Israel prepares for new gas era
Israeli producers and consumers both disclosed plans in late February ahead of the imminent commissioning of the giant Leviathan gas field.
The asset’s US operator, Noble Energy, updated shareholders on the project’s progress during the reporting of full-year results. The firm revealed that only around 66% of capacity was likely to be used in the field’s first year of operations, as questions around viable supply outlets for the country’s prized resource continuing to be asked.
Meanwhile, the main domestic consumer negotiated a price freeze for contracted gas from the Tamar field, the only current producer.
During an earnings call on February 19 to discuss 2018 results Noble CEO David Stover reported that the US$3.75 million first-phase development project at the 606 bcm Leviathan offshore field was 75% complete. The results included a much-narrowed US$66 million net loss.
Stover confirmed that all four production wells were now on stream and had been tested to confirm capacity of 3.1 bcm per year apiece, and that the installation of in-field gathering lines and subsea trees had been completed. The jacket had arrived in Israeli waters in January.
The significance of the last of these for the Israeli economy was marked in a ceremony on February 1 attended by Israeli Prime Minister Benjamin Netanyahu and Energy Minister Yuval Steinitz.
The platform’s construction is under way and the entire project was said to be on track for scheduled completion by the end of the year. Noble operates the field with the local Delek Drilling as the main partner.
Production from Tamar, which the company also operates, was said to have been running at around sustainable capacity of 10.3 bcm per year. This was cited by Noble’s chief operating officer Brent Smolik in an upbeat assessment of Leviathan’s demand prospects.
“Israel’s gas demand has been exceeding domestic gas deliverability, requiring higher-cost LNG to supply growing power generation [needs],” he said. “That demand growth underscores the importance of bringing Leviathan online … [and] we are also seeing growing regional demand.”
However, the executives also acknowledged that a portion of the first-phase of output remained uncontracted. 2020 production is anticipated totalling only 8.3 bcm, around 66% of upstream design capacity.
Supply commitments have been signed for 9.3 bcm but some of the contracts are not due to be fulfilled until the latter part of 2020 or 2021, Stover said. “Our first emphasis in the area is going to be continuing to fill up that additional capacity … and we’ve seen with Tamar, that’s rapidly filled up – ‘build it and they will come’,” he added.
Domestic demand is increasing rapidly on the back of Tel Aviv’s policy of replacing coal with gas for power generation.
The first phase of the smaller Karish field development, under way by Greece’s Energean to the north-east of Leviathan, is due on line in early 2021. The project has been designed in such a way as to enable a swift increase from initial output capacity of 4.1 bcm per year – with the FPSO unit to be built with space to handle twice that volume.
Stover said that the company was continuing to look at ways to raise upstream production potential at Leviathan. Reserves have previously been reported as being sufficient to support a doubling of first-phase capacity.
But any expansion launched in the next few years would likely be executed piecemeal rather than as a single, largely costly project. Noble would “continue to look at modulars and different components of capital-efficient expansion,” he said.
While Tamar gas will still to supply the bulk of local requirements over the coming years, primarily under a long-term contract with state utility Israel Electric Corp. (IEC), Leviathan’s success rests on regional outlets.
Eyes on Egypt
Noble and Delek concluded a 10-year, US$15 billion contract with Egypt’s Dolphinus Holdings in February last year for the firm supply of 3.6 bcm per year from Leviathan from field start-up and the interruptible delivery of the same volume from Tamar.
In September, the developers reached a complex and critical deal allowing the companies to use the existing East Mediterranean Gas (EMG) pipeline to fulfil the export agreement.
The 90-km line, running from a connection point with Israel’s domestic grid at Ashkelon in southern Israel to Arish in the Sinai Peninsula, was commissioned at the end of last decade to send Egyptian gas in the opposite direction. It was idled in 2012 amid political upheaval in Cairo and domestic shortages. Capacity stands at 7 bcm per year and is expandable to 9 bcm.
Stover told investors that due diligence on the deal was ongoing and that flow testing with Tamar gas would begin by the end of the first half. The agreement will see the upstream partners acquire a 39% stake in the pipeline company for US$518 million.
“The pipeline further improves our ability to meet growing regional gas demand and potentially provide gas to global markets through the underutilised Egyptian LNG facilities,” he said.
The EMG deal secures the cross-border section of the proposed export route. However, questions were raised in the local press in late February over the ability of the relevant portion of the national grid to handle the additional volumes required by the Dolphinus deal. The grid is operated by state-owned Israel Natural Gas Lines.
In January, Steinitz publicly raised the possibility of installing a second pipeline running directly from Israel’s offshore fields to Egypt’s liquefaction plants on the Mediterranean coast.
In doing so, the Israeli Energy Minister appeared to accept that monetising Israeli gas via Egypt was likely to prove a more cost-effective, swift and feasible solution than the long-mooted East Med Pipeline to southern Europe via Cyprus.
The discovery of a new field in the island’s waters, announced at the end of February by US heavyweight ExxonMobil, promises to alter the calculations again for the various players.
IEC struck a controversial domestic supply deal with Noble/Delek in 2012, three years before the regulatory regime for the sector was set down by the Natural Gas Framework Agreement.
This committed the power generation utility to buying a total of up to 87 bcm of gas from Tamar under a 15-year take-or-pay arrangement with the operating consortium.
The minimum annual rate was reduced as per a 2016 amendment from 5 bcm to 3 bcm from the start of this year.
The much-maligned contract allows for the first renegotiation of the price only in July 2021, with a second adjustment possible in 2024. The value in the deal comprises a baseline value increased in line with the US Consumer Price Index plus 1%.
As new supply agreements have subsequently been made with other consumers, by the Leviathan partners and by Energean, offering gas at significantly lower prices, IEC has been seeking an earlier change.
In late February, Delek unveiled a deal with IEC whereby the gas price would be frozen effective from the start of this year at the unstated 2018 rate of around US$6.1 per mmBtu until the first adjustment date. Delek said this would save IEC US$85 million.
Meanwhile, IEC’s daily take-or-pay commitment would be cut from 655,200 mmBtu (18.5 mcm) to 500,000 mmBtu (14.1 mcm) from the date of Leviathan’s first gas – without any alteration to the customer’s annual offtake obligation.
Noble and Delek have been progressively reducing their stakes in Tamar to comply with the 2015 regulatory settlement – and at present hold 25% and 22% respectively.