Charles Ellinas BG deal approved by the Council of Ministers

BG deal approved by the Council of Ministers

Today Cyprus’ Council of Ministers ratified BG’s application to buy 35% of Block 12, which includes the Aphrodite gas-field.

The deal was first announced simultaneously by Noble and BG on the New York and London Stock Exchanges on Monday 23 November 2015, 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 offtake rights to lift 3.6 mtpa.”

Lakkotrypis said at the time “It is very important that commercial interests are becoming aligned with our efforts to supply gas to Egypt.”

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.

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, 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.

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 2015 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.

Given Noble’s fiscal problems in 2015, as a result of the very low oil & gas prices, the deal provides the company much-needed cash as it continues to formulate spending plans for 2016.

In the meanwhile BG is faring much better, with strong liquidity in 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 and downstream 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. As a result, the strategic fit of this deal to BG’s business in Egypt may also make it more difficult for Leviathan gas exports to Idku.

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-$3.0 billion.

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 about $6 per mmBTU and are expected to stay low 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, should it go to Idku. 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 see its acquisition by Shell closed, expected later this month, with the combined group becoming the lead global LNG player. But it remains to be seen what Shell does with BG’s assets. However, should there be a solution to the Cyprus problem, opening-up possible gas sales to Turkey, that could be of interest to Shell who is a major investor in energy in Turkey. BG’s entry into Block 12 is positive and opens up a number of possible development options.

Dr Charles Ellinas


Nonresident Senior Fellow – Eurasian Energy Futures Initiative - Atlantic Council

18 January 2016