The Israeli Gas Connection
by Kent Moors Ph.D. | published April 20th, 2012 Oil and Energy Newsletter
Most attention in the Middle East is now transfixed on the ongoing crisis in Syria, the renewed uncertainty after the Egyptian elections, and the developing standoff between Iran and the West.
However, something else is happening offshore that may be a positive game changer.
Natural gas development, and apparently a lot of it.
This interest converges in two unlikely places – off the island of Cyprus, and in the waters of the Mediterranean shelf off Israel.
While both fields carry the potential to redraw the gas sourcing equation in a wider region between the Levant and Western Europe, it is their impact upon two factors that are most important.
The first is the continuing reliance of Europe on increasing Russian gas imports that we've talked about so much.
These new finds are hardly likely to change the overall dynamic of the import flow. But Cyprus could be a welcome addition to non-Russian sourcing coming across Turkey to Europe from the Caspian, Iraq, and Northern Africa.
The second factor, however, may be far more important.
Israel Seeks Greater Energy Independence
Israel depends upon Egypt for much of its gas, a proposition that may become more problematic as new political leadership in Cairo sends signals of renewed hostility to Tel Aviv.
That makes the Tamar (discovered in 2009) and Leviathan (in 2010) offshore fields so important from the standpoint of Israeli security. These are large fields – gas reserves are estimated at 260 billion cubic meters (9.2 trillion cubic feet) at Tamar and 453 billion at Leviathan.The fields dwarf Israeli domestic needs, meaning a rising volume of gas will be exported. That is already prompting new competition over who will control those exports and where the new riches will be moving.
U.S.-based Noble Energy (NYSE: NBL) is drilling at Tamar, the field that will come on line first, in conjunction with several Israeli-based companies. Part of the total reserves from both of the fields, about 130 billion cubic meters, has already been sold under long-term agreements to consumers in the Israeli domestic market.
Commercial planning is currently underway on the remaining volumes put in the global market.
Currently under consideration is an option to construct a floating terminal for liquefied natural gas (LNG), an LNG plant on the Israeli Mediterranean coast, and even the capacity to liquefy gas in the south of Israel, to have direct access, via the Red Sea and the Indian Ocean, to the most attractive Asian gas markets.
In other words, these discoveries are going to be affecting areas of the world well beyond where the gas is sourced. And that is setting the stage for another contest between Russian natural gas giant Gazprom and the European Union in Brussels, which is intent on lowering continental reliance on Russia for gas imports.
Gazprom has repeatedly tried to gain access to the Israeli fields. In late 2010, the government-controlled company announced plans to establish a joint venture for development. Gazprom also said it planned to buy a 50% stake in the Israeli private company owning the field licenses.
These plans failed.
Still, Gazprom has not lost interest in these gas projects. According to Russian media reports, it continues talks with local Delek Energy about a possible collaboration on the Leviathan project. And according to Israeli newspapers, several options are under consideration, including Gazprom's participation in a consortium to develop the field or the purchase of gas from the Leviathan for further delivery to Mediterranean countries.
Gazprom Swiss subsidiary Gazprom Marketing & Trading Switzerland (GMTS), founded in 2011, is going to sell Tamar gas. GMTS reported that it has signed the corresponding protocol of intent with Levant LNG (an already existing South Korean-Israeli joint venture). A preliminary engineering study for the determination of supplies is underway. GMTS wants to start LNG deliveries in 2017, according to a report to the Tel Aviv Stock Exchange from an Israeli company participating.
Levant LNG plans to buy gas from Tamar, using a floating LNG plant. In November of 2011, the Tamar project consortium signed an agreement with Daewoo Shipbuilding & Marine Engineering on the construction of floating installations for the production, storage, and shipment of gas from the field. Daewoo previously reported that it plans to start producing LNG in late 2016.
All of this means that, not being able to control production, Russian commercial interests may still have a thing or two to say about where that production goes. The competition for Israeli gas will pit the European and Asian markets against each other.
Of course, the amount of additional availability moving from Tamar and Leviathan into the export market will not be decisive for either major market. But there is one truism about international gas trade. Finding an additional source for 3% or more of demand, allows all other pipeline and LNG prices to be renegotiated – downwards.
That places Israel squarely in the middle of changes in much broader gas markets. It also opens up an intriguing new investment opportunity involving a company positioned in both the U.S. and Israel.
And I will be releasing that move to my Energy Inner Circle subscribers next week.