Thursday, May 11, 2017

Few takers for Israel's new gas exploration tenders - GLOBES

11 May, 2017 10:30
Nati Yefet

Burdensome regulation, limited export opportunities and geopolitical isolation mean there is scant interest in the licenses on offer.


The Ministry of National Infrastructure, Energy, and Water Resources' tender is likely to yield meager results, even though the deadline for participating in it was postponed from April until July. According to various energy market sources, three to five companies are expected to take part in the tender, even though it involves 24 marine blocks, and despite the grandiose declarations issued when the tender was announced last November. The Association of Oil and Gas Exploration Industries in Israel termed the tender a "historic decision," and Minister of National Infrastructure, Energy, and Water Resources Yuval Steinitz has since repeated at every opportunity his intention of turning Israel into a "regional natural gas power."


In reality, the situation is very different. A month ago, the Cypriot government signed a series of agreements with leading companies, including ENI, Exxon Mobil, and Total for gas exploration in the blocks it was marketing, and the Lebanese government announced two weeks ago that 26 companies had passed the initial selection stage in its new offshore oil and gas exploration tender. This tender is creating a dispute with Israel, given the disagreement about ownership of territory included in three of the five blocks that Lebanon is marketing on its marine border with Israel.

The skeptics assert that, as shown by the successful preliminary procedure held by Lebanon in 2013, in which 43 companies made it to the next stage, but which was eventually canceled, nothing will happen this time, either. At the same time, the number of companies that made it through the process and their identity indicates that the market has confidence in Israel's northern neighbor. These companies include, among others, Indian energy giant ONGC Videsh, with 33,000 employees; Russian oil producer Lukoil, whose revenue totaled $114 billion in 2014; Malaysian company Sapurakencana, with 13,000 employees in 20 countries; Algerian government company Sonatrach, with 120,000 employees; and Qatar Petroleum, which is entering the Cypriot market.


Small market, big regulation

In Israel, it appears, Greek company Energean, operator of the Karish and Tanin gas reservoirs, and Edison, owned by French company EDF, are almost sure to bid in the tender.

Most of the energy market players commenting on the subject regard this as a failure, but another party asserted that this is only an interpretation, and that even a small number of companies can lead to a gas discovery and a greater success in future exploration tender. The tender itself is based on work commissioned by the Ministry of National Infrastructure, Energy, and Water Resources from Beicip-Franlab, which found that the undiscovered gas potential in Israel waters amounted to 2,200 BCM, 70% more than the amount of gas discovered.

Various sources told "Globes" that they agree that there was great potential for finding significant amounts of gas. The sources cited two reasons for the looming failure of the tender. The first involves factors over which Israel has no control, while the second concerns primarily Israel's regulatory policy. The first reason consists of factors such as the low price of oil (about $50 a barrel), which makes natural gas less attractive; Israel's security situation, in which Israel is involved in a war every few years and is exposed to missile attacks; and the geopolitical situation, which encourages companies operating in the Persian Gulf and the Arab world in general to refrain from activity in Israel.

Other reasons include the bad reputation gained by Israeli regulation, which is perceived as unstable, at least for the coming years, and there is almost nothing Israel can do on the matter. Other factor dampening interest in Israeli energy exploration licenses include: the small size of the Israeli market; the dependence of the Israeli market on Tamar and Leviathan; the fact that until Energean has reported that it has signed agreements with customers and closed financing deals for the development of the Karish gas field; domestic competition is purely theoretical; and the major difficulty in finding export markets for gas that might be discovered.

The issue of export markets was handed another hammer blow this week with the renewal of tension between Jerusalem and Ankara in the wake of Turkish President Recep Erdogan harsh speech about Israel. Even in the positive scenario of Israeli gas exports to Turkey, it would be in quantities that would not likely justify the development of additional gas fields.

Furthermore, the widespread assumption in the global energy market is that Egypt will produce all the natural gas that it needs for its own domestic requirements and that therefore the chances of exports to Egypt are close to zero. Gas exports to Europe also look close to impossible, mainly because they are not economically viable. So it looks as if no international company would rely on that as a basis for a business model, which would permit gas field exploration and development in Israel.

Regarding reason connected to Israel specifically, time and again local regulations are cited as a problem. This is also directed at the latest tenders, which it is claimed, have unreasonable demands. This includes the requirement of operators to have equity of at least $800 million, at least a decade of experience in deep water drilling, and will own at least 25% of the partnership where they are drilling - in other words they will bear the cost of at least $25 million for each exploration drilling. This last restriction is especially difficult for overseas companies that are willing to cooperate in the Israeli market but are not prepared to risk their money, even though the chances of energy finds are relatively high at about 30%.



An ugly bride with a hump


Adv. Anat Klein, head of the energy and infrastructure department at Tel Aviv's GKH law firm thinks that the export market is not necessarily the main factor for the expected failure of Israel's gas license tenders. She says that there is major interest in the Far East in the possibility that Israel will have sufficient quantities of gas for exports. However, she claims that alongside the regulatory problems there are also geopolitical and security difficulties.

She said, "On the security level, it is known that Israel is a target on this or that level and it continually faces war and terror. Therefore the insurance for here is much more expensive. When you talk about production costs for these fields, these costs are a drop in the ocean but at the exploration stage it is a burden."

The Ministry of National Infrastructures, Energy and Water Resources said in response, "The Ministry continues to lead the competitive process for distributing natural gas and oil exploration licenses, and to interest various companies in joining Israel's natural gas market."

Published by Globes [online], Israel business news on May 11, 2017 - © Copyright of Globes Publisher Itonut (1983) Ltd. 2017
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