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| The 24 blocks on offer in Israel’s offshore licensing round. |
Israel is hoping to build on the hype surrounding exploration in the East Mediterranean with its first offshore licensing round. The Ministry of National Infrastructures, Energy and Water Resources (MIEWR), the government agency responsible for overseeing all petroleum-related activities in the country, intends to approach IOCs in September before the official launch of the round in November.
The areas in the licensing round offer high gas prospectivity, but IOCs may need convincing because of the geopolitical situation and the uncertainty surrounding possible routes to market for gas exports.
A total of 24 blocks, each covering up to 40,000 hectares, will be on offer. Israel’s Petroleum Council approved the delineation of the exploration blocks on 10 August. The government hopes the round will draw more IOCs to the country’s oil and gas sector while promoting competition and transparency.
IOCs have been invited to meet the Israeli minister of energy, Yuval Steinitz, at roadshows in London on 1 September and Singapore on 6 September. The ministry will hold an information session in Houston after that. Other dates may be added, according to IHS Energy, which is advising the government on the round. Public holidays are likely to stymie progress in October so the round will officially open in November.
A new strategy
The licensing round represents a new approach for Israel, which has so far developed fields on an ad hoc basis where IOCs submit applications for review and approval. The licensing round will reopen exploration in Israel’s exclusive economic zone (EEZ) after four years of inactivity. The country stopped issuing exploration licences in 2012, after which it reviewed its options and decided to tender licences in rounds.
Tenders for exploration licences were on hold while the country grappled with anti-trust legislation and competition regulation involving Noble Energy and Delek Group. But now the issues have been resolved, Israel is keen to press ahead.
The government also hopes to benefit from growing enthusiasm for gas exploration in the East Mediterranean region. "The Eastern Mediterranean is a hot exploration area, one of the few in the world currently [as] exploration activity is generally down," Tim Hemsted, managing director of upstream energy consulting for IHS Energy, told Interfax Natural Gas Daily.
A third-party study estimated Israel’s offshore acreage could hold 6.6 billion barrels of oil and 2.13 trillion cubic metres of gas. "The council chose 24 blocks as to which the seismic and geological data indicate a high potential for promising geological structures," the MIEWR said in a statement. "Some are adjacent to the substantial deepwater gas discoveries in Israel’s EEZ."
However, the cost and technical expertise of exploiting deepwater reserves may deter some IOCs, particularly as oil and gas companies have cut costs in response to low oil prices.
"Water depth is between 800 and 1,800 metres, which is deepwater; not as deep as some areas that are currently being explored globally, but it is still expensive to drill," said Hemsted. "Therefore it is expected that operators will be capable companies – smaller companies are more likely to apply as partners in a consortium."
The areas in the licensing round offer high gas prospectivity, but IOCs may need convincing because of the geopolitical situation and the uncertainty surrounding possible routes to market for gas exports.
A total of 24 blocks, each covering up to 40,000 hectares, will be on offer. Israel’s Petroleum Council approved the delineation of the exploration blocks on 10 August. The government hopes the round will draw more IOCs to the country’s oil and gas sector while promoting competition and transparency.
IOCs have been invited to meet the Israeli minister of energy, Yuval Steinitz, at roadshows in London on 1 September and Singapore on 6 September. The ministry will hold an information session in Houston after that. Other dates may be added, according to IHS Energy, which is advising the government on the round. Public holidays are likely to stymie progress in October so the round will officially open in November.
A new strategy
The licensing round represents a new approach for Israel, which has so far developed fields on an ad hoc basis where IOCs submit applications for review and approval. The licensing round will reopen exploration in Israel’s exclusive economic zone (EEZ) after four years of inactivity. The country stopped issuing exploration licences in 2012, after which it reviewed its options and decided to tender licences in rounds.
Tenders for exploration licences were on hold while the country grappled with anti-trust legislation and competition regulation involving Noble Energy and Delek Group. But now the issues have been resolved, Israel is keen to press ahead.
The government also hopes to benefit from growing enthusiasm for gas exploration in the East Mediterranean region. "The Eastern Mediterranean is a hot exploration area, one of the few in the world currently [as] exploration activity is generally down," Tim Hemsted, managing director of upstream energy consulting for IHS Energy, told Interfax Natural Gas Daily.
A third-party study estimated Israel’s offshore acreage could hold 6.6 billion barrels of oil and 2.13 trillion cubic metres of gas. "The council chose 24 blocks as to which the seismic and geological data indicate a high potential for promising geological structures," the MIEWR said in a statement. "Some are adjacent to the substantial deepwater gas discoveries in Israel’s EEZ."
However, the cost and technical expertise of exploiting deepwater reserves may deter some IOCs, particularly as oil and gas companies have cut costs in response to low oil prices.
"Water depth is between 800 and 1,800 metres, which is deepwater; not as deep as some areas that are currently being explored globally, but it is still expensive to drill," said Hemsted. "Therefore it is expected that operators will be capable companies – smaller companies are more likely to apply as partners in a consortium."
Territorial claims
Some companies may decide not to participate in the round for fear of drawing the ire of other countries in the region that are hostile to Israel’s territorial claims. Israel has ongoing disputes with Lebanon and Palestine, as well as unitisation talks with Cyprus.
But while other countries in the region have prioritised the development of fields that lie on maritime boundaries, Israel has chosen to focus on less contentious blocks located in the centre of its offshore area and those near confirmed gas finds.
"The blocks chosen are those that are considered to have most potential and are away from any disputed zones," said Hemsted.
IOCs may also be attracted by Israel’s reserve estimates and the predictability around its fiscal regime. Unlike in some other countries, IOCs are aware of the government’s intended take from hydrocarbon sales. The MIEWR intends to supply information on the criteria against which Israel will assess offers submitted in the licensing round, along with fees, at the roadshows.
But some observers are anticipating limited interest from IOCs. "The big companies like Shell, Eni and Total usually look at regions as a whole, regardless of country boundaries. Nevertheless, I doubt they’ll explore offshore Israel due to political and gas pricing considerations," Amit Mor, chief executive of Eco Energy Financial & Strategic Consulting and a professor for energy economics and geopolitics at the Interdisciplinary Center Herzliya, told Interfax Natural Gas Daily.
The need to find a suitable route to market for the gas could be another deterrent. "It is a major challenge to secure markets for east Mediterranean gas these days," said Mor. "The domestic Israeli market is pretty much saturated. Developing export markets in a geopolitically sensitive and competitive environment is complicated."
Israel is likely to finalise an export contract to supply 3-4 billion cubic metres of gas from the Leviathan field to Jordan’s National Electric Power Co., said Mor. "It is important to Jordan to diversify its gas sources," he said, adding that the deal will be priced competitively given the current low LNG prices.
Israel may eventually pipe gas to Turkey, but there is considerable uncertainty around this. Cyprus may try to block the path of a pipeline through its EEZ, and competition with Russia, Iran, Azerbaijan and Kurdistan presents additional uncertainty, said Mor.
Israel is keen to develop additional sources of domestic gas to meet its growing demand. The country’s gas consumption stood at 8.4 bcm in 2015, according to BP data. "This year it will be 9.5 bcm," said Mor. "I estimate that the market will grow to 12 bcm by 2020."
Diversifying supplies
The government is also keen to diversify its sources of gas supply. "In 2015, 55% of Israel’s electricity was generated with gas from one field – Tamar – and in times of peak demand, in the height of summer and winter, up to 70% of the electricity is generated by gas from that field," said Mor.
The Tamar field is located offshore Israel, and connects to the mainland via a single 150-km pipeline. "This situation creates a major national security threat, since in a case of a technical fault both the Israelis and Palestinians would sit in the dark," said Mor.
Concerns over Tamar are justified, according to Zenonas Tziarras, a teaching fellow in security and diplomacy at the University of Central Lancashire Cyprus. "When you rely on one source the risk increases," he told Interfax Natural Gas Daily. "I think concerns [that the supply route could be attacked] are well-founded. This is why they’re trying to develop Leviathan and open up some more areas."
Promoting the development of the Tanin and Karish fields would help diversify supply. Greek explorer Energean bought the fields last week for $148 million from Delek, which was forced to find a buyer within 14 months of the signing of Israel’s gas framework in December. Delek bought the rights to the fields from Noble Energy in November 2015 for $67 million.
While Noble and Delek have not been excluded from participating in the offshore licensing round, they are not expected to submit bids. They previously held exploration agreements covering large swathes of the area that will be licensed in the tender, but they relinquished the blocks when their contracts expired.
Should they decide to participate in the tender and find gas, they would most likely have to divest their assets. Having just about covered drilling costs in their disposal of the Tanin and Karish fields, they would be unlikely to seek more gas assets in Israel’s acreage.
"They’re not exploring for more gas offshore Israel," said Mor. "They may possibly explore offshore Cyprus." Noble is a partner in Cyprus’s Aphrodite find and Delek submitted a bid for Block 8 alongside Capricorn Oil as part of Cyprus’s third licensing round in July. If Noble and Delek offered competitive bids they would be considered by the MIEWR, with the competition issue addressed subsequently.
If significant oil reserves were found in Israel’s acreage, the incentives to take part in the licensing round would change significantly. The experiences of Noble and Delek in their search for oil in Israeli waters could deter other IOCs.
"Some companies may wish to explore for oil in the east Mediterranean as Noble Energy and its partners drilled in Leviathan for prospects beneath the gas layer at 7 and 10 km in depth," said Mor. "These drills, however, faced technical difficulties and were not completed. I believe that once commercial oil is discovered it will be a game changer for oil and gas exploration in the region."
While a significant oil find would raise exploration interest in Israel, the current price environment may see IOCs decide that their limited upstream budgets are better deployed elsewhere. The level of interest the MIEWR is able to draw in its roadshows will offer some indication of IOC interest.
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