by Charles Ellinas*
We had a number of important developments regarding Cyprus Exclusive Economic Zone this week. BG Group (BG) agreed to acquire a 35% stake in Block 12, which includes Aphrodite.
Total reconfirmed its interest to extend the period of its Production Sharing Contract (PSC) for Block 11
Cyprus and Israel are meeting this week to finalise the unitisation agreement.
Even though formalities still need to be completed and approvals given by the government of Cyprus, nevertheless these are important steps and have given renewed life to Cyprus EEZ.
BG’s entry into Block 12
The deal was announced simultaneously by Noble and BG on the New York and London Stock Exchanges on Monday, and by Cyprus’ Energy Minister Giorgos Lakkotrypis.
BG announced it has "taken a 35% holding in Block 12 offshore Cyprus which includes the Aphrodite gas discovery. This upstream position provides a potential source of gas to Egypt where BG Group holds equity in the two-train LNG export facility at Idku as well as LNG off-take rights to lift 3.6 mtpa … Completion of the transaction is subject to certain regulatory approvals as well as customary closing conditions”.
Lakkotrypis said "It is very important that commercial interests are becoming aligned with our efforts to supply gas to Egypt.”
Assessment of the deal
No financial details were disclosed, other than the price BG will pay
for this 35% share is $165million, putting the current value of
Aphrodite at $471million. Noble will remain the Block’s operator with a
35% stake and Delek will hold the remaining 30% of the shares.
Noble also sold its share in Tanin and Karish in Israel to Delek, thus netting altogether $238million.
Some analysts have already said that BG picked up this asset on the cheap. The resource value for the Aphrodite farm-out works out to about $0.1 per mmBTU, far lower than prices paid for LNG-scale gas over the past few years of about $0.5 per mmBTU, according to Tudor, Pickering, Holt&Co (TPH).
"Given the fall in oil prices and oversupply in the LNG market it is not
surprising to see lower prices, but the magnitude of the fall is
surprising,” TPH said.
They also said the valuation of the deal pales in comparison to its
enormous resource potential. It will be even cheaper if the other
potential but smaller gas resources identified in Block 12 are confirmed
through further drilling. In fact, TPH went as far as to say that
"ultimately, the sale of Cyprus gas assets provides a negative marker
for other international gas projects”.
Previous known deals involving appraised gas-fields tend to confirm this. CNPC bought a 20% stake into ENI’s Block 4 in Mozambique in March 2013 for about $0.38 per mmBTU. A year later Woodside offered $0.25 per mmBTU for a 25% stake in Leviathan, with additional payments to be made on achieving certain project milestones. In addition, the $155million offer made by Delek in June to acquire 19.9% of Noble’s stake in Block 12 corresponded to $0.16 per mmBTU, ie substantially better than BG’s offer, but no deal was made.
Noble’s performance
So why didn’t Noble not proceed with Delek and agreed to sell half of its stake so cheaply? The answer might be found in the synergies with Idku, but also in its financial performance this year. Noble’s results at the end of Q3 2015 show a substantial loss of revenue, $0.21 adjusted loss per share, high debt to equity, and decreased net operating cashflow. This performance is below average compared to Noble’s peers, putting it under increasing financial pressure. Inevitably the company is taking measures to improve its performance.
Noble reduced its 2015 capital expenditure budget by $100 million, has shed 10% of its staff, with more to come and made it clear that it intends to spend within internally generated cash flow in 2016. Noble said: "While maintaining an eye toward the future, we expect a reduction in our capital investment in 2016 to manage within cash flow. Activity levels are anticipated to remain lower until commodity prices support increased investment.” And as commodity prices aren’t expected to go up any time soon, Noble’s activity levels may remain low for quite some time.
Last week Noble had another setback when it decided to postpone indefinitely an IPO of its US midstream business, which was expected to raise £238million. This was supposed to improve Noble’s performance in the US.
The $238million East Med sell-off exactly covers this amount and provides Noble much-needed cash as it continues to formulate spending plans for 2016.
BG’s opportunity
In the meanwhile BG is faring much better, with strong liquidity and on track to deliver at least $300 million target cost savings for 2015. As a result it can afford to snap up cheap assets, such as Aphrodite, especially given its strategic fit to its business in Egypt.
But also as a 35% resource holder, BG would make profits in the upstream as well as in the mid anddownstream development of Aphrodite. This change in project structure reshapes the risk profile for Aphrodite exports into Egypt and makes Aphrodite much more attractive than exports from Israel into Egypt.
Teaming up with BG could not have come at a better time as it also gives Noble access to BG’s technical expertise as well as marketing knowhow and financial might. The deal is important also because BG could share in the cost of bringing the gas to market, estimated at $2.5-$3 billion.
Implications
Lakkotrypis said production will possibly start in 2020. But timing of actually developing Aphrodite will depend on the bottom price in BG’s existing LNG sales contracts and gas prices in Europe, which are challenging and at present discourage investment.
These are down to $6-$7 per mmBTU and are expected to stay at this level into the early part of the next decade.
It will also be interesting to see what price BG is prepared to pay to buy Aphrodite gas. Given current gas prices it could be quite low.
Nevertheless, this appears to be a good deal for all parties and at the right time it could unlock development of Aphrodite.
Noble’s venture with such an established partner like BG remains the bright spot, TPH said. In addition to a deep E&P portfolio, BG will soon close its acquisition by Shell, expected by mid-2016, with the combined group becoming the lead global LNG player. But it remains to be seen what Shell does with BG’s assets.
*Charles Ellinas is a hydrocarbons business consultant
(26 November 2015)
