Uncertainty surrounding Israel's upstream activity
Israel has sought to end years of upstream uncertainty, introducing new regulations for the development of offshore reserves, but obstacles remain
Israel's prime minister Binyamin Netanyahu has had his attention drawn away from the country's perennial security challenges in recent months. Controversies over the country's hydrocarbons policy have risen to the top of his in-tray.
In early September, the Israeli parliament gave the green light to a framework regulation designed to encourage the development of offshore reserves, with a US-Israeli consortium given the go-ahead to develop the Leviathan gas field.
It obliges Israel's Delek to sell its 31% stake in Tamar in six years and the US' Noble must scale down its stake from 36% to 25% in the same period. They must also sell their stakes in the Karish and Tanin fields within 14 months and there will be price controls on gas sales to consumers in the Israeli market.
These moves suggested that finally, Israel moving forward in developing its substantial offshore natural gas reserves. Netanyahu boasted that the deal would bring the country 'hundreds of billions of shekels' in coming years.
But many Israelis are justifiably sceptical. When Houston-based Noble Energy first discovered gas in Israel in the late 1990s, there was reasonable hope that the Middle East's strongest democracy would prove more adept at developing its hydrocarbon resources than some of its neighbours.
Figure 1: Eastern Mediterranean Map
A decade and a half later, Israel's stop-start progress in tapping vast offshore gas reserves suggests that it has conformed to the regional norm.
Despite the 7 September Knesset vote in favour of the new gas framework, the jury is still out as to whether Israel has fashioned a business environment that would give Noble Energy and its consortium partners the confidence to proceed with full field development plans.
The fear frequently expressed in Tel Aviv - accentuated by the late August announcement of Eni's massive 30 trillion ft3 Zohr discovery in the Mediterranean - is that Israel may have missed the boat in becoming a world-class gas exporter.
Energy minister Yuval Steinitz calculates that the delay in developing the 22 trillion ft³ Leviathan field, discovered in 2010, has cost Israel tens of billions of shekels in lost revenues.
One reason for this is that the Jewish state's regulatory environment has changed repeatedly since the main gas discoveries were made. This has created uncertainty and jeopardised the future development of the Leviathan field.
Noble and its Israeli partners first found the Noa and Mari gas fields in 1999 and 2000, followed some 10 years later by the more substantial 11 trillion ft3 Tamar field, and then Leviathan.
Since then, progress has been fitful. The imposition in 2011 of a new government fiscal regime for gas, which led to a hiking in the companies tax rate from about 20% to close to 60%, changed the equation for the operators, although it reassured the public that the foreign companies had been given overly-favourable terms.
The operating consortium has countered that the fiscal terms were in fact far from generous; a recent report commissioned by Delek, undertaken by consultants McKinsey, estimated the internal rate of return on the Tamar reservoir at 21.8%, which would put it in the bottom third of similar projects in OECD countries.
While the gas structure has been approved in substance, final approval by the minister for the economy, Aryeh Deri, is still pending. The minister has so far refused to sign an order exempting it from anti-trust laws. Until that exemption is provided, it can't be described as a done deal.
Still, given the drift of the past years, the agreement represents a step in the right direction. "It does help the operators to continue with the negotiations with external partners in monetising the gas. Clarity has been achieved, but the question is whether it is too late," says an Israeli energy consultant.
This clarity relates to setting the gas price in relation to a basket of fuels linked to the electricity price, with an additional link to the Israeli consumer price index. Noble itself has acknowledged that the framework agreement provides transparency for future domestic pricing.
The price of gas would be in the range of $4.60-4.70/m Btu, compared with the previous $5.40-5.60/m Btu.
Another significant change in the framework involves agreed milestones in the Leviathan development timetable. Pending necessary regulatory approvals and project FID, Noble will contract $1.5bn-worth of gross of project services and equipment by the end of 2017. Leviathan is also to produce first gas within 5 years or have spent $4bn, gross in development of the asset.
Noble's chief executive David Stover said he was encouraged by the parliament's vote expressing broad support for the framework, but with a rider that Tel Aviv must ratchet up the pace. "It is imperative that the government of Israel now act upon this support and follow through on this approved framework without further delay," a statement said 7 September.
Delek is equally adamant that greater speed is needed. "We must not waste time on more political delays and we must complete the required procedures to start in a new direction," a company statement said.
When the framework deal is finally implemented, Noble Energy and its Israeli partners will enter into gas sales contract negotiations. But even assuming that the most insurmountable obstablces have been removed, Israel faces another conundrum: marketing the gas.
Eni's headline-grabbing announcement of its Zohr find is a potential game changer here. Not only is there the potential for Israel to lose a viable potential customer for its gas, but Egypt's willingness to provide liquefaction capacity for Israel gas at the Idku and Damietta plants could also be compromised, should the Zohr gas leave insufficient room for non-Egyptian volumes.
Opinion is divided as to how serious the Zohr threat is to Israel. The rapid falls in the operating companies' share prices following the announcement highlighted investor anxiety about the implications for Israeli field development plans not least given the technically complicated nature of the Leviathan reservoir.
But others urge calm. First, Egypt is a growing market in which gas demand will increase substantially over the long-term, requiring several sources of gas. Second, it will take a long time to develop the Zohr reservoir, which in any case has not been fully appraised yet. "There's still a window of opportunity for Leviathan to monetise the gas," says the energy consultant.
Egypt is not the only game in town. Jordan presents a simpler option for Israeli gas supply. On September 8, Israel's national planning and construction committee approved the route of a gas pipeline to the Hashemite kingdom to be laid near the southern end of the Dead Sea. Jordan is committed to take Leviathan gas over a 15-year period in a deal signed in September of last year estimated to be worth $15bn.
Jordan is a small but important market for Israel, with forecast demand of around 6bn m3/year by 2020, underpinned by a rising population that has been substantially added to by millions of Syrian refugees.
"Jordan is paying high prices for imported LNG at Aqaba, in the region of $12-16/m Btu," says the consultant. "If Israel can sell cheaper gas to Jordan it would make the latter a more stable economic environment and provide geopolitical benefits." However, spot LNG prices are below $9/m Btu and with the oversupply on the market that is not likely to rise much for some years.
Another possible pipeline option put forward by Qatar, which is acting as an intermediary between Hamas-ruled Gaza and the Israeli authorities, would be to lay a pipeline from Tamar to the Gaza Strip, feeding Israeli gas to a new power plant there.
Further afield, Turkey has also expressed interest in Israeli gas.
These various options will likely increase in attractiveness if Egypt fades as a viable customer and liquefier of Israeli gas. The question is whether they are adequate compensation if Egypt really is off the agenda. "Leviathan is a major field. The Jordanians and Palestinians are not buying substantial volumes, so Israel will still need a major market," says a fellow at the Brookings Institute, Tim Boersma, who co-wrote a study on Israel's energy options earlier this year.
More immediate concerns will confront the fractious Israeli political class as they finesse the new, improved regulatory environment. Creating agreed terms that are favourable to operator and domestic user alike, and are binding, is perhaps biggest challenge of all, never mind what is happening in other parts of the Mediterranean.