Israeli operators upbeat on demand prospects
Israeli gas developers reported good progress on offshore development projects in November while talking up the prospects of local and regional supply options for the output, writes Clare Dunkley
What: Noble and Delek have made progress on major projects to produce and distribute Israeli gas.
Why: Momentum is building in the country’s offshore sector as it seeks to replace coal with gas as well as target profitable export markets.
What Next: A licensing offshore round has been launched as the government looks to attract new investors.
The US’ Noble Energy used a quarterly update last month to report that the development project at the giant Leviathan asset was on track to deliver first production by the end of 2019.
The company also predicted the imminent closure of a hard-won deal to acquire an existing pipeline to fulfil a landmark supply pact with Egypt – with the conditions precedent gradually falling into place.
Meanwhile, Israeli partner Delek Drilling put forward public explanations for the firms’ bullishness over future local and regional demand for the country’s gas – reprised by Tel Aviv later in the month during the formal launch of a new upstream bid round.
Noble reported in third-quarter results published in early November that output from the 317 bcm Tamar field, thus far the sole source of Israeli production, had reached a record quarterly average of 11.4 bcm per year.
This was noted to have been driven by the ongoing, government-mandated process of replacing coal with gas in power generation combined with strong electricity demand.
Development of the 605 bcm Leviathan field – under a US$3.75 billion project targeting production of 12.4 bcm per year from the end of 2019 – was said to be 67% complete.
Two of the four production wells had been finished, with flow tests confirming production capacity of 3.1 bcm per year apiece, and fabrication of the deck and jacket of the production platform was under way, the company said. Noble is the operator of both Leviathan and Tamar.
An update was also provided on a deal reached in September for Noble and Delek to acquire a stake in, and operating rights over, the idled East Mediterranean Gas (EMG) pipeline – which runs from southern Israel to Egypt’s Sinai Peninsula. The transaction is crucial for the ability of the two firms to fulfil the terms of a groundbreaking agreement sealed in February to export 7 bcm per year of gas from Tamar and Leviathan to Egypt’s Dolphinus Holdings.
According to the US firm, technical evaluation of the 90-km pipeline – built by a privately led consortium in the second half of last decade for the supply of Egyptian gas to Israel – and the testing of flow reversal were in progress, a positive result which would enable the closure of the acquisition deal during the first half of 2019. The line’s current capacity of 7.2 bcm per year was said already to be being assessed for a possible expansion.
In late November, Cairo reportedly reached an agreement with Tel Aviv-owned Israel Electricity Corp. to pay part of a US$1.75 billion compensation penalty handed down by the International Chamber of Commerce in Geneva in 2015. However, the IEC last week dismissed these reports as inaccurate.
This relates to the Egyptian government’s abrogation of the original agreement to supply gas to the Israeli firm via the EMG pipeline.
Yitzhak Tshuva, the controlling shareholder of Delek Group – the parent company of Delek Drilling – elaborated on the prospects for increased domestic supply from both Tamar and Leviathan in an address to an investor conference in Tel Aviv later in November.
Total 2018 demand was forecast to amount to around 12 bcm – not all of which would be met – while the figure was predicted to reach 14 bcm in 2020, mainly through reduced coal use and the power requirements of new desalination plants.
Later in the month, Delek Drilling CEO Yossi Abu re-invigorated confidence over domestic demand while also expressing high hopes for additional regional supply contracts – irrespective of increasing indigenous production in Egypt.
“There’s room for everyone,” he claimed. “The Egyptian economy has become the father of the regional market”: the North African country’s much-vaunted return to a position of net exporter is expected to reverse by the middle of next decade.
Abu also clarified that initial gas supplied to fulfil the Dolphinus deal would be sent via Jordan through the existing Arab Gas Pipeline, with the EMG link being used at a later stage.
In late November, reports in the local press indicated a modest fillip to the Tamar partners’ ambitions in the form of an additional contract worth around US$200 million with their first foreign customers – Jordan Bromine and compatriot Arab Potash – to deliver a total of 1 bcm from the field on an interruptible basis from the first quarter of 2019.
The two private sector firms quietly began importing Israeli gas last year under a US$500 million contract signed in 2014 for a combined 1.8 bcm from Tamar over 15 years from first supply. The industrial firms are based on the Jordanian side of the Dead Sea and have been connected to Israel’s domestic grid. Both deals run until 2032.
Conditions precedent were met in March on the more important US$10 billion deal for the Noble/Delek team to sell a total of 45 bcm of Leviathan gas over 15 years to the Amman-owned National Electric Power Co. (NEPCO) utility.
Divestment and development
Delek is required by the terms of the gas framework agreement contentiously agreed in 2015 to divest the entirety of its stake in Tamar as a condition for maintaining an interest in Leviathan. It sold 9.25% last year to a Tel Aviv Stock Exchange (TASE) listed special purpose vehicle, Tamar Petroleum.
CEO Abu revealed that the relinquishment of the company’s remaining 22% holding in the licence was expected to be accomplished by means of an international sale next year – opining that the local market’s exposure to the asset had reached its limit.
Both Delek and Tel Aviv are banking on overseas investors taking a more bullish attitude to investment in the Israeli gas sector than has been the case in recent years – when the seeming absence of economically viable export outlets for substantial volumes of additional production deterred newcomers.
The Ministry of National Infrastructure, Energy & Water Resources formally launched the country’s second international upstream bid round on November 26 with an “initial call for bids” – auctioning 19 blocks grouped into five “clusters” with incentives to acquire several contiguous licences. Bidding is due to close on June 17, with awards anticipated in mid-July.
On the same day, the authorities re-announced a provisional agreement on the hugely ambitious project to build a 2,100-km gas pipeline running from Israeli and Cypriot offshore fields via Crete to mainland Greece and Italy.
The EU – eager to dilute its dependence on Russian gas – was noted to be funding the feasibility study, and an intergovernmental agreement is reportedly due to be signed during a summit in late December.
“The fact that Israel has become a gas exporter to Jordan and Egypt, alongside completion of the agreement to build an Israeli-European gas pipeline, creates a more attractive environment for international energy companies,” Energy Minister Yuval Steinitz said in the bid round launch statement.
However, widespread scepticism persists about whether the estimated US$6.75 billion link will ever move beyond the drawing board – especially as Egypt positions itself, beginning with the Dolphinus deal, as a transit hub for gas from across the region via LNG export facilities on the Mediterranean coast.