Last week, Noble Energy (NBL), the independent oil and gas producer developing the massive Leviathan gas field offshore Israel, announced that Australia's Woodside Petroleum will no longer be acquiring a 25% interest in the project as was previously expected.

But far from signaling any looming issues with Leviathan, Woodside's departure simply reflects the project's changing logistics. For Noble Energy and its partners, development of Leviathan remains a highly promising venture, especially given the strong and growing regional demand for gas.

Photo credit: Wikimedia Commons.

Why Woodside backed out
Earlier this year, Woodside had agreed to acquire a 25% stake in Leviathan for as much as $2.6 billion, as part of the Australian energy producer's efforts to revive production growth through acquisitions. Initially, Noble was interested in working with Woodside because of the company's strong working relationships with Asian buyers of liquefied natural gas, or LNG, and its technical expertise in gas drilling.

But the deal fell through mainly because of major changes in Leviathan's development plans. Noble and its partners, which include Delek Drilling, Avner Oil Exploration, and Ratio Oil Exploration, no longer need Woodside's Asian LNG connections, since they are now looking to export gas from Leviathan to neighboring countries via pipeline, as opposed to converting it into LNG and shipping it to more distant markets.

In Noble's press release, Charles Davidson, its chairman and CEO, explained the importance of these regional markets:

The plans for development of the Leviathan discovery have significantly changed since we began the search for a partner approximately two years ago. Perhaps the most dramatic changes have been associated with the growth in the regional markets. The emergence of these regional markets, which are accessible through pipeline outlet, has pushed the need for LNG into a later phase of development versus our earlier plans.

Strong regional gas demand
As Davidson notes, the emergence of regional export markets has been a real game changer for Leviathan's development. Earlier this year, the company inked its first definitive, long-term agreement to supply $1.2 billion worth of gas from Leviathan to the Palestine Power Generation Company over a 20-year period.

It also signed a letter of intent earlier this month to export as much as 2.5 trillion cubic feet of gas from Tamar, another major offshore gas field it is currently developing, to a liquefying facility in Egypt operated by Union Fenosa Gas. Noble is also working on gas export deals to other nearby markets, including Jordan, Cyprus, and Turkey.

By targeting these markets, it hopes to capitalize on the strong and growing demand for gas among Israel's neighbors, many of which are facing gas shortages because of a sharp drop-off in exports from Egypt, which was once the region's largest gas exporter.  

Supplying gas from Leviathan and Tamar to these regional markets has one major benefit for Noble and its partners -- massive cost savings that will result in much stronger returns. That's because building pipelines to places like Jordan or Palestine is significantly cheaper than constructing the liquefaction plants and LNG export terminals needed to export gas to more distant markets.

Noble expects to begin work at Leviathan by the end of this year, with first production from the field currently planned for late 2017. Leviathan will be initially developed using a 1.6 billion-cubic-feet-per-day floating, production, storage and offloading system, with the second phase to be developed using a floating, liquefied natural gas production system.

Investor takeaway
Things are really looking up for Noble Energy. Having already signed a definitive long-term agreement with Palestine and a letter of intent with Egypt, Noble is likely to ink additional agreements with regional players in the months and years ahead, given the strong and growing demand for natural gas in the Eastern Mediterranean region. That makes it all the more likely that production from Leviathan will commence as planned in late 2017.

In the meantime, Noble's onshore U.S. assets in the DJ Basin and Marcellus should continue to drive strong production growth and generate ample cash flow for the company. With a large, diversified, and growing asset portfolio in some of the most exciting resource basins across the world, Noble should be able to deliver peer-leading, double-digit production growth for several years that should handsomely reward its shareholders.