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Why Developing Israel’s Leviathan Gas Field Is A Mammoth Task

By Knowledge Wharton. Originally published at ValueWalk.

Suddenly, it’s all happening in the Eastern Mediterranean.

After years of delay, confusion and dwindling hopes, the efforts to develop the offshore natural gas Israel discovered in 2009-2010 — especially the giant Leviathan field — are back on track. This rebirth began late last year, but it is the slew of developments in recent weeks which seems to signal a move into much higher gear.

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If Israel’s potential as an energy producer is this time fulfilled, it will impact everything from regional geopolitics to the commercial prospects of the specific American, Israeli and Greek-Cypriot energy companies now engaged in exploration and production. But that remains a very big “if.”

The most significant of the recent developments serves to illustrate how complex and multifaceted the Eastern Mediterranean energy story is — as well as why nothing about it should be taken at face value.

On August 8, Egyptian President Abdel Fattah al-Sisi signed into law a measure that will allow Egyptian private companies to import natural gas. The immediate reaction, reflected in media reports and analysts’ updates, was that this move opens the way to the sale of gas from the Leviathan field to Egypt — thereby providing the major export market that the Leviathan project badly needs to ensure its viability.

Not only would the consortium that owns Leviathan rake in profits, but also the Israeli government — which has adopted a policy earmarking Leviathan’s production for export — would benefit from royalties on sales and taxes on the profits. Best of all, from Israel’s point of view, opening up a large export market such as Egypt would generate interest on the part of more foreign energy companies in the new round of licenses that the Israeli government is currently offering for exploration in its EEZ (exclusive economic zone, extending 200 miles from its coast), including areas close to the Leviathan field.

All of those desirable things might indeed happen — but first there is a long list of problems to be addressed and resolved. First, importing Israeli gas to Egypt may now be legal, but that very fact may strengthen the already significant domestic political opposition within Egypt to expanding commercial ties with the Jewish state.

Then there is the matter of physically getting the gas to Egypt. One possibility is to bring it ashore in Israel and then via pipeline through Jordan — but this would offer an easy target for Islamic terrorist groups, as had already occurred in 2011-2012, when Egypt was exporting its gas to Israel and Jordan.

An even more basic question is whether Egypt actually needs to import Israeli gas. If it were available immediately, the answer might be yes, because Egyptian domestic production is currently insufficient to meet its requirements. But by the time Leviathan enters production — probably in 2020 — Egypt will have no need for imports, thanks to its own giant field, Zohr, which Italian energy firm ENI discovered in 2015 and, after a remarkably rapid development schedule, is likely to bring online in 2018.

There is an alternative scenario for Leviathan gas to be sold to Egypt. First, it could be pumped directly there, via an undersea pipeline — possibly linking up with the infrastructure being built for the Zohr field. In any event, the gas would not be earmarked for the Egyptian domestic market, but rather for re-export after being converted to LNG (liquefied natural gas) in one of two large LNG facilities in Egypt that are currently sitting idle — because Egypt’s burgeoning domestic demand has left nothing to export.

However, even this creative approach may not work, for very prosaic reasons. The costs of building a pipeline, converting the gas to LNG and then shipping it — whether to Europe or the Far East — may make it uncompetitive in today’s low-price energy markets, and hence make the whole scheme unviable.

But this is the Middle East, and things don’t necessarily follow what looks like the obvious path. Thus, the Egyptian law that seemingly paves the way to a major deal between Egyptian companies and the Leviathan consortium may prove to be the factor that pushes Turkey’s president, Recep Tayyip Erdogan, to support a deal ensuring that the bulk of Leviathan’s production goes to Turkey. Erdogan has had a volatile relationship with Israel over the years, but he wants to supplant Egypt as the leader of the Sunni Muslim world. Furthermore, Turkey — unlike Egypt — could really use Israeli gas imports.

The Wider Context

To fully understand this latest development in the Leviathan saga, it needs to be seen in a wider context. It comes one year after a revised “framework agreement” was reached with Texas-based Noble Energy, Israel’s Delek Group and Ratio Petroleum Energy — the companies that compose the Leviathan consortium — and the government, thereby enabling the Leviathan project to move forward again.

If Israel’s potential as an energy producer is fulfilled, it will impact everything from regional geopolitics to the commercial prospects of the energy companies now engaged in exploration and production.

That agreement ended almost five years of public debate within Israel, which saw the laws governing taxation and royalties levied on natural resource firms revised and the rates increased. Even so, a fierce prolonged public debate ensued over whether and how to develop the major gas finds made in Israeli waters in 2009 and 2010 — primarily the Tamar and Leviathan fields. Much of this debate focused on regulatory oversight of the energy sector and whether it was possible to achieve genuine competition in it.

While these arguments raged, the global energy sector changed dramatically. Roee Zass, a partner and head of the energy and utilities practice of TASC, an Israel-based consultancy, explains: “After production at Tamar started in March 2013, the development of both Tamar and Leviathan was blocked by political, regulatory and other issues. During that period, global energy prices — both oil and gas — fell sharply. This reduced the economic viability of exploration and drilling projects and, as a result, the level of activity fell all over the world. Another very important recent development is the emergence of the U.S. as an exporter of natural gas, after previously being an importer.”

Thus, while Israel was sorting out its policies, the prospects for exporting Leviathan gas were deteriorating. Nevertheless, following the completion of the framework agreement, the Leviathan consortium was able to concentrate on moving ahead with developing the field. To this end, each of the companies lined up its share of the financing needed for the first stage of the project, totaling $3.6 billion.

This enabled the companies to announce their FIDs — Final Investment Decisions — committing them to proceed with the project as planned. These, in turn, set in motion the process of planning, drilling, and installing production platforms and pipelines that would enable the consortium to meet its new target date for bringing Leviathan online, namely “late 2019.”

Welcome as the recent renewal of development activity may be, there still hangs over it the question of whether the major clients lined up by the consortium to date are sufficient to make Leviathan a viable project.

On the one hand, the facts seem to speak for themselves. “Had the

The post Why Developing Israel’s Leviathan Gas Field Is A Mammoth Task appeared first on ValueWalk.

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