Plans to develop Phase 1 of the Leviathan gas field were approved last week. TheMarker answers who, what, where, when, why and how much
The largest infrastructure project in Israel’s history is about to get under way, after the partners in the Leviathan offshore natural gas field announced on Thursday the approval of a final investment decision of $3.75 billion in phase one of the project. Gas should be available to the Israeli market by the end of 2019, according to the plan.
It was a long road to the decision, which comes nearly seven years after gas was first discovered at the giant Mediterranean Sea field. During the intervening period, global energy prices collapsed, potential customers came and went and Israel underwent the long and painful process of sorting out its regulatory regime.
Phase one of the plan agreed upon by Noble Energy, Delek Drilling, Avner Oil Exploration and Ratio Oil Exploration involves drilling four subsea wells.
What is Leviathan?
Leviathan is the largest natural gas reservoir discovered in Israeli territorial waters. Located some 10 kilometers off the coast of Haifa, it was discovered in December 2010, about a year after the Tamar field was found. It was one of the biggest natural gas discoveries in the world in the past decade.
Texas-based Noble Energy, the operator of Leviathan, owns 39.7% of the field. The rest is split among three Israeli partners. Delek Drilling and Avner Oil Exploration, two subsidiaries of Yitzhak Tshuva’s Delek Group that are in the process of merging, each holds 22.7%. Ratio Oil Exploration, which is controlled by the Landau and Rotlevy families, holds 15%.
The amount of gas in the field is a matter of dispute: A government analysis shows 500 billion cubic meters of gas; the partners estimate is around 620 BCM, a not insignificant difference of almost 25%. By way of comparison, the neighboring Tamar field holds about 310 BCM. In addition, Leviathan contains nearly 40 million barrels of natural-gas condensates, which can be used for the production of Brent crude oil.
How much is all that natural gas worth?
Estimates for the entire field in its current state of development are in the $5 billion to $6 billion range, compared to $12 billion for Tamar, which has been pumping gas since 2013.
The much larger Leviathan should be worth more than Tamar, but because the project is still in its infancy and has yet to produce any energy, the risks involved in its development are much greater, a factor that lowers its present value. The farther along the development goes and the risks involved fall, the more Leviathan will be worth.
The total value of all the revenues from Leviathan over the life are estimated at $100 billion to $150 billion, at current prices.
Modest Phase I
What does the development plan call for?
The initial development plan is quite modest, and based on selling gas to Jordan and customers in Israel. As opposed to Tamar, in which the process of treatment for the gas ends in onshore facilities, the entire process for the gas from Leviathan will take place at sea.
Stage 1A of the development plan involves drilling four subsea production wells, at an average depth of five kilometers below sea level. The gas from these wells will be transported through two underwater pipes, 120 kilometers in length, to a processing and production platform situated about 10 kilometers offshore from Hadera.
The processed gas will be piped from the platform, through a northern entry pipeline that will be connected to the national gas transmission system of Israel Natural Gas Lines, a government-owned corporation, at its northern access point. From there, the gas will flow to Israeli customers and neighboring countries.
The processing and production platform will be similar to the one located near Ashkelon that now takes the gas from Tamar. The platform will be anchored to the sea bottom at a depth of only 80 meters, with the platform above the water.
This platform is expected to handle some 12 BCM a year, twice the amount the Israeli economy uses today. The cost for phase 1A is estimated at $3.75 billion, not counting the $1 billion that has already been invested so far in exploration, appraisal and planning activities.
How will the partners pay for the project?
Each partner is required to put up funding according to its ownership stake. Delek Drilling and Avner will put in about $1.75 billion. Toward that end, last week they signed a financing agreement with a consortium of 20 financial institutions, headed by HSBC and JPMorgan Chase. The financing agreement includes loans, with a weighted average interest rate of 5.5% annually. The loans will be provided in tranches, depending on milestones set for the project. The loans are supposed to be paid back within four years using money raised from the sale of bonds, similar to the funding for Tamar. The interest costs on the loans for Delek Drilling and Avner is estimated at $250 million to $300 million over the life of the loans.
Ratio needs to put up some $600 million. In December 2016, it signed an agreement for a $400 million loan from HSBC and BNP Paribas. In addition, Ratio issued a series of bonds to raise $160 million, to serve as its own equity for the project. It now has $250 million, including money raised recently from the sale of options.
Noble said on Thursday that it would finance its $1.5 billion contribution to phase one with operating cash flows from the nearby gas field Tamar, as well as east Mediterranean portfolio proceeds. This includes the sale of 7.5% of the Tamar field as required by the gas framework agreement, which will reduce Noble Energy’s stake in Tamar to just 25% within a few months. In addition, Noble is expected to sell off part of its share of Leviathan. It has already sold part of the Cypriot Aphrodite field to BG, as well as its holdings in the smaller Tanin and Karish fields.
Who will buy the gas?
The biggest customer for the gas from Leviathan is expected to be Jordan’s National Electric Power Company. A contract was signed with NEPCO in September 2016 for 45 BCM over 15 years for $10 billion. For political considerations, the contract was signed by a subsidiary of Noble Energy, NBL Jordan Marketing, and not an Israeli company.
Today, Jordan buys liquefied natural gas for its power plants at a relatively high price. The Jordanians will buy the gas from Leviathan at a price of $5.50 to $6.50 per million British thermal units, a bit more than the $5.30 or so Israel Electric Corporation pays.
The Leviathan partners have also signed contracts with Israeli customers, including the operators of the largest private power station, Edeltech, for 6 BCM of gas over 18 years for its Tamar power plant at Mishor Rotem in the Negev and another in Ashdod. The IPM power plant in Be’er Tuvia will buy 13 BCM over 18 years. Other contracts were signed with the Paz oil refineries and Or Power Energies, the owner of the Dalia power plant.
All together, these contracts are for 5.3 BCM a year. The Leviathan partners want to sign more such contracts to reach 10 BCM a year by the time production starts in 2019.
Has the exploratory drilling at Leviathan ended?
No. The partners are continuing to carry out exploration of the Leviathan field to determine its size and the amounts of gas it contains. One such test well, Leviathan 5, is now being drilled, at a cost of $77 million, and it is hoped the results will solve the dispute as to how much gas really exists in the field. This well will later be connected to the production pipelines.
The partners plan on conducting a further exploratory drilling to determine if oil is present, too, and in what quantities. This well was supposed to have been drilled in 2013. Prospective geological formations that could contain oil were identified under the gas field, at a depth of seven kilometers under the sea floor. Oil reserves are estimated at 560 million barrels, with a possibility of 15% more or less. Previously, the exploratory well at Leviathan 1 reached a depth of 6,500 meters, the deepest well ever drilled in the Levantine basin.
What is the next stage in developing Leviathan?
After Stage 1A is completed, in 2019, the plan is to sell gas to other customers in the Mediterranean basin. Stage 1B involves the drilling of four additional production wells and the expansion of the processing and production platform to handle an additional 9 BCM a year of gas. After this stage is completed, total production capacity will reach 21 BCM a year. The cost of this second stage will be in the range of $5 billion to $6 billion.
In this stage, the partners want to find a new large customer. The two main possibilities are business customers in Turkey, which gets most of its natural gas from Iran and Russia, or international energy companies such as BG, which has natural gas liquefaction plants in Egypt and could ship Israeli LNG to Europe in tankers.
For now it is unclear how likely such sales to Egypt are, partly because of the recent discovery of a large Egyptian gas field, known as Zohr. But the Turkish option is now on the table. At later stages, Leviathan is planned to link up with the neighboring Cypriot gas field, Aphrodite, in which Noble, Delek Drilling and Avner also have stakes.
Is the development of Leviathan a blessing or a curse for Israel?
The development of Israel’s natural gas fields prompted a huge public debate and demonstrations, particularly over the royalty framework agreement. Most of the criticism concerned the decision to allow large-scale exports of gas, instead of keeping the gas as future energy reserves for Israel. Another major dispute was over the price Israeli customers pay for gas producers, which are a cartel. The price is higher than in most other gas-producing countries (especially the United States), which give the producers very high profit margins. But the development of Leviathan provides the Israeli economy with another proven source of natural gas in addition to Tamar, and the smaller gas fields are supposed to connect up to the Leviathan infrastructure, too. In any case, the development of Leviathan now seems to be a done deal.