Nadav Shetreet
Cyprus, Lebanon, Egypt, and Israel are issuing a new series of natural gas exploration licenses.
The major natural gas reservoirs that have been discovered off the Mediterranean shores in recent years have made the region a focus of international interest. The past few months have been especially lively, with Lebanon, Egypt, Cyprus, and Israel simultaneously issuing new exploration licenses.
The American Geosciences Institute estimated in 2010 that the Eastern Mediterranean basin, which includes the territorial waters of Israel, the Gaza Strip, Lebanon, Syria, and Cyprus, has 3,450 BCM of natural gas and 1.7 billion barrels of oil. These reserves are likely to have substantial economic and environmental consequences. The discovery of these reservoirs in the their territory has given countries that were previously dependent on energy imports an opportunity to develop gas fields, achieve energy independence, and earn money by exporting gas to other countries.
The potential of this gas, however, is also posing challenges, such as competition for new remote markets, attracting strong international operators, technical difficulties in building the infrastructure for gas exports, and commercial and geopolitical questions.
Gas industry sources said that competition is not necessarily between the operating companies, but between the countries seeking to attract those companies: what agreement the country will offer, how much it is willing to contribute to the costs, the size of its market, and whether it is guaranteeing governmental and regulatory stability. Given the renewal of exploration, "Globes" will try to draw a map of the regional interets.
Egypt: El-Sisi putting up prices
The countries in the region have different points of departure, and their reservoirs are in different states of development. We will start with Lebanon, which has been left behind in the discoveries and drilling in its territory. In March 2013, the country began a process of pre-selection for oil and gas companies wishing to operate there. 12 international operators made it through this stage, and 34 more non-operator companies also underwent the process required for acceptance as partners.
Lebanon intended to issue 10 marine licenses, but a lack of regulatory and political stability in the country caused a delay in issuing them. Now, following the sale of the Karish and Tanin reservoirs to Energean, the Lebanese are concerned that gas will be pumped from their blocks, which are particularly close to the Karish reservoir, and this event could expedite the publication of the licenses tender there.
Activity is currently taking place on a far larger scale in Egypt, Cyprus, and Israel, but these countries differ from each other in development, consumption, and interests. While the gas reservoirs discovered in Israeli and Cypriot territory are enough to supply their needs for the next 30 years with a surplus for export, Egypt has to import gas, despite its 3,000 BCM in proven gas reserves, triple the size of Israel's proven reserves.
European energy giants BP and ENI announced the discovery of gas off Egypt's shores in June. ENI estimates that the new discovery will increase volume of gas in the Nooros area to 70 BCM. This discovery comes on top of the Zohr discovery reported by ENI in August 2015, which contains an estimated 850 BCM. Egypt currently produces 40 BCM a year, and needs an additional 10-20 BCM for its own needs. It is therefore importing 13 BCM in liquefied natural gas (LNG) annually. Egypt needs to import gas because of a string of government decisions that caused gas prices to fall too low, causing the energy companies to halt their operations, with gas production falling precipitously as a result. Projections in Egypt are that gas production will catch up to local consumption only in 2020-2021.
"One of the reasons for the Mubarak administration's economic collapse was energy subsidies, which amounted to 40% of the state budget," says Eco Energy CEO, economic and strategy consultant, and Herzliya Interdisciplinary Center Institute for Policy and Strategy fellow Dr. Amit Mor. "In an attempt to stabilize the Egyptian economy, Egyptian President Abdel Fattah el-Sisi has increased natural gas prices and set a tariff according to the type of drilling ($3.50 per mmbtu on land, $4.20 in marine drilling, and $5.90 in deep water drilling)."
It now appears that the Egyptian effort to induce international companies to invest in natural gas projects is yielding results. In recent days, Egyptian Minister of Petroleum and Mineral Resources Tarek El Molla announced that he planned to issue 10 more licenses for gas exploration and production by the end of the current year, following his announcement three months ago of the distribution of 28 new blocks. Over the past 30 months, Egypt has signed a total of 66 new license issuing agreements.
The country is also now in negotiations with the International Monetary Fund for a $12 billion loan, some of which will be used to repay Egypt's debts to oil and gas companies for LNG imports, but it is doubtful whether this loan can rescue the country from its severe shortage of foreign currency, which is creating difficulties for international energy companies operating in its territory.
The possibility of Israel exporting gas to Egypt was considered for a while, but the memoranda of understanding signed between the two countries did not produce a final agreement. It now appears that Cyprus is a more realistic source for imports, but the new discoveries in Egypt may nevertheless still provide a basis for cooperation with Israel in building infrastructure for gas exports to Europe and Asia.
Mor says that future cooperation between the countries depends on solving the dispute between Egypt and EMG, after Egypt halted the supply of gas to the company, which it was sending to Israel Electric Corporation (IEC) (TASE: ELEC.B22). International arbitration found that Egypt owes $1.8 billion in compensation, and Egypt has appealed the ruling.
Cyprus: Looking to Egypt
In contrast to Egypt, potential consumption in Cyprus is fairly small 1.7 BCM annually, and its challenge is therefore to find remote markets. In competition with Israel's Leviathan and Tamar gas reservoirs, Cyprus has some advantage since it needs little gas for its own consumption, Cyprus does not faces the same pressure to retain the gas in the country that Israel does, and has greater flexibility in setting gas prices.
Four months ago, Cyprus began issuing its third round of gas licenses. In the first round in 2007, Delek Group Ltd. (TASE: DLEKG) and Noble Energy discovered the Aphrodite reservoir, estimated to contain 125 BCM, in Block 12 the only reservoir discovered in the country to date, located 170 kilometers south of Cyprus, which is currently a partner with Delek Group and Noble Energy in this field. In the second round in 2012, 33 companies competed for nine blocks. Among others, the winners included French energy company Total (two blocks) and ENI and Kogas (three blocks). In the current round, Cyprus has marketed three of 13 blocks, and is slated to decide on the identity of the operators by the beginning of 2017. The largest energy companies - Statoil, Royal Dutch Shell, Total, and Action - are waiting for information.
Ironically, from the operating companies' perspective, a peace agreement in Cyprus ending the 40-year conflict between northern Cyprus, (cleansed of its majority Greek population and) occupied by the Turks, and the Greek-speaking population of the free areas (south) of the Republic of Cyprus (some believe that an agreement could be signed in the coming year) is liable to upset the relative geopolitical stability in the country, following regulatory changes caused by a peace arrangement, in addition to potential disputes between the two sides involving the ownership of the gas reservoirs.
Former Ministry of Foreign Affairs director general Alon Liel doubts whether any peace agreement will be signed. "Peace talks have been going on for 40 years, and when it will happen is unpredictable," he says, but adds that Israel will profit from it. "Israel will be able to benefit from direct access to Greece and Turkey, which currently is still a problem."
Meanwhile, Cypriot gas is destined for Egypt. Early this week, the in-cyprus news website reported that El Molla would visit Cyprus this week for a meeting with his Cypriot counterpart, Yiorgos Lakkotrypis, in order to sign an agreement for the sale of Cypriot gas to Egypt. This agreement, together with two other bilateral agreements slated for signing in the near future, involve an arrangement for transporting gas from Cyprus to Egypt. The Cypriot website claimed that this development "paves the way for the construction of an undersea gas pipeline between Cyprus and Egypt, not Turkey, as third parties, including Israel, are trying to promote."
According to Mor, the cost of building this pipeline casts doubt on the economic viability of the agreement, and the agreement could be mainly an attempt to improve political positions.
Israel
Like Cyprus, Israel is looking for markets to export gas, and several agreements with Jordan are currently on the table: one, already signed, involves exporting gas in 2017 from the Tamar reservoir to Jordanian Dead Sea enterprises, and another agreement, which as far as is known is ready and waiting for signing, involves exports of gas from Leviathan to the Jordan Electric Power Company (JEPCO). Under this agreement, which is supported by the US government, the US Overseas Private Investment Corporation (OPIC) will provide a financial guarantee for JEPCO's purchase of 3 BMC of gas a year from Leviathan for a 15-year period.
Exporting gas to the Palestinian Authority is also a possibility, but the big story, Mor says, is the possibility of exporting 10 BCM of gas annually to Turkey in the second stage of Leviathan's development. "The agreement should be extremely worthwhile, but a great deal of geopolitical and diplomatic work is obviously required, including obtaining permission from the government of Greek-speaking Cyprus to lay the pipeline in its waters. In the commercial aspect, Israel and the Leviathan owners will have to negotiate with European and Turkish companies, and compete with the gas suppliers in Turkey, headed by Russian company Gazprom, which currently supplies 27 BCM annually to Turkey - 57% of Turkey's gas consumption - and with gas from Iran and Azerbaijan, and soon also Kurdistan."
The real challenge facing the Israeli economy and the relevant government ministries is converting the Israel economy to gas and substantially increasing demand. According to the Ministry of National Infrastructure, Energy, and Water Resources, demand for natural gas is slated to develop in the transportation and petrochemical sectors, and demand in Israel for natural gas is projected to rise gradually in the coming years, from 5 BCM annually in 2010-2011 to 12 BCM in 2020 and 18 BCM in 2030. The demand forecast for 2013-2040 is 436 BCM.
Where development of the reservoirs is concerned, the coming year is likely to be significant for Israel. Only last week, Delek and Avner Oil and Gas LP (TASE: AVNR.L) reported to that Greek company Energean had signed an agreement to buy the Karish and Tanin reservoirs for $148 million, plus future royalties. The Israel Petroleum Council in the Ministry of National Infrastructure, Energy, and Water Resources is scheduled to approve the agreement within 45 days of its signing. Its implementation will serve as a test case for attracting new investors in the gas reservoirs and shaping Israel's image as an attractive investment target.
The most significant development, however, is the Petroleum Council's announcement of the distribution of oil and gas exploration licenses in a tender procedure for 24 blocks in Israel's economic waters. The decision to begin this procedure is based on independent research recently commissioned by the Ministry of National Infrastructure, Energy, and Water Resources, which found that Israel's marine basin contained undiscovered resources total 6.6 billion barrels of oil and 2,137 BCM of natural gas. This November, the government and the Antitrust Authority are due to publish the threshold conditions for potential bidders in the tenders.
"This is a very important measure, which is expected to encourage international energy companies to invest in the natural gas sector in Israel," Minister of National Infrastructure, Energy, and Water Resources Yuval Steinitz declared. It is indeed an extremely important measure, since the cumulative financial strength, size and experience of the companies that will compete in the tender will to a large extent determine the future of the gas sector.
"We will apparently not see the majors (biggest gas companies, N.S.) entering into the initial phases, but we will see lower-level international players. The image Israel has acquired as a result of its zigzags in recent years and the changing and retroactively applied policy are still an Achilles heel. It will take time before international confidence in Israel and regulation here is restored," GKH Law Offices energy and infrastructure partner Anat Klein told "Globes."
"There were several major companies on the verge of beginning substantial activity in Israel," Klein adds. "According to what was published, at least, they chose not to enter the gas business in Israel because of the government's conduct. Another difficulty faced by an international player is the fact that Israel is not joining the Energy Convention as a member, which could have provided a recognized framework for large players and international rules providing a layer of defense."
Marine engineer and Tamuz Group oil and gas director and energy consultant Eyal Schneider believes that Israel has advantages over its neighbors. "The regulatory environment is clearer than in the past, and Israel is politically stable. Egypt has had revolutions that exacted a huge price from the energy companies, and they are still in legal proceedings against the administration," he said. According to Schneider, Israel's small size is also an advantage, because of the relatively short distances between the marine drilling platforms and the endpoint, which saves on development costs. At the same time, he adds, "The operators are aware of the potential in Israel, but they are wary of entering it. It appears that one of the main reasons is the bad impression made by the collapse of the Leviathan-Woodside deal and its accompanying consequences."
Schneider believes that before publishing the threshold conditions in November, the state should provide easy digital access to geological surveys. "It is necessary to make sure that all the particulars and the Ministry's demands are written very clearly in English," he says.
Klein adds that before the threshold conditions are published, it is important to establish the marine boundaries, so that potential developers will not be afraid that a license granted to them will make them hostages in a political struggle between Israel and its neighbors.
"New players will come to Israel only if they believe that projects are economically worthwhile," sources at the Association of Oil and Gas Exploration Industries in Israel said, "so increasing competition in the gas sector requires the formation of an energy policy by the Israeli government and protection for infant industries in order to encourage development of small and medium-sized reservoirs in the existing licenses and in new licenses."
Published by Globes [online], Israel business news - www.globes-online.com - on August 24, 2016
© Copyright of Globes Publisher Itonut (1983) Ltd. 2016
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