Noble Energy Will Cash In on This Israeli Game Changer

Noble’s recent agreements to supply gas from its Leviathan field offshore Israel make it all the more likely that the project will come to fruition as planned.

Arjun Sreekumar
Arjun Sreekumar
Jul 2, 2014 at 11:00AM
Energy, Materials, and Utilities

Noble Energy (NYSE:NBL), the Houston-based independent oil and gas producer, serves as the operator of the Tamar and Leviathan fields offshore Israel, two of the largest deepwater gas discoveries of the past decade. As the company moves toward first production from Leviathan, it is making all the right moves to secure long-term customers and ensure the project is brought online by the targeted date of late 2017.

Photo credit: Wikimedia Commons.

Noble executes non-binding agreement to supply gas to Egypt
Noble on Monday announced the execution of a non-binding Letter of Intent (LOI) between the Leviathan field partners and British gas company BG International Limited to supply gas from Leviathan to BG's existing natural gas liquefaction (LNG) facilities in Egypt.

The LOI calls for the Leviathan partners to supply BG with up to 3.75 trillion cubic feet (Tcf) of gas over a 15-year period, or the equivalent of roughly 700 million cubic feet per day. The gas will be supplied from Leviathan's floating production, storage, and offloading (FPSO) vessel to BG's LNG facilities in Idku, Egypt, via a subsea pipeline.

Though Noble didn't provide any information on the price the Leviathan partners will receive for the gas, nor an estimate of the potential value of the deal when and if it is finalized, an industry expert with knowledge of the matter said the transaction could be worth $30 billion, making it the most valuable energy deal in Israeli history.

Growing Middle East gas demand
The agreement with BG Group, while non-binding, signals just how strong the regional demand for natural gas is and bodes well for further supply agreements. Through the end of this decade, the International Energy Agency (IEA) forecasts global gas demand will rise by more than 14%, from 3,500 billion cubic meters (bcm) last year to an estimated 3,980 bcm by 2019, with the Middle East expected to be the second-largest contributor to demand growth after China.

Demand for gas in the Middle East is especially strong because exports from Egypt, once the largest gas exporter in the region, have fallen sharply in recent years because of domestic shortages and attacks on a major gas pipeline in the Sinai peninsula.  

This makes nearby markets like Jordan, Cyprus, and Turkey especially attractive for Noble. Crucially, gas from Leviathan can be exported to these markets via pipelines, which are much cheaper to build than liquefaction plants and LNG export terminals.

Leviathan milestones to date
Capitalizing on the strong regional demand for gas, Noble has already inked a major long-term agreement to supply $1.2 billion worth of gas from Leviathan to the Palestine Power Generation Company over a period of 20 years. It also inked a letter of intent last month to supply as much as 2.5 trillion cubic feet of gas from its Tamar field to Union Fenosa Gas SA's liquefying facility in Egypt.

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Noble also received some encouraging news regarding Leviathan in March of this year, when the Israeli government converted the Leviathan licenses to Production and Development Leases. This distinction grants the Leviathan partners 30-year terms to develop the project, lasting from February 14, 2014 until February 13, 2044, and provides targeted milestones for its development, among other things.

If everything goes as planned, production from Leviathan will begin in late 2017. The field, which is estimated to contain 19 trillion cubic feet of gas, will initially be developed using a floating production, storage, and offloading (FPSO) system capable of supporting daily production of 1.6 billion cubic feet per day.

Investor takeaway
Though Noble's biggest near-term growth drivers will be its onshore U.S. operations in Colorado's DJ Basin and Pennsylvania's Marcellus shale, Leviathan will be a crucial driver of the company's growth post-2017. The fact that Noble and its partners have already secured a firm long-term agreement with Palestine and a non-binding letter of intent with BG to supply gas from Leviathan is encouraging, as it makes it more likely that the first phase of the project will be sanctioned.