Sunday, December 4, 2016

Development of Leviathan - IN CYPRUS / CYPRUS WEEKLY

December 4, 2016
By Charles Ellinas

Delek announced at the Tel Aviv Stock Exchange that it had signed a commitment letter securing up to $1.75 billion in financing from JPMorgan and HSBC for Phase 1A of the Leviathan development.

Ratio Oil sold new debt and equity earlier this year, raising about a third of its $600-million share of the project. Noble Energy has only raised part of its portion of the financing, expected to be about $1.6bn, and is looking to sell 10% of its Leviathan holding to support this.

The total estimated Phase 1A development cost is $4bn.

This, coupled with changes in Turkey’s energy strategy to diversify away from gas, may have profound effects on the future of East Med gas.

Leviathan is the largest gas-field in Israel with 621bcm of gas, but even though it was discovered in 2010, it is still undeveloped. It is owned by Delek Drilling and Avner Oil, which jointly hold 45.34%, Noble with 39.66%, and Ratio Oil with 15%. The operator is Noble.

The problem has been finding buyers for its gas. But this appears to be on the way to being resolved, at least sufficiently to proceed with Phase 1A, which includes supply of gas to the local market, Jordan and the Palestinian Authority (PA).

Israel finalised a deal in September to sell Jordan’s NEPCO 3bcm/y for 15 years, worth $10bn. This is still subject to regulatory approvals and has been the subject of mass demonstrations in Amman. It was followed this month by a gas sales agreement with Israel’s PAZ Oil worth $700mn, involving the supply of 3.12bcm over a 15-year period.

These are on top of other domestic deals for three forthcoming IPPs. A deal was signed in May with Israeli company IPM to supply it with 13bcm gas over an 18-year period, worth $3bn. Another deal was signed in January with Israeli company Edeltech, and its Turkish partner Zorlu Enerji, to supply it with 6bcm gas for 18-years, worth $1.3bn. Finally, a deal has just been signed with Or Energy for 8.8bcm gas for 20 years at $2bn. But none of the IPPs has progressed yet.

Earlier this year, Israel’s Ministry of Energy authorised the sale of 0.25-0.4bcm/y to the PA, but the PA has not yet responded and nothing has been signed.

In all these deals, the gas appears to have been sold at prices corresponding to $6.2-$6.5/mmBTU, even though the final price will be the one prevailing in the Israeli market – but nevertheless a healthy range, given current global gas market conditions.

The Leviathan partners are still hopeful of exports to Turkey and Egypt and to Greece through the much talked-about East Med pipeline, to enable development of follow-up phases of Leviathan. But all of these are commercially challenged.

Phase 1A appears to be going ahead without the need for such export sales.

The Leviathan partners declared that they plan to reach final investment decision (FID) before the end of 2016. Construction can then start in 2017, and be completed by end of 2019.

But this is not without its risks. Only the PAZ deal is firm. Even though the NEPCO deal is likely to be concluded, resistance to it in Jordan still carries on. Other deals still need the IPPs to progress.

This is perhaps the reason why the partnership’s financing agreement with JPMorgan and HSBC has a caveat. The partnership has the right to cancel the commitment letter until no later than February 20, 2017, in return for a cancellation fee, should the conditions that led to it, presumably gas sales deals, not materialise.

Nevertheless, the Leviathan partners appear to be progressing the development of Leviathan’s Phase 1A confidently. Yossi Abu, CEO of Delek Drilling and Avner, said: “we are committed to act in order to transmit gas from Leviathan to the Israeli market and to start exporting already at the end of 2019”.

Gas pipeline to Turkey

Gas exports from Israel to Egypt and Greece, and from there to Europe, are commercially challenged. It will cost over $7/mmBTU to get such gas to Europe, but 2016 average annual prices there were about $4.5/mmBTU. Until recently, though, the gas pipeline from Israel to Turkey, to transport 8-10 bcm/y gas, was gaining support and momentum. However, a number of developments have taken place that may now put this into question.

First, the urgency for such a project from Leviathan’s viewpoint has now partly abated, even though the government may still attach high priority to this for political reasons.

With Phase 1A progressing, the need for further sales may be receding into the future. For the Leviathan partnership, the priority must be to secure Phase 1A and achieve FID as soon as possible.

In addition, a number of developments have, to a certain extent, taken the steam out of this project in Turkey.

The country has put in place a new energy strategy focusing on energy source diversification, away from piped-gas to renewables, LNG, coal and nuclear. This appears to be succeeding. Gas imports in 2016 are now expected to total 45bcm, well down on 2015 with 48.4bcm, which in turn was lower than gas imports in 2014. With future gas import growth under question and security of low-cost Russian gas supplies assured, the need for such a pipeline is receding.

With the strategic requirement for such a pipeline weakened, any gas from Israel must compete with gas supplies from Russia, Azerbaijan and Iran, with current prices ranging between $4.4-$5/mmBTU and LNG at less than $6/mmBTU. It is difficult to see how Israeli gas can compete with such prices.

Finally, TurkStream is now back on track, with each string designed to carry 15.75bcm/y. According to Gazprom, the first string will be replacing the west route through Ukraine, which currently carries 14bcm/y to Turkey. In addition, the capacity of Blue Stream can be increased from 16bcm to 19bcm/y through additional compression. Thus, by 2019, Gazprom will have the capacity to deliver a further 4.75bcm/y to Turkey than it does now, and at low prices. And Gazprom has made it clear that it intends to defend its gas markets, including Turkey, by lowering prices further, if need be.

Italian companies have indicated they are keen to see additional Russian gas coming through Italy, promoting the idea of a second TurkStream string. Should this materialise, it would offer another opportunity to provide additional gas to Turkey.

These developments, and especially the price differential, pose challenges to a pipeline from Israel to Turkey. This could happen only for strategic reasons, and the price challenge would mean that only Botas, Turkey’s national gas company could pursue such a project, as private companies will find it difficult to take such a risk. As a result, its chances of succeeding are receding.

Implications for Cyprus

The good news for Cyprus is that, with the chances of an Israel-Turkey pipeline receding, the potential challenge to its EEZ is also diminishing.

However, this would leave Aphrodite out of future developments, including future gas sales to Turkey, should there be a solution to the Cyprus problem.

Without an Israel-Turkey pipeline and low gas prices in Turkey, Aphrodite will find it difficult to send its gas by pipeline to Turkey and even more so to Europe, even with a Cyprus solution.

With such options out of the way, both Cyprus and Israel may have to consider FLNG more seriously, as the remaining export option.

Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council