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Israel's offshore in search of regulatory shake-up

The country's latest licensing round failed to lure IOCs to its upstream

Twice delayed, Israel's offshore licensing round for 24 blocks closed on 15 November. It was a disappointment: the only submissions were from Greece's Energean, and a consortium of four large Indian corporations: ONGC Videsh, Bharat PetroResources, Indian Oil and Oil India.

It's hard for Israel to put a brave face on it. This is the first bidding round since the granting of offshore licenses was suspended four years ago. The disheartening reality Israel has to face is that ever since the its first domestic, offshore gas discovery in 2000, the country has struggled to attract and keep investment from international oil companies.

The Ministry of Energy has promised another licensing round in 2018. But for this to be successful, the ministry must focus on and clarify four concerns to energy companies considering investment in Israeli offshore: gas demand; infrastructure; fiscal and development regulation; and operator criteria.

Gas demand

On 23 November, the energy ministry said that by 2022, in the continuing move away from coal dependence, 85% of Israel's electricity would be generated from gas. The problem is that this target figure is at odds with a 19 November study from the electricity regulator, PUA. It forecasts that the share of gas in the country's energy mix in 2022 will be only 67%. Potential new bidders thus lack clarity on future gas demand.

Infrastructure

Israel's high-pressure gas transmission pipeline network spans 650km (403 miles). Deployment, however, is uneven. Two significant spurs run from the centre to the north of the country; but in the south, the diameter of the pipes limits additional significant consumption. New funding and tariff measures are likely to constrict gas consumption and could thus lead to increased use of coal.

As for low-pressure distribution lines, the current policies and financial incentives have resulted in only a dozen factories receiving and consuming gas, whilst industrial consumption has the potential to reach 3bn cubic metres a year by 2025. State guarantees should be provided for new pipeline projects, the financing of which could be quickly recuperated from tax revenues on the extra volume of gas sold. Government support should also be provided for export infrastructure to facilitate regional sales.

Regulation

To attract new exploration, the government needs to revise some of its regulations such as 12.5% upfront royalty payments. These make the development of small fields uneconomic.

At present, every gasfield has to be connected to the Israeli shore and every export facility must be located within Israeli territory. These regulations need amending because by 2022, three offshore fields with total reserves of 1 trillion cm of gas will already be connected to Israel. But gas consumption in 2022 is estimated at only 15-17bn cm/y. The government has set June 2018 as its deadline for reviewing current regulations.

Operatorship criteria

Geopolitical concerns constitute the main reason why new international oil and gas companies give Israel a wide berth. This isn't something which will be easily resolved. All the more reason, then, for the authorities not to shackle domestic companies. In 2018's upcoming licensing round newcomers are more likely to be encouraged by being allowed to carry out seismic surveys themselves for offshore prospects.

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