East Mediterranean’s new play gets hotter
Israel’s burgeoning gas reserves could transform a region
The discoveries just keep on coming. In February, it was Tanin, in the Alon A licence area 120 km northwest of Haifa. Two months earlier, in Cyprus’s block 12, it was Galit, another discovery by US firm Noble Energy. And a year before that, it was Leviathan, the subsea giant that promises to end Israeli worries about its energy security – and make a fortune for the field’s developers.
All told, recent discoveries – there have been six significant ones in the past two years – in the Levant basin, which stretches from the Gaza Strip to Cyprus, amount to around 1.1 trillion cubic metres (cm) of gas, or about a third of the reserves the US Geological Survey estimates it holds. The trove could be worth up to $130 billion, according to Israeli government calculations. If the basin holds oil, as analysts believe, then a quiet rush to invest in the east Mediterranean’s deep water may turn into a stampede – and Israel, a country that long lamented the lack of indigenous hydrocarbons, could emerge as one of the energy world’s hottest properties.
It all promises a new source of revenue for its government, a bonanza for the drillers, and a shift in the region’s geopolitics. But, say those in Israel’s nascent oil and gas business, the milk and honey will only flow if Israel looks beyond its own borders. With demand for gas running at just 5bn cubic metres a year (cm/y), Israel’s market is puny, and its prices cheap. Only if Israeli gas can also reach more lucrative markets in Asia and Europe will the companies sink more capital into the basin.
Handing a potential cash cow to industrialists isn’t politically easy. But lobbying seems to have persuaded the government of the export logic. A committee headed by the director-general of the Israel’s ministry of energy and water resources, Shaul Tzemach, is likely to recommend increasing the volume of gas available for foreign markets. An earlier idea was to limit such sales to just 10bn cm/y. With big new desalination plans underway, and a strategic goal to increase the use of gas in power generation and transportation, the government may set aside enough gas to meet Israel’s needs in 2040, up to 400bn cm, according to local business newspaper Globes. That’s less than a third of what’s already been discovered. The rest, hope the companies, could be sold abroad.
Although Tzemach’s report isn’t due for several weeks, meanwhile, the government has already said it is “inclined to exports”. Gas is the country’s “strategic asset”, said one official recently – and could underpin the country’s economy and economic cooperation in the region.
Indeed, better relations between Israel and its neighbours may be an unlikely dividend of the country’s new gas wealth. Before exports to Asia or Europe are considered, Israel may sell its gas locally. Uzi Landau, the country’s energy minister, said on 28 March that the “immediate” recipients would be Jordan and Palestinians.
It would create confidence and “foster peace in the region”, he added.
Egypt, whose own domestic gas industry hopes have soured, is likely to be another possible destination for Israel’s gas, believe some in the industry. “The gas will go first to countries that have peace agreements with Israel,” said one analyst. “Egypt’s already looking at gas shortages in coming months.”
That would be a reversal that points again to the shifting dynamics brought by Israel’s gas discoveries. Since 2008, Egypt has supplied gas to Israel through a pipeline between El Arish and Ashkelon. Now that pipeline, which since the Egyptian revolution has been bombed repeatedly by Islamists in the Sinai region, has been shut in. Officially, Israeli policy is to keep those supplies flowing, both as a symbol of cooperation with Cairo, and to diversify the country’s energy sources. Discoveries in the Mediterranean, however, could soon make the pipe redundant.
But the bigger transformation for the country will come as Israel turns its Mediterranean riches into a liquefied natural gas (LNG) business. “The far east is the primary market,” said Uri Aldubi, chairman of the Association of Oil and Gas Exploration Industries in Israel. Noble Energy and its partners in Cyprus’s block 12 have already considered building a $2bn pipeline to the island, where a $10 billion export plant could be built. It would gather gas from Leviathan, too.
An Israeli onshore export facility has also been proposed. Local green objections may make such a development difficult – the problem with building things in a democracy, noted one executive. But two Israeli pipeline firms, National Gas Pipelines and Eilat-Ashkelon, are pressing ahead with plans to build a $6bn plant in Eilat. It could ship up to 7bn cm/y by 2018, if the plans get the nod.
But new momentum is behind a proposal, first mooted last year, to build a floating LNG (FLNG) plant atop the giant Tamar field. In March, Russia’s Gazprom reportedly opened talks to buy 2 million to 3m tonnes a year (2.8bn to 4.1bn cm/y) of LNG from Noble-led consortium developing the field. The deliveries, if they are agreed, would begin in 2017 and last up to 20 years, and would underpin the project. Crucially, they would be based on LNG prices in Asia, an increasingly important market for the Russian firm. Prevailing LNG prices in Asia, which are trending higher, run at about $16 per million British thermal units – between two and four times Israeli levels.
The Tamar partners (Noble, Delek, Isramco Negev, Avner Oil Exploration and Dor Gas Exploration), which also recently sewed up an $18 billion, 15-year supply deal with Israel Electric Corporation, signed a heads of agreement last year with South Korea’s Daewoo about building an FLNG plant based on the field.
Gazprom isn’t likely to be the last major international firm looking for a foothold in Israel’s upstream. LNG favours deep-pocketed firms. Capital expenditure of $15bn to $20bn is needed in the next eight years, reckons Aldubi. Asian companies are circling. With the export plans likely to go ahead, market valuations of firms already active in the sector may begin to look cheap. “Everything is undervalued,” said Aldubi in an interview. Analysts agree. In 2005, energy companies made up just 0.5% of the TA-25, an index of shares on Tel Aviv’s stock exchange. Now, points out Guil Bashan, an analyst at IBI Investment House, an Israeli brokerage, they account for 10.5%. In coming years, the number will more than double, he expects.
It won’t all be plain sailing. Nagging maritime disputes with Lebanon could yet turn into something more serious. Plans to export via Cyprus could increase tensions on the island between Greece and Turkey, unless a way of sharing the revenue is agreed. Thanks to successes with the drillbit, however, the fundamentals of Israel’s upstream look sound.
And that’s before any oil is found. Noble is drilling a “deep oil concept” in Leviathan, hoping to find crude lying beneath the gas reservoirs. The results could come within weeks. Bushan puts the chances of finding 1.2bn barrels at 9-15%. But many in the sector are even more confident. “Once we hit oil, you’ll know there’s lots more out there,” said Aldubi.
Figure 1: Levant basin