

Next the gas that is potentially there is delineated one more time by Woodside: “The Leviathan field is contained within the licences, and based on information provided by the operator Noble Energy, has an estimated ‘2C’ contingent resource (100%) of 18.9 trillion cubic feet of natural gas and 34.1 million barrels of condensate.” Note: 2C simply means it is a mid-range estimate of what is there, and not the most optimistic.

Next it is determined that if it all goes ahead: “Woodside would be the operator of any LNG development of the field, while Noble Energy would remain upstream operator.” This is important to Woodside as LNG is something they do very well.

Only then do they talk about money. The MOU stipulates that if a definitive agreement is indeed signed by March 27th, then Woodside will commit to pay:

i) US$850 million as a down payment upon completion of the transaction under a fully termed agreement
ii) US$350 million when there is either an agreement for an LNG development or up to US$350 million when alternative export milestones are met
iii) US$1.3 billion in total by way of payment of 5.75% of Woodside’s well head export gas revenue, and commencing after at least 2 trillion cubic feet have been exported from the Leviathan field.
iv) A 2.5% royalty on commercial oil produced from Leviathan’s deeper Mesozoic zones, after payback of development costs
v) US$50 million, as a one-time payment once total gas reserves are independently assessed to exceed 20 trillion cubic feet, and payable once 4 trillion cubic feet have been delivered.

All of the payments stipulated above are conditional on the MOU being converted into a signed “fully termed” agreement between the partners. The Woodside payments total over US$2.5 billion, but these are not all payable up front, rather over many years, so the “discounted” value of the field is not simply a four times multiple of the total amount Woodside may be committing to for its 25% position.

Finally Woodside also cautions: “Such an agreement is also conditional on “certain policy tax and regulatory approvals from the Israeli Government”.

With these caveats, Woodside CEO Peter Coleman said the MoU provided a potential commercial outcome with compelling value, and he commented as follows: “We look forward to the ongoing engagement with the joint venture, government and other stakeholders to move forward with the Leviathan project.”

Inch by inch this is getting closer to a done deal. If you should think it is almost as difficult as negotiating an Israel-Palestine peace agreement you would be right, though here they may grounds for optmisim. Once in place too, the development of Israel’s off shore fields will encourage, more broadly, peace in the region. Gaza has offshore as fields too, for example, and it will need calm seas in order to develop them.




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