Tamar: Win one contract, lose another

Following Noble Energy and Delek Drilling’s announcement in February that it would be selling gas to Egypt’s Dolphinus Holdings from the Tamar and Leviathan fields, Egypt is ditching a previous agreement to import gas from Tamar.

Madrid’s Union Fenosa Gas had signed a non-binding letter of intent in May 2014 with the Tamar field partners to buy gas for the supply of the Damietta LNG plant in Egypt. The LNG plant is operated by Segas, a JV between Union Fenosa Gas, Eni and the Egyptian state. This arrangement has been cancelled as at the end of March, citing that it was “no longer relevant”.

This suggests that Eni, one of the partners of Segas, will supply Damietta with gas from its Zohr field.

Last month, Dolphinus Holdings had agreed to import 3.5bcm from each of Tamar and Leviathan for a period of 10 years under a contract wortg USD15 billion.

Tamar is owned by Isramco Negev (28.75%), Noble Energy (25% operator), Delek Drilling (22%), Tamar Petroleum (16.75%), Dor Gas (4%) and Everest Infrastructures (3.5%) – this reflects the ownership post the recent sale of 7.5% by Noble Energy to Tamar Petroleum as reported previously (Tamar Petroleum to raise bonds to finance acquisition of Tamar from Noble and Israel capital cycle: Noble sells down Tamar to fund Leviathan).

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Dolphinus and the wider Egyptian gas hub story

Dolphinus was established with the main aim of becoming a “reliable and stable supplier of gas to major industrial gas distributors and consumers in Egypt”. It was co-founded by prominent Egyptian entrepreneurs Dr. Alaa Arafa, Eng. Khaled Abu Bakr and Mohamed Khalifa.

As a first step in its strategy, Dolphinus entered into a 64bcm, 10 year gas supply contract with Noble Energy and Delek Drilling for their gas in Israel (see Israel's Leviathan and Tamar gas to be sold into Egypt).

This is a welcome move for Egypt as Dolphinus can act as “middleman” for sourcing Israeli gas into Egypt. The two countries are still embroiled in a lawsuit over compensation to Israel when Egypt stopped supplying gas to the former in 2014 under a long term contract after Egypt ran into domestic supply shortages. Dolphinus therefore acts as a politically clean way to buy gas from Israel.

Dolphinus sees Egypt becoming a regional gas hub and looks to take part in that story by playing to the as import side of the story. Egypt has the right ingredients to be a hub. The country has a long history with gas, being an exporter for decades up until 2014 before needing to import gas in the last few years. This means the country has much of the infrastructure in place from domestic gas grids, cross-border pipelines, LNG facilities and access to FSRU capabilities.

While Egypt remains short gas, it is on the verge of being able to export again given the recent large discoveries in the offshore and also the emerging ability to re-export gas sourced from another country. This introduces the concept of Egypt being a gas trader, albeit currently at very early stages.

The existence of LNG export facilities means that the country has the ability (as it did before) to ship gas to a wide variety of destinations and is not reliant on pipeline infrastructure to penetrate markets. Being on the doorstep of the East Med allows Egypt to tap abundant sources of gas and the developing gas import dynamics means that the country is no longer tied to domestic supply sources to feed LNG – the issue back in 2014 when domestic demand outstripped supply and led to LNG facilities to call force majeure and stop exports.

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Israel's Leviathan and Tamar gas to be sold into Egypt

Noble Energy and Delek Drilling announced plans in February to export gas to Egypt. The plan is to supply 64bcm over a 10 year period to Egypt’s Dolphinus Holdings – 32bcm from Leviathan and 32bcm from Tamar.

Each field is contracted up to 3.5bcm p.a. or c.350mmcfpd and will bring the partners USD15 billion over the life of the supply contract. The contracted price and terms are in line with other supply contracts from these fields which is based on a Brent linked formula.

Source: Delek Drilling, February 2018

Leviathan is owned by Delek Drilling (45.34%), Noble Energy (39.66% operator), Ratio Oil Exploration (15%). The field is on track to target first gas by end 2019 and with the extra 350mmcfpd to Dolphinus brings contracted sales close to 900mmcfpd, just below the 1bcfpd target. The first phase of the field is planned to deliver 1.2bcfpd from four wells.

Source: Noble Energy, November 2017 with 525mmcfpd firm GSPAs at the time

Tamar is owned by Isramco Negev (28.75%), Noble Energy (25% operator), Delek Drilling (22%), Tamar Petroleum (16.75%), Dor Gas (4%) and Everest Infrastructures (3.5%) – this reflects the ownership post the recent sale of 7.5% by Noble Energy to Tamar Petroleum as reported previously (Tamar Petroleum to raise bonds to finance acquisition of Tamar from Noble and Israel capital cycle: Noble sells down Tamar to fund Leviathan).

The export route for the gas to Egypt is still to be decided but could utilise existing infrastructure or a new pipeline. At the end of February Noble Energy, Delek Drilling and Dolphinus were reported to be considering acquiring the Arish-Ashkelon pipeline owned by the East Mediterranean Gas company (otherwise known as the EMG pipeline).

Source: Delek Drilling, February 2018

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Tamar Petroleum to raise bonds to finance acquisition of Tamar from Noble

As reported previously, Tamar Petroleum is acquiring a 7.5% stake in the Tamar field from Noble Energy for USD800 million. The consideration will be paid USD560 million in cash with the remainder in Tamar Petroleum shares.

To help finance the transaction, Tamar Petroleum is planning to raise USD 625million (ILS 2.178bn) through the sale of bonds, Ha'aretz. reported. The net proceeds are expected to be c.USD605 million, the excess would be put in a special fund for a potential bond buyback, or early repayment.

Tamar Petroleum's holding in the field will increase to 16.75% following the deal, whereas Noble will be left with a 25% stake. This deal builds on Tamar's acqusition of 9.25% in the field from Delek Group for USD980 million in 2017.

Tamar Petroleum was a wholly owned subsidiary of Delek Drilling that was established to acquire the initial 9.25% stake in Tamar from Delek. The subsidiary was listed on the Tel Aviv Stock Exchange in 2017, raising USD330 million as part of the IPO. At the same time, it also raised USD650 million on the bond markets to fund the acquisition.

The move by Delek Drilling was the first in a series of steps to sell its entire 31.25% stake in the Tamar field by 2021 as mandated by the government due to competition concerns.

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Israel capital cycle: Noble sells down Tamar to fund Leviathan

Noble Energy is divesting 7.5% of its 32.5% interest in the Tamar field for USD800 million. This will reduce Noble’s interest to 25% as required by the Israeli government’s competition requirements. The buyer is Tamar Petroleum who will pay for the acquisition with USD560 million in cash and 38.5 million shares in Tamar Petroleum. The divested interest represents 62mmcfpd of production in 2017 and reserves of 500bcfe.

Noble intends to sell-down the share portion of the consideration over the next few years. After capital gains tax on the USD800 million, Noble will net around USD615 million which it will use to help cover upcoming development expenditure on the giant Leviathan development. The spend in 2018, net to Noble, is USD600 million in 2018 and USD425 million in 2019.

Noble continues to be a major player in the Eastern Mediterranean and advances its contracting efforts on Leviathan where it has signed up 525mmcfpd is gas sales contracts with another 1,100mmcfpd being negotiated.

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