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Israel's Leviathan in talks to sell gas to BG's Egypt LNG plant

(Adds details, background, BG comments, share reaction)

By Steven Scheer

JERUSALEM, June 29 (Reuters) - The partners in Israel's giant Leviathan natural gas field said they had signed a preliminary agreement with British oil and gas company BG Group (LSE: BG.L - news) to negotiate a deal to export gas to BG's liquefied natural gas (LNG) plant in Idku, Egypt.

In the deal under discussion, Leviathan - off Israel's Mediterranean coast - would supply 7 billion cubic metres (bcm) annually for 15 years via an underwater pipeline, the partners said in a statement on Sunday.

An energy source in Tel Aviv said such a deal would be worth about $30 billion - providing a windfall to Israel's coffers from royalties. The source said the pipeline would be built by BG and a final agreement was expected by the end of 2014.

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Such a a deal would be among the largest in Israel's fledgling energy sector and would help the partners develop Leviathan - which holds an estimated 19 trillion cubic feet of gas (530 bcm) and is expected to go online in 2017. Much of the reserves are earmarked for export.

BG said the Leviathan talks were one of several options it was considering to increase the supply of gas to its Egyptian plant. "While this non-binding letter of intent with the Leviathan partners is a first step, it is very early days," said a spokesman.

The talks with BG - which exports to more than 20 countries - come after Woodside Petroleum (Other OTC: WOPEF - news) , Australia's top gas producer, last month ditched plans to take a stake worth up to $2.7 billion in Leviathan.

Texas-based Noble Energy (NYSE: NBL - news) is the field's operator with a 39.66 percent stake. Avner Oil and Delek Drilling, subsidiaries of Delek Group (Other OTC: DGRLY - news) , hold a combined 45.34 percent, and Ratio Oil has the remaining 15 percent.

Shares of Avner were 1.8 percent higher, while Delek Drilling's shares were up 1.1 percent and Ratio's shares gained 3.5 percent in midday trading in Tel Aviv.

Delek and Avner last month raised $2 billion in an international bond offering to help fund Leviathan's development.

The gas unit of Turkish fuel retailer Turcas is holding non-binding talks with another company to jointly procure natural gas from Leviathan, while Leviathan's partners have also started looking into selling gas through a pipeline to Cyprus.

BG's first-quarter exploration and production volumes fell 4 percent, hit by output problems in Egypt where the company's LNG project failed to deliver any cargoes in the quarter.

Production in Egypt fell 35 percent compared with the fourth quarter as the reservoir feeding its plant is in decline and the local Egyptian market took more supply, for which BG receives lower payments.

BG said Egypt's government has not honoured its agreements and is diverting more gas for the domestic market. (Additional reporting by Tova Cohen; Editing by Andrew Heavens)