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    Noble Energy Eyes Leviathan Payout in Four Years

Summary

Based on $5 mn btu Noble Energy is seeking for a quick payout

by: Ya'acov Zalel

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Noble Energy Eyes Leviathan Payout in Four Years

US explorer Noble Energy expects its revenues from Leviathan to generate an operational cash flow of $650mn/yr from the first year of production, the company said in a presentation at an investors conference organised by investment bank UBS.

Over the first 10 years of production, the company expects operational cash flow of more than $5bn. According to the company, the project promises "Steady cash flow, payout within 3-4 years." If the cash flow drops to $400mn net, the payout period will be extended by another year. Noble Energy is seeking to divest up to 10% of its holdings in the project and is looking for investors.

According to the company, the first stage of the Leviathan project requires a total investment of $3.75bn, of which Noble Energy's share, with 39.66% will be $1.5bn. Noble says that the project will be fully financed from the operational cash flow received from Tamar operations, in addition to "planned E Med portfolio management", meaning divestment of parts of the project to other investors. However, in its latest quarterly report, Noble Energy published a facility agreement to borrow $1bn for the Leviathan development from a bank consortium led by Credit Agricole, ING Bank, and Societe Generale.

Noble claims in the presentation that the sales from day one will be at a 1bn ft³/day, equivalent to about 10bn m³/yr. Based on this production volume, a wellhead gas price at $5/mn Btu and production cost of $0.4/mn Btu the company expects operational cash flow of $650mn/yr.

Wishful thinking?

Noble intends to increase its gas production in Israel to 4 Bcf/d, from both its assets in Tamar and Leviathan, saying that the current gas regional deficit is at 4 Bcf/d and will grow to over 9 Bcf/d. That might contradict discoveries in Egypt over the last two years, which led to massive investments and rapid development of Zohr gas field, offshore Egypt, as well as other natural gas assets.

Noble Energy bases its projected revenues on the price it charges customers in the Israeli domestic market, an average of $5.30/mn Btu and on the claim that regional markets will be undersupplied for years to come. However despite gas shortages in Egypt in the last few years, which forced the Egyptian government to start importing large quantities of LNG, so far no gas sales agreement has been signed with Israel. And the Leviathan partnership has contracts only for 3-4bn m³/yr, the biggest of them with Jordan's National Electric Power Company.

The monopolistic prices Tamar charges in Israel are not achievable anywhere else and there are signs that gas shortages in regional markets in Egypt and Turkey, the two main target markets for Israeli gas, are easing.

In addition, major energy companies, such as ExxonMobil, Statoil and Total, are about to begin exploratory drilling offshore Cyprus and possibly Lebanon, which may lead to additional gas discoveries which will shake the regional energy markets and make Israeli gas superfluous.

Another obstacle in Noble's optimistic assessment is the pipeline needed to transmit gas from Israel's exclusive economic zone either to Egypt or to Turkey. Access to these markets will require the laying of 500 km of underwater pipelines, costing $2bn in either direction. That limits the attractiveness of the enterprise even if gas prices do not fall.

 

Ya'acov Zalel