Israel Finds $240 Billion Gas Hoard Stranded by Politics

Israel, reliant on imported energy since the state’s foundation in 1948, now has more natural gas than it can handle.
Noble Energy Inc. (NBL), Delek Group Ltd. (DLEKG) and other explorers have discovered enough gas under the Mediterranean Sea to supply Israel’s needs for 150 years. To profit from the finds sooner, the companies want to export the gas by pipeline or ship. As the Ministry of Energy prepares to publish a blueprint for developing the fields later this month, officials say the country’s economy and security must come first and shipments abroad should be limited.
Exporting natural gas presents challenges. A shortage of land and environmental opposition complicates building a plant to liquefy the fuel for export, while an offshore facility or pipelines to nearby countries will be hard to protect. Tapping all of Israel’s discoveries, which include Leviathan, a single field holding more gas than Middle East exporter Yemen has in reserves, may prove uneconomic without exports.
“I’d be surprised if some of the gas in Israel isn’t stranded,” said Nick Maden, a senior vice president for international exploration at Statoil ASA (STL), which has been examining the region’s potential. This is “the play that most companies will be trying to follow” and there has “been more gas discovered than you can commercialize.”
Prime Minister Benjamin Netanyahu met energy executives last month and said he would take steps to strengthen the potential of gas exports.
‘Many Reforms’
“We need to make many reforms and maintain a responsible framework for the state” in the energy market, Netanyahu said in a statement after the meeting.
The debate in Israel is similar to that in the U.S., where gas-hungry companies including Dow Chemical Co. and DuPont Co. have lobbied lawmakers to prevent exports on a scale that risks driving up natural-gas prices.
Noble discovered the Leviathan gas field in Israel’s deep waters in 2010 and at the time it was the world’s largest find of its kind in a decade. The Houston-based explorer is looking for a partner to develop an LNG project, which may cost as much as $5 billion. It also plans a deeper well next year to search for Israel’s first offshore crude finds, Chief Executive Officer Charles Davidson said on a July 26 conference call with investors.
“We’ve found far more natural gas that can ever be used in Israel,” Davidson said at a conference in May. “There are more natural gas resources to discover in Israel and they have to be able to demonstrate there is a market there in order to justify other producers to come in and explore.”
The company declined to comment for this story.
Economic Output
Noble, partner Delek, and other explorers have discovered about 760 billion cubic meters (28 trillion cubic feet) of gas, according to Noble data. That’s enough to meet the country’s demand for more than 150 years at current consumption rates, according to Bloomberg calculations based on BP Plc data. The gas would be worth about $240 billion, equal to Israel’s annual economic output, based on today’s prices in the U.K.
The Israeli government has set up a research committee chaired by Shaul Zemach, director-general at the Ministry of Energy and Water Resources, to develop a blueprint for gas industry development due to be published this month. Today, Israel imports gas by LNG tanker.
“One of our targets” is to encourage “companies to come to Israel to invest money” in exploration and “do exporting in a good way,” said Yeoshua Stern, director-general of the natural gas authority at Israel’s Energy Ministry and one of the team behind the report. “I hope there is enough gas for the domestic market and for export.”
Securing Resources
In April, the committee presented an interim report marrying the aims of encourage exploration in Israel, securing resources for domestic use through 2040 and allowing some exports. The energy industry said it creates uncertainty because gas exports will only be allowed at the government’s discretion.
“Foreign investors won’t come here because of the regulatory uncertainty,” said Yossi Abu, the CEO of Delek Drilling LP, speaking in July at a Tel Aviv investors’ conference. “It’s not the government versus the developers, but the government and the developers versus our competitors in the rest of the world.”
While Noble and Delek have held preliminary talks with South Korea’s Daewoo Shipbuilding & Marine Engineering Co. and Russia’s OAO Gazprom (GAZP) about building a floating LNG unit, there is concern that such a facility could be vulnerable to an attack.
Security Threat
“The security threat to the gas fields is serious,” said Giora Eiland, a retired general and research fellow at the Institute for National Security Studies at Tel Aviv University. “Protecting all the activities of an LNG infrastructure will be an extremely expensive undertaking, and if a floating LNG platform worth billions of dollars is set up, it will likely be the most vulnerable target.”
The world’s largest energy companies like Royal Dutch Shell Plc (RDSA), Chevron Corp., and Exxon Mobil Corp. will be deterred from investing in Israel because of interests they have in the rest of the Middle East, said Fadel Gheit, an analyst at Oppenheimer & Co.
“This is a geopolitical reality and has nothing to do with economics,” Gheit said from New York. “Most likely they will have to export the gas because it exceeds the domestic consumption. They have a tremendous gas surplus.”
Gazprom, which supplies about a quarter of gas consumed in Europe, in March signed a preliminary deal to buy gas from Levant LNG Marketing Corp., set up to sell the fuel from the Tamar and Dalit fields using a floating LNG plant.
Bombed Pipeline
Egyptian Natural Gas Holding Co., which runs its LNG plants below capacity, would be also interested in buying pipeline gas from Israel, said Mostafa El Bahr, vice chairman for agreements and exploration at the company. In April, Egypt terminated a gas-supply contract with Israel signed in 2005, after the Sinai pipeline supplying the fuel was bombed more than a dozen times.
Export proposals also include building a pipeline all the way to Greece or combining the gas from discoveries off Cyprus and Israel at a joint LNG plant as soon as 2018. Another option is to build a plant in Jordan to ship the fuel to Asia through the Red Sea, according to Noble.
The pipeline to Greece is so expensive it won’t be economically viable, while the link to Turkey will lack flexibility of buyers, according to Gerry Peereboom, a director of LNG at Noble. Leviathan partners can start pumping first gas as soon as 2016 to supply the Israeli domestic market, Noble Chief Operating Officer David Stover said July 26.
“There is almost certainly enough gas for export” in Israel, said Simon Henderson, the director of energy policy at Washington Institute. “They’ve got to make some decisions and make them fairly soon.”
Source: Bloomberg