In the oil and gas exploration industry, letters of intent are considered like engagements, there is a ring and declarations, but it is not yet too late to call everything off, albeit at the cost of some unpleasantness.
As far as Delek Group Ltd. (TASE: DLEKG) controlling shareholder Yitzhak Tshuva and his partners in the Tamar offshore natural gas prospect are concerned, the gas delivery contract with Israel Electric Corporation (IEC) (TASE: ELEC.B22) is an excellent match at good terms. Despite all its troubles, IEC is still the richest groom in town, and a 15-year contract is a long time, and indicates the seriousness of the company's intentions.
Analysts estimate price of the gas in the deal at $5.50-6 per British Thermal Unit (BTU), at least 20% above the price obtained by the Tamar partners in the much smaller contract signed with Dalia Power Energy Ltd. two weeks ago. The main open questions concern the financial closing, the total gas production cost, and the date for the start of delivery. These matters will be settled and clarified.
As for IEC, the price is higher than in previous gas supply contracts, but the deal gives it some important advantages. Interestingly, in the current deal IEC agreed to store part of the natural gas in the Mary B well of Yam Tethys owned by Delek Group and Noble Energy Inc. (NYSE: NBL) offshore from Ashkelon.
This consent paved the way toward turning the emptying Mary gas field into a strategic reserve that will serve Israel in times of emergency. Establishment of this reserve greatly improves the reliability of gas supplies from Tamar and lifts one of the main worries about supplies from a single source.
On the other hand, the need to send gas from the Tamar field to the Mary B well will require the Tamar partners to build another undersea gas pipeline, which could cost hundreds of millions of dollars.
The deal also underscores Tamar's potential. It will supply IEC with an estimated 45 billion cubic meters of gas - less than a quarter of the field's proven reserves. This means that there are grounds for Tshuva and his partners' ambitious plan to export natural gas. The only question is whether it would be better to save this gas for future generations, as the Rand Organization advises in a report disclosed by "Globes" earlier this month.
Published by Globes [online], Israel business news - www.globes-online.com - on December 27, 2009
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