Delek Group Ltd. (TASE: DLEKG) will appeal to Minister of Energy and Water Resources Uzi Landau against the recommendation by the Petroleum Council to reject the company's request to allow it to give liens on its rights in Leviathan to HSBC Holding plc (LSE: HSBA; HKSE: 005; NYSE, Paris: HBC) as collateral for loans to finance development of Tamar, Noa, and other offshore natural gas fields.
Yesterday, the Petroleum Council accepted the opinion of Petroleum Commissioner Alexander Varshavsky that Delek's request should be rejected, overruling a minority opinion that the application should be returned to Delek to be amended. The rejection left Delek the options of appealing against the decision to Landau within two weeks, or of resubmitting the request when the Petroleum Council next convenes in a few weeks.
The lien on Delek's Leviathan rights is intended to enable it to obtain the $500 million in interim financing it urgently needs to develop the Tamar and Noa fields. The estimated cost of developing Tamar is $3 billion, and so far Delek has spent half of its $1 billion share of this cost. The estimated cost of developing Noa is $200 million, of which Delek's share is $100 million. The financing to develop the reservoirs is due to be included in Delek's agreement with HSBC and Barclays Capital, but the company cannot draw the bulk of the financing until it has a signed gas supply contract with Israel Electric Corporation (IEC) (TASE: ELEC.B22).
Last month, the IEC contract was delayed indefinitely because of the insistence of IEC's board of directors on inserting terms to guarantee the utility preferential status compared with Israel's private power producers - terms that will probably be unacceptable to Antitrust Authority director general David Gilo.
Bridge loan
Two weeks ago, Delek persuaded HSBC to grant it a bridge loan, until it receives the bulk of the financing, in exchange for a lien on the company's rights to Leviathan as collateral. Delek indirectly owns 45% of Leviathan through the 22.67% stake held by each of gas exploration subsidiaries Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L). Noble Energy Inc. (NYSE: NBL) owns 39.66% of Leviathan, and Ratio Oil Exploration (1992) LP (TASE:RATI.L) owns 15%.
HSBC's agreement to grant the financing to Delek in exchange for a lien on the rights was considered extraordinary by the gas exploration industry, because the Leviathan field has not yet reached the development stage, and Delek currently has no customer that has declared that it will buy gas from the reservoir.
Cross-lien
However, the Petroleum Council decided to adopt Varshavsky's position that the request should be rejected, on three main grounds. First, the Leviathan reservoir has not yet been recorded as a discovery, even though it is one of the largest natural gas discoveries in the world. The Ministry of Energy says that registering the reservoir as a discovery requires certain procedures that the Leviathan partners have no interest in entering into at this time, because declaring it as discovery requires developing the reservoir within 36 months.
The second reason for rejecting the request was a lack of clarity about how Delek intended to use the financing it would obtain.
The third reason was the that Ministry of Energy was uncomfortable in having the state's rights in a reservoir (Leviathan) attached in favor of another reservoir (Tamar). The ministry said that such a "cross lien" was in line with Gilo's argument that Delek's holdings in the two reservoirs harmed competition.
Varshavsky said that Delek had other options for developing the reservoir without a lien on the state's rights, including a debt or rights offering.
"Idiocy and stupidity"
Delek Group was stunned by the Petroleum Council's decision yesterday, which it called "idiocy and stupidity". The company says that unless the decision is overruled, it could delay development of the Tamar reservoir, the gas from which is critical for the economy.
Delek's partners in Tamar and Leviathan told "Globes" that they could not understand the logic behind the decision. One source said, "The substance of Delek's request was to obtain the financing needed for the development of the gas reservoirs. This is not just an interest of the company, but of the country, which is I cannot understand why the government is trying to delay it. A lien on the rights to one reservoir in favor of another is accepted practice in an efficient energy market. That is why the decision to ban it increases uncertainty in the industry. Even if Delek is able to secure alternative financing, it will needlessly involve much higher costs. The impression is that it's more important for the Ministry of Energy to assert 'you can't fool us' than to develop the country's oil and gas reservoirs."
The Ministry of Energy and Water Resources said in response: "The rejection of the application is no reason for delay in the development of Tamar, and the partnerships must adhere to the development timetable for the reservoir." The ministry added that Delek asked to mortgage the two licenses in the Leviathan structure not just for the benefit of Tamar but also in order to develop "other hydrocarbon assets of the company, including those outside of Israel," referring to Block 12 in Cypriot waters. Delek denied that it sought to use the finance for projects outside Israel.
Sources in the group told "Globes" that they removed Block 12 from the application following an enquiry from the Ministry of Energy and Water Resources, and that the assets mentioned in the application were all in Israeli territory.
Published by Globes [online], Israel business news - www.globes-online.com - on January 11, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012