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Israel tries to rejuvenate its gas-export plans

New upstream terms will perk up interest in the upstream, thinks the government. But has Israel missed its chance?

After years debating quite what to do with its huge offshore gas wealth, Israel wants to begin a new phase of upstream development, and thinks it can become a pivotal exporter to regional and European markets.

In August, Israel launched its first offshore licensing round, offering 24 blocks in the eastern Mediterranean’s Levant basin. The blocks vary in size, up to 400 square km, and sit in water depths of 1,500-1,800 metres. The bidding will close at the end of March 2017.

“Over the next few months we’re going to offer our economic water for new exploration and discoveries,” Yuval Steinitz, Israel’s energy minister, tells Petroleum Economist. And he has big plans: “In a few years the North Sea will be replaced by the eastern seas.”

Having at last decided that it does want to export some gas, Israel thinks the giant 22-trillion-cubic-foot Leviathan field, found in 2010, can supply Egypt, Jordan, Turkey, Palestine and even Europe.

US firm Noble Energy, which found the field and made a string of other large discoveries offshore Israel, had hoped to build a lucrative liquefied natural gas business on the back of the reserves. Opposition within Israel killed the idea. In 2014, Australia’s Woodside, an experienced LNG operator, pulled out plans to buy into the project. Since then, LNG prices have cratered, weakening the rationale for a politically difficult project.

It was all a pricey failure – Steinitz says the delays have cost Israel tens of billions of shekels in lost revenues.

But now he wants to make up time. Improved upstream terms are on the table, designed to revive international interest. Royalties are set at 12.5%, companies can bid for any number of blocks (though awards are capped at eight) and licences will be for an initial three-year term with the option to extend every year up to a total of seven years.

Jim Thomas, an analyst at IHS Markit, says the terms on offer are ”better than or equivalent” to those available elsewhere in the region. “The sense of urgency here is very much apparent,” Thomas told an Israeli gas investment forum in London.

But the earlier political squabbles within Israel will still loom over investors’ risk assessments.
Responding to fears that Israel – then heavily dependent on energy imports – would export gas at the expense of energy security, the government in 2013 proposed capping exports of gas at 40% of reserves, or around 34 trillion cf of gas. Critics said the limit would curb international oil companies' appetite for exploration in Israel's offshore. It did.

In a bid to end years of upstream uncertainty, Israel introduced new regulations in 2015 for the development of its offshore. In September last year the Israeli parliament finally approved framework regulation designed to coax more development of offshore reserves. Noble and its partners, including local conglomerate Delek, also got the go-ahead to develop Leviathan.

“A year ago when I became energy minister I said enough is enough and this is high time to conclude the debate and offer a clear, unified policy,” Steinitz says. “Israel is back in business after a few years off. It’s not enough to have a lot of potential. It’s my job to make Israel very attractive for investors.”

Steinitz says the government will reserve around 0.54 trillion cm (19 trillion cf) of gas for the domestic market over the next 30-35 years. This is more than enough to meet domestic demand and means output from existing discoveries alone will be able to export at least 300bn-350bn cm.

But even assuming investors can be lured in, the next problem will be finding markets for all the gas. The outlook has changed since Noble found Leviathan in 2010. Global gas supplies – piped and seaborne – are ample. Investors elsewhere have repeatedly delayed new gas-export projects in recent years, deterred by a glut of supply and weak prices.

Steinitz says Israel is looking beyond the slump. “We’re thinking about the next step in 20 or 30 years,” he says. “The current low gas prices are not necessarily relevant in terms of longer-term investments. Over the next three decades the world will need more and more natural gas.”

Regional buyers will be a first port of call. Gas demand in both Turkey and Egypt is expected to double over the next decade, to around 100bn cm a year, says Steinitz. Egypt, which once exported gas to Israel, has also talked of importing Israeli gas to use in two mothballed LNG-export projects on its own coastline. An improvement in relations between Turkey and Israel has also revived plans to supply Israeli gas to that market, though this remains politically difficult.

The other main target market, Europe, looks more doubtful. Consumption there has fallen over the past two years and prices remain depressed. Sluggish economic growth, a resurgence of coal and confusing government energy policies have combined to thwart expectations of ever-rising demand in the continent. Last year, it consumed just over 0.9bn tonnes of oil equivalent of natural gas, according to Cedigaz, 8% less than in 2005.

And Europe is hardly short of other suppliers targeting its market. Israel would face competition from Russia, Qatari LNG and gas shipped in from the US.

Still, Steinitz is optimistic, saying “very serious” depletion in the North Sea would offer an opportunity. “I can tell you that the European energy commissioner, whom I have already met, sees the eastern Mediterranean basin as some kind of replacement to it,” Steinitz says. “Of course you’ll have gas from Russia, from Qatar or the US but our region and Europe will need to consume more, and would like to diversify reliable sources of natural gas supplied with pipes through the eastern Mediterranean."

This article is a later version of Israel's offshore open for business, published on 2 September 2016.

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