Australia | Jun 20 2013
– Woodside has shelved growth for yield
– Leviathan one of few growth options
– Israeli government stalling on Leviathan
– Capital may be returned
By Greg Peel
The US government currently has a dilemma on its hands. The rapid growth of shale oil and gas production in the past decade has surprised everyone involved, and provided the US with the opportunity to extricate itself from being beholden to crude oil imports from enemies in order to sustain energy sufficiency. The sheer extent of gas being produced would also allow the US to become a major LNG exporter at competitive pricing, tapping into lucrative burgeoning demand from Asia.
The dilemma is that the big US energy companies are keen to export LNG and maximise their own profits, while on the other hand, politicians and other industries argue that domestic gas should be kept for the domestic economy, providing greater energy security, greener energy consumption and a value-add to all exported goods through cheaper energy costs. It is a difficult decision to be made in the world’s bastion of free market capitalism. (See: Could A Global Pricing War Dash Australia's LNG Hopes?)
The Israeli government is also now facing a fairly similar dilemma. Israel is energy deficient and in the past has relied heavily on imported gas from Egypt. When the Mubarak government was overthrown in the Arab Spring of 2012, imports via the Egypt pipeline ceased. The pipeline was bombed fourteen times in 2011-12 and the new Egyptian regime is not too keen on exporting to Israel anyway.
In 2010, the largest reserve of natural gas discovered in a decade was located in the Israeli waters of the Mediterranean Sea. Suddenly Israel found itself potentially energy self-sufficient. The problem was that Israel lacked the infrastructure and expertise to exploit the offshore gas reserves, having always relied on imports. The only option was to call on foreign energy companies to provide assistance. Foreign companies were keen to become involved on the basis they could also export some of the gas as LNG. There were enough gas reserves identified to allow for export as well as satisfying Israel’s domestic energy requirements.
So was born the Leviathan project, currently owned 39.66% by project leader Noble Energy, 22.67% by Israel’s Avner Oil Exploration, 22.76% by Delek Drilling, and 15.0% by Ratio Oil Exploration. But if there is one country with extensive offshore LNG experience, it is Australia. And if there is one company with a proven track record, it is Woodside Petroleum ((WPL)). And so it was that Woodside committed to invest its experience and US$1.5bn for a 30% stake in Leviathan.
Leviathan is arguably as important to Woodside as Woodside is to Leviathan. Not so long ago, Woodside was seemingly sitting pretty in the great LNG export race with sizeable growth prospects from its offshore Western Australian projects. Pluto would perhaps justify three LNG trains, and then there was Browse, for which a massive onshore LNG facility would be built at James Price Point, and Sunrise, in the Timor Sea. All would complement Woodside’s stake in the long running North West Shelf operation.
Due to lack of gas reserves, Pluto is now stuck at one LNG train. Costs and political protests have rendered James Price Point unviable, suggesting a floating facility may be the best option for Browse, thus delaying the project. Sunrise appears off the table at present. In a world of rising costs, falling gas prices, and stiff competition for gas reserves, Woodside elected in April to delay or defer its growth projects for the time being and instead redirect NWS and Pluto cashflows to shareholders via a special dividend and increased dividend payout ratio. (See: Woodside Now A Yield Play)
The decision was warmly greeted by shareholders and the market, but analysts warned a lack of growth would render future dividends potentially unsustainable. At present Woodside’s hopes in providing future growth lie with the now delayed Browse, and with the longer lead-time Leviathan.
But now there is a problem with Leviathan.
For Leviathan to be commercially viable as an LNG export project for its investors, including Woodside, half of the gas in the Leviathan field must be committed for export, leaving half for domestic consumption. Israeli president Benjamin Netanyahu originally agreed to such a deal. But from the beginning the deal met with protest from the Israeli parliament, and in recent weeks those protests have only become stronger. The Israeli government is continuing to debate the situation as the deadline for Woodside’s committed funds approaches.
Parliament is against exporting Israeli gas on the open market. At the very least, parliament wants to increase the ratio of Leviathan reserves held back for domestic consumption and thus reduce the ratio available for export. And then there are Israel’s allies to consider.
From its perilous location amidst Arab enemies, Israel has always relied on the more secular states of Turkey and Jordan to help provide a buffer. Turkey and Jordan have their own energy problems. Turkey relies heavily on gas imports piped from Russia, and Russia is not beyond using its gas for political leverage. Turkey also imports gas piped from Iran, and aside from the pipeline being unreliable, relations with Iran are never easy. As was the case for Israel, Jordan relies on gas imports piped from Egypt. While Egypt is not looking to cut off Jordan, Egypt’s own energy supply has become tenuous under post-Mubarak political turmoil.
From a diplomatic perspective, it would be in Israel’s interests to export its own newfound gas to Turkey and Jordan via pipelines. Such exports, as well as domestic supply, would be government controlled, leaving even less gas reserves available for the Leviathan LNG export project. Israel’s dilemma, nevertheless, is that if Leviathan’s foreign investors decide to pull the pin, Israel is left with lots of gas and no means of exploiting it. The Leviathan project would bring the expertise and infrastructure both for LNG export and for domestic supply.
In Washington, the government has to date approved two LNG export projects but held back on approving the many more under application. While the Obama administration’s policy is not yet clear, it appears at the very least the US will not rush into letting all its newfound domestic gas supply disappear to Asia. In Tel Aviv, a decision is yet to be made. Parliament wants to keep more than half the gas, but with less than half the gas, the LNG export project becomes less viable. Without the LNG export project, there will be no gas.
The Israeli government is dragging its feet on a decision. Woodside cannot drag its feet, given under its US$1.5bn commitment payments to the other stakeholders must begin shortly as per the arrangement. The stakeholders are seeking to renegotiate – give Woodside more time – but Woodside is believed to have set its own deadline of June 30 for a conclusion of the deal. In other words, if the Israeli government has not come to the party by then, chances are Woodside will pull out of Leviathan.
The Leviathan project, on original planning, is rumoured to require US$4.5bn in investment, and perhaps more if a floating LNG facility is preferred. The project needs to have 20 years access to sufficient gas to make the return projections on the plan commercially sound. Woodside backed out of James Price Point, and thus delayed Browse, given rising costs which reduced potential return and also political opposition. In Israel, Woodside is now faced with a similar decision.
Without Leviathan, Woodside’s growth profile would take yet another backward step, notes BA-Merrill Lynch. The stock’s current yield offers share price support but is unlikely to drive any outperformance in Merrills’ view. The yield is not sustainable if Woodside does try to find growth elsewhere, and subject to oil price fluctuations. Most brokers agree with Merrill’s assessment.
Outperformance may, however, be achievable were Woodside to return the US$1.5bn of allocated Leviathan funds to shareholders, perhaps in another special dividend. But for shareholders such a boost would prove short-lived, and now that the yield feast of April is over (Woodside, banks, others), the market’s focus has returned to growth opportunities, Merrills notes
Take away Leviathan and Woodside’s growth opportunities diminish further.
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