Leviathan gas deal down to the wire ahead of BG-Shell merger vote

Published January 25th, 2016 - 12:00 GMT

Shareholders will vote this week on Shell's takeover bid for BG, which operates the LNG plant at Idku.

The partners in the Leviathan gas reserve need to act fast if they want exports to Egypt to go ahead. Unless an agreement is signed within the next few days with BG, such an agreement is liable to be delayed substantially, at best, or, at worst, to disappear from the agenda. The reason is that BG and Royal Dutch Shell shareholders are due to vote this week on the takeover of the former by the latter. Shell, which operates in Qatar and may do so in Iran as well, will think twice before signing a deal in Israel.

Under the letter of intent signed in June 2014, Leviathan is supposed to supply 105 BCM (billion cubic meters) of gas to BG's liquefied natural gas (LNG) plant at Idku in Egypt over fifteen years. The deal is estimated to be worth $30 billion. This is a huge deal, under which about one sixth of the gas in the reserve will be exported, and it is meant to enable the field to be developed. So far, no final agreement has been signed between the parties because of regulatory problems, mainly in Israel.

The entry into the picture of Shell, which seeks to buy BG for $70 billion, raised the question whether the deal could go ahead at all. Shell is very active in Qatar, and in fact currently sells Qatari gas to the Egyptian market. Shell has also announced its intention of operating in Iran with the lifting of international sanctions on that country, which happened a week ago.

Furthermore, Israel does not feature in the list of countries in which Shell seeks to operate, and nor for that matter does Egypt. The company has even announced that after the acquisition it will sell $30 billion worth of assets and dismiss tens of thousands of employees. The Leviathan partners were aware of the situation and held intensive negotiations with BG last month, in the hope of signing the contract before this week's shareholder vote.

While BG shareholders are expected to approve the deal, Shell shareholders are divided. When Shell announced the acquisition, it estimated that the price of oil would be $60 a barrel, but the oil price has slumped to $32. Nevertheless, what should favor the deal from Shell's point of view is the fact that nearly all its major shareholders are also shareholders in BG (19 out of the 20 main shareholders). Shell CEO Ben van Beurden is pushing the deal hard.

The Israeli gas companies have been trying to sound reassuring, pointing out that Shell has in any case been monitoring the negotiations between Leviathan and BG, and gave its blessing to the contract. They also say that the key people in BG with whom the talks are being held will remain after the merger. Among others, they mention BG chief operating officer Sami Iskander, and the company's executive vice president for global energy marketing and shipping Steve Hill, who is responsible for BG's LNG activity.


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