A&O, Shearman advise on $900m Israeli gas field financing

Allen & Overy (A&O) has closed the biggest ever internationally-led project finance deal in Israel, advising Delek Drilling, Avner Oil Exploration and Dor Gas Explorations as sponsors on the US$900m (£562m) financing of the development of the Tamar gas field, first discovered 50 miles off the coast of Israel in January 2009.

A&O’s team was led by project finance partner Charles Lindsay, assisted by consultant Simon Baum and associate Julian Ewart. Projects partner John Geraghty – who joined A&O from Herbert Smith in 2010 – advised on the contract side, assisted by associate Darren Spalding.

The lending banks, an eleven-strong consortium led by Barclays and HSBC, were represented by Shearman & Sterling project finance partner Ben Shorten and associates Natasha Kirby and Leona McManus.

Projects partner Tim Pick advised on the project contract. Former Shearman veteran project finance partner Ken MacRitchie also led on the deal before he retired from practice at the beginning of this year.

The permanent financing funds the Delek consortium’s remaining development costs for the Tamar project and refinances a 2010 bridge loan. The A&O team also advised Delek on the complex contractual arrangements with the consortium operating the Yam Tethys offshore gas field, which will allow Delek to use its existing processing and pipeline facilities.

Charles Lindsay told The Lawyer: “This deal was really satisfying to bring to financial close. It was interesting because of the structure of the project – especially sharing of some of the key export facilities with the Yam Tethys field, which had a separate limited recourse financing embedded into it.

“That presented challenges in producing documents which on the one hand gave the Tamar lenders enough comfort that their security over the key assets was comprehensive but on the other hand not unduly prejudicing the limited-recourse lenders to the Delek-related sponsors on the Yam Tethys field. And of course the transaction was important because of its size and enormous significance for Israel’s energy security.”

Background to this deal:

The discovery of natural gas off the coast of Israel is a development that could revolutionise the country’s energy supply, and Delek is one of the major players in the burgeoning and strategically important gas sector.

The financing relationship with A&O is run by Lindsay, who over the past year has relocated to the firm’s new Istanbul office. Lindsay originally acted on the opposite side of the table of Delek when he advised the EIB, Banco Espirito Santo and Calyon on the US$463m financing of the Hadera desalination project in 2010, where Delek was involved as sponsor.

While the Tamar field is hugely significant, it was not the first gas discovery in Israeli waters.

The Yam Tethys consortium, with which Delek had to negotiate for pipeline facilities, runs two major gas reservoirs that were discovered in 1999. US-based Noble Energy owns 47.1 per cent of the Yam Tethys fields, and Delek Group owns 52.9 per cent through its units Avner Oil Explorationand Delek Drilling. Yam Tethys was originally financed with a 144A bond placed in the US. The lenders, which included Morgan Stanley, were advised by Skadden Arps Slate Meagher & Flom.

The Israeli gas industry looks set to provide further work for project finance lawyers; in late 2010, Delek struck the largest natural gas find in Israel’s history at the Leviathan well. Both Tamar and Leviathan are the largest deepwater gas discoveries in the world in the past decade.