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Oil price drop could benefit Israeli gas producers

The cost of hiring production rigs has plummeted, making development of the Tamar and Leviathan cheaper.

Tamar gas

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Energy stocks fell sharply yesterday on the Tel Aviv Stock Exchange, against a background of tumbling oil prices, which led to falls in energy stocks in Europe and the US at the end of last week.

It could be, however, that the stocks of the Israeli entities that are partners in the Israeli Tamar and Leviathan gas fields, such as Delek Group Ltd. (TASE: DLEKG), Avner Oil and Gas LP (TASE: AVNR.L), Delek Drilling, and Ratio Oil Exploration (1992) LP (TASE:RATI.L), will actually benefit from the situation.

The partnerships face investing $6.5 billion in developing the Leviathan reserve and a further $1.2 billion in expanding the Tamar reserve. Following the drop in oil prices, oil drillings around the world have been cancelled, leading to the hire of drilling and production platforms becoming substantially cheaper.

For example, a drilling rig that a year ago cost $650, 000 a day now costs just $340, 000 a day, a reduction of nearly 50%. Because of the fall in the cost of hiring rigs, energy market sources estimate that the cost of developing the Leviathan and Tamar fields will also fall, although it is still not clear by how much.

Although they fell on the stock exchange yesterday, the Israeli partnerships have no exposure to the price of oil. The anchor contract of the Tamar partners with Israel Electric Corporation is not linked to the oil price but to the US Consumer Price Index. Similarly, the contracts of the private power producers are linked to the Electricity Authority’s electricity production cost tariff, and not to the price of a barrel of oil. In fact, only the Tamar partners’ contract with Oil Refineries Ltd. (TASE:ORL) is linked to the price of oil, but its effect is small compared with that of the other contracts.

The gas partnerships are exposed to fluctuations in the price of oil in a series of memoranda of understanding they have signed with customers in Egypt and Jordan, but even there a floor price is set for each contract that does not allow the price to fall below the average price of gas sales in the local market.
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