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Leviathan Project to supply natural gas to Paz Ashdod Refinery

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Hydrocarbon Engineering,

Delek Group summarises below an immediate report published by each of Avner Oil Exploration Limited Partnership and Delek Drilling Limited Partnership (the Partnerships) regarding an agreement by the Leviathan project partners, including the Partnerships, to supply natural gas to the Paz Ashdod Refinery Ltd.

Further to what was stated in section 7.14.1 of the Partnerships’ Annual Report dated 31 December 2015, as published on 28 March 2016 regarding the negotiations of the partners in the Leviathan project, including the Partnerships (Leviathan Partners) for marketing natural gas and condensate to potential customers in the local market, and according to section 7.25.1 of the Annual Report regarding government resolution No. 476 dated 16 August 2015 regarding the outline to increase the amount of natural gas produced form the Tamar natural gas field and rapid development of the Leviathan, Karish and Tanin natural gas fields and additional gas fields (the Gas Outline Plan), the Partnerships have announced as follows:

On 24 November 2016, an agreement for the supply of natural gas was signed between the Leviathan Partners and the Paz Ashdod Refinery Ltd (the Purchaser), according to which the Purchaser will purchase natural gas from the Leviathan Partners for the operation of the Purchaser's facilities in Ashdod (the Supply Agreement). According to the Supply Agreement, the Leviathan Partners have committed to supply the Purchaser with approx. 3.12 billion m3 of natural gas (the Total Contractual Quantaty – TCQ), according to the terms specified in the Supply Agreement.

The period of the Supply Agreement will begin upon the execution date of the Supply Agreement and is expected to expire at the earlier of the following dates: (1) the date on which the Purchaser will consume the TCQ; (2) 15 years after commercial quantities of gas have been provided from the Leviathan gas field to the Purchaser. The parties have the right to extend the period of the Supply Agreement for a period of up to one year or until the TCQ has been consumed, whichever is the earlier.

The Purchaser has undertaken to Take or Pay for the Minimal Annual Amount of gas in accordance with the scope and arrangements fixed in the Supply Agreement (the Minimal Annual Quantity).

In accordance with the provisions of the Gas Outline Plan, the Purchaser holds an option to reduce the Minimal Annual Quantity to an amount that is equal to 50% of the average annual amount that was consumed in the 3 years prior to the date on which the option exercise was announced, in accordance with adjustments that were stipulated in the Supply Agreement (Reducing the Purchased Quantity). Reducing the Purchased Quantity is possible at any time during the period starting at the later of these two dates and ending 3 years after this date: (1) once 4 years have passed since the date on which the Petroleum Commissioner had approved the transfer of rights to the Karish and Tanin holdings according to the Gas Outline Plan (the Option Opening Date); (2) 5 years after the date on which gas flow has started from the Leviathan project to the Purchaser. The announcement for exercising the option for Reducing the Purchased Quantity will become valid 12 months after the aforementioned announcement is made. Once the Purchased Quantity is reduced, the other quantities that were set in the Supply Agreement will be reduced accordingly.

In accordance with the arrangements established in the Gas Outline Plan, the Supply Agreement states that the gas price will be partially linked to the price of a Brent barrel, and partially to the electricity manufacturing cost, as it will be set from time to time by the Electricity Authority, and including a Floor Price.

The Partners believe the overall revenues for the sale of natural gas to the Purchaser (regarding 100% of the rights to the Leviathan project) during the period of the Supply Agreement (based on the Partnerships’ evaluation regarding the price and quantity of the natural gas that will take place during the Supply Period), may reach US$700 million, assuming that the Purchaser will consume the aforementioned TCQ. It should be clarified that the actual revenue will consist of a number of factors, including the actual gas quantities that will be purchased by the Purchaser, the price of a Brent barrel and the electricity manufacturing cost.

The Supply Agreement includes a number of contingent conditions aimed at approval of the Leviathan gas reserve development plan, receiving a gas transportation system license from the Leviathan gas field according to the Natural Gas Sector Law, 2002 and the Final Investment Decision (FID) by the Leviathan Partners. To the best of the Partnerships’ knowledge, the Purchaser is a subsidiary of Paz Oil Company Ltd, which engages in the import, refining and distribution of crude oil, as well as manufacturing and selling electricity.

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