Leviathan partners sign $1.3B worth gas sale deal

The partners in the Leviathan gas field in the Mediterranean Sea, offshore Israel, have signed an agreement worth approx. $1.3 billion for the supply of natural gas from the field to Edeltech Ltd. 

The partners in the Leviathan project and their holding rates are Noble Energy with 39.66% interest, Delek Drilling – Limited Partnership with 22.67%, Avner Oil Exploration – Limited Partnership with 22.67%, and Ratio Oil Exploration – Limited Partnership with 15% interest.

The agreement was signed on Saturday evening, January 30, 2016. The gas will be supplied to Edeltech for the purpose of operating power plants due to be built together with its Turkish partner Zorlu, in Ashdod and Mishor Rotem.

Edeltech is a private company owned by the Edelsburg family. The buyer and Zorlu are partners also in the Dorad power plant (43.75%) and hold, jointly, additional cogeneration plants, Ashdod Energy and Ramat Negev Energy.

The Leviathan is estimated to hold approximately 622 billion cubic meters of gas.

Terms of agreement

According to the supply agreement, the Leviathan Partners undertook to supply to the buyer natural gas at a total scope of approx. 6 BCM (billion cubic meters), in accordance with the terms and conditions specified in the supply agreement.

The supply agreement determines a mechanism whereby the buyer will be entitled to adjust the quantities purchased (including the total contractual quantity) until the date of start of the gas flow, according to the size of the power plants that will be built, and the gas quantities that it will require at such time, all subject to the restrictions set forth in the agreement.

The term of the supply agreement will start on the date of the gas flow in commercial quantities from the Leviathan reservoir to the buyer and will end 18 years after this date or on the date on which the buyer will consume the total contractual quantity, whichever is earlier. The parties are entitled to extend the term of the supply agreement by a period of up to two additional years or until the date of consumption of the total contractual quantity, whichever is earlier.

The buyer undertook to take or pay for a minimum annual quantity of gas at the scope and according to the mechanism set forth in the supply agreement.

The agreement determined that the buyer will have an option to reduce the minimum annual quantity to an amount equal to 50% of the average annual quantity it actually consumed in the three years preceding the date of the notice of exercise of the option, subject to adjustments, as determined in the supply agreement.

Upon reduction of the minimum annual quantity, the other contractual quantities, which were determined in the supply agreement, will be reduced accordingly. Reduction of the minimum annual quantity will be possible at any time during a period of 3 years starting in the beginning of the six year from the date of commercial operation or 4 years from the date on which the Petroleum Commissioner approved the transfer of the rights in the Karish and Tanin leases according to the Gas Framework (whichever is later). If the buyer gives notice of exercise of the option for reduction of the minimum annual quantity as aforesaid, the quantity will be reduced as aforesaid after a period of 12 months from delivery of the notice.

Revenues from the sale

The Leviathan Partners estimate that the aggregate revenues from the sale of natural gas to Edeltech during the term of the supply agreement, may amount to approx. $1.3 billion, assuming that the buyer will consume the foregoing total contractual quantity.

A change in the total contractual quantity (up or down) will result in a change in the projected revenues. The actual revenues will derive from a gamut of factors, including the gas quantities that will actually be purchased by the buyer and the electricity production tariff.

The supply agreement includes several conditions precedent, and mainly approval of the Leviathan reservoir’s development plan, receipt of a license for the gas transportation system from the Leviathan reservoir in accordance with the Natural Gas Sector Law, 5762-2002, adoption of a final investment decision (FID) by the Leviathan Partners by the end of 2016 and adoption of a final investment decision by the buyer.