Woodside Farm-In At Risk As Turkish Pipeline Interest Grows


BMI View : Woodside Petroleum's farm-in to the Leviathan field offshore Israel is increasingly at risk of falling through. This is in face of rising interest in pipeline gas export from Leviathan, particularly to Turkey, and with the apparent financial backing of Turkish firms. Given that Woodside was most likely selected as a partner in 2012 based on its extensive LNG experience, its involvement may be deemed to lower in value if Leviathan's resources are to be commoditised in the form of pipeline gas.

Woodside Petroleum made a splash when it was announced to have beaten several high profile bidders - including the likes of Russian gas giant Gazprom - to emerge as the fifth partner of Israel's giant Leviathan field ( see 'Woodside Counts On Leviathan', December 4 2012). In a deal worth US$1.25bn, the Australian player would take a 30% stake in the field and operate any liquefied natural gas (LNG) export project developed. However, the closure of the deal is subject to the passing of a law permitting LNG exports and a decision to move ahead with a LNG development plan by the Leviathan consortium, which consists of Noble Energy (30%), Delek Group (15%), Avner Oil Exploration (15%) and Ratio Oil Exploration (10%).

However, the Australian Financial Review reported that Woodside's farm-in has yet to be finalised despite nearing a year since the deal was announced. This is attributed to both continued policy uncertainty regarding gas exports from Israel and, increasingly, the emergence of a pipeline gas export alternative to a LNG project. According to an estimate by Avner released in October 2012, the cost of developing a LNG project for Leviathan could cost more than US$10bn (including field development), but a pipeline linking the offshore gas from Israel to Turkey could cost about US$2.5bn ( see 'Politics Blocking Gas Plans In The Pipeline', November 6). Together with field development cost of about US$4.5bn, as reported by Reuters quoting an official source in June 2013, a pipeline export project could come up to US$7bn or more.

The choice of a pipeline export plan in particular could see the original members of the consortium running Leviathan to pick another partner at a lower cost instead, given that the Australian firm was most likely picked for its extensive experience in large LNG export projects in Australia. The other option would be for Woodside to increase its offer for Leviathan.

Green Light For Exports To Move Ahead

The long tussle between conservatives and liberals over the deployment of Israel's newfound offshore gas resources gave the victory to the latter, following the Israeli Supreme Court's decision to reject a petition that sought to overturn a government decision to allow up to 40% of the country's gas to be exported in October 2013 ( see 'Supreme Court Decision Powers Exports', October 23). This should have helped advance plans for the development of the giant Leviathan field, which mean reserve potential was upgraded by 11% from 476bn cubic metres (bcm) to 532bcm - nearly twice that of Israel's existing proven gas reserves and sufficient to last the country for 143 years based on its level of gas consumption in 2012.

Leviathan - A True Giant
Recoverable Mean Estimates Of Major Gas Fields/Discoveries In Israel

Only Politics In Way Of Pipeline Realisation

Israel's political isolation had made LNG exports - delivered via sea to partner destinations - appear more feasible than pipeline gas exports to its neighbours in the region. However, Noble and its partners - who hold rights to Leviathan and its surrounding gas-rich fields - have been slowly warming up to pipeline gas exports particularly to Turkey instead. This was boosted by Turkish firm Zorlu's announcement in November 2013 that it is holding talks to purchase 3bcm of gas per year under a 15-year contract from the Leviathan field, which would be transported via a pipeline to Turkey.

Turkish holding company Turcas has already submitted plans for a 470km subsea pipeline connecting Leviathan to the Turkish ports of Cekisan and Mersin ( see 'No Done Deal In East Med Gas Transportation', September 18). Zorlu would also make a financial contribution alongside other partners to the construction of this US$2.5bn pipeline, which could have an initial capacity of about 8-10bcm per annum.

We had highlighted that tensions between Turkey and Israel following the fall-out from the 2010 Gaza flotilla incident could stall progress on such energy cooperation between the two countries. However, Energy Minister Taner Yildiz had acknowledged that Turkey was 'interested in Israeli gas'. The country's poor balance of trade position - which Turkish reliance on energy imports has contributed greatly to - could also push the two countries towards a deal so long as there is supportive commercial interest in both countries ( see 'Politics Blocking Gas Plans In The Pipeline', November 6).

Other possible pipeline export options include Jordan and Egypt. Since the Arab Spring in 2011, outage to Egyptian production and the country's own uncurtailed rise in consumption has seen Egypt's net gas import capacity steadily fall. In fact, prior to the disposal of President Mohamed Morsi in June 2013, the government had approached Qatar for LNG imports on preferential terms. The ouster of Morsi has displeased Qatar and dampened Egypt's chances of cheap Qatari gas, even as it continues to search for other sources to supplement domestic supplies.

Spring Sees Exports Fall Instead
Egypt - Gas Production, Consumption & Trade, bcm

Jordan, which had been reliant on gas imports from Egypt transported via the Arab Gas Pipeline, has also been struggling with the Egyptian outage and constant militant attacks disrupting operations on the Arab Gas Pipeline.

Arab Spring Hits Jordanian Gas Supplies
Jordan - Imports Of Dry Natural Gas, bcm

Like with Turkey, political tensions remain the key obstacle to the materialisation of gas exports from Israel to Egypt and Jordan. However, if this can be overcome, the cost of infrastructure development to facilitate exports to Egypt would also be much lower than a greenfield LNG project, as it could simply be a matter of reversing the pipeline flow of the existing Arish-Ashkelon pipeline.

Turkish Delight, Woodside's Pain

Egypt appears to have ruled out gas imports from Israel in the near future, choosing instead to rely on LNG supplies through a rented floating platform, according to chairman of Egyptian Natural Gas Holding Company (EGAS) as quoted by Reuters. Jordan also has a floating LNG terminal which it hopes to receive first LNG by 2015 ( see 'Oil Terminal Bolsters Energy Security', November 8). These additional sources of supply would likely make these countries less willing to take on politically-sensitive supplies from Israel, and vice versa.

However, even with Azeri gas set to flow into Turkey from 2019 with the completion of the Trans-Anatolian gas pipeline (TANAP), the country's rapid rate of gas consumption growth will make it eager to secure any additional supply of gas. This would not only meet domestic needs, but also provide the physical liquidity needed to enable Turkey to effectively assume its desired role of a regional energy trade hub at the intersection of major gas suppliers in the Middle East, Caspian Sea and from the West.

Consumption, Hub Ambitions Push Up Import Needs
Turkey - Gas Production, Consumption & Trade, bcm

Turkey's gain could be Woodside's pain if active Turkish wooing continues to increase the feasibility of a gas export plan, thereby pushing aside the necessity of Woodside's LNG expertise in the development of Leviathan. This is unless Noble and its partners decide to tie-in the development of Leviathan with the Aphrodite field in Cyprus to bring about a LNG export plant in the East Mediterranean Sea, following less than satisfactory appraisal results of Aphrodite's resource potential ( see 'Little Love From Aphrodite', October 7). However, this plan could also face significant political hurdles, given the need for cooperation between the Israeli and Cypriot government on profit-sharing. Moreover, continued disputes between Cyprus, Israel and Turkey over maritime boundaries in the East Mediterranean Sea could see an Israeli-Cypriot LNG project incur the political opposition of their Turkish neighbour.

This article is tagged to:
Sector: Oil & Gas
Geography: Israel, Cyprus, Egypt, Jordan, Turkey

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