Despite promising potential reserves and a favorable regulatory framework, Israeli offshore gas exploration is a tough sell.
Israel has been looking to develop its huge offshore gas resources after a period of regulatory uncertainty, but the challenges surrounding the construction and security of export pipelines may put off all but the most forward-looking investors.
Israel has one of the biggest gas reserves in the eastern Mediterranean basin, the Leviathan field, which could in time turn it into a major regional energy player. However, getting the gas out of the ground has been dogged with problems. Chief among them was an antitrust ruling stemming from concerns that the two main exploration companies, Texas-based Noble Energy and Israel’s Delek, stood to monopolise the country’s natural resource sector.
The subject was addressed in protracted production agreement negotiations between the government and the investors. The process was held up by persistent claims that the latter were being offered too generous a deal. Eventually approved by the Supreme Court in May, the so-called “Gas Framework” offers exploration companies a friendly regulatory and tax environment, exempting them from royalties until they achieve a 150% return on their investment.
Early this month, the Israeli Ministry of National Infrastructure, Energy and Water Resources held an event in London aimed at encouraging international oil and gas companies to submit bids for several new exploration blocks off Israel’s coast. The Minister, Yuval Steinitz, alongside the ministry’s Director General and its Chief Scientist, gave a presentation underlining both the high likelihood of a major natural gas discovery and the attractive production terms offered by the government. It was the second leg of a roadshow that has also taken in Houston and Singapore. But while there is no doubting the commercial potential of the 24 blocks up for auction, Israeli officials may find them a tough sell.
One of the main reasons is the slump in the price of natural gas, which many believe will be long term because of excess supply. There is intense competition between exporters over a limited number of major consumer markets. Since sale to Israeli consumers alone would not be sufficient to offset the costs of production, the commercial success of companies exploring Israel’s offshore reserves will rely on their ability to export to other countries in the Middle East and beyond.
This would require close cooperation between four major actors— Israel, Turkey, Egypt and Cyprus— to create a regional export network. The centrepiece of a plan being discussed in diplomatic and business circles throughout the region is an underwater pipeline running from Israel through Cyprus to Turkey. Turkey is one of the fastest growing energy markets in the world and, more importantly, a gateway to Europe, which has been heavily reliant on gas from Russia. An existing pipeline would connect Israeli offshore sites to Egypt, which is developing substantial LNG infrastructure, and could offer a shipping gateway for LNG exports. This pipeline runs through the volatile Sinai Peninsula and previously transported gas from Egypt to Israel. At that time, its reliability was questioned because of repeated sabotage by terrorists.
The diplomatic challenges involved in getting these countries to cooperate on a gas export project of this scale are formidable. Turkey has only just restored diplomatic relations with Israel after years of heightened tension, and still does not officially recognise the Cypriot government. Relations between Turkey and Egypt have also been strained ever since the July 2013 coup, which ousted former Muslim Brotherhood President Mohammed Morsi, who was supported by Ankara. While Egypt and Israel have been on relatively good terms under President Abdel Fattah el-Sisi’s administration, open cooperation with Israel would leave him facing accusations of ‘selling out’ the Palestinians. All of which undermines the business rationale for launching a major exploration operation in the eastern Mediterranean basin.
But while geopolitical conditions might be difficult, they have never been more favourable than now. The Israeli government is keen to promote regional stability, particularly to make the point that it can be achieved without major concessions to the Palestinians. Turkey’s adoption of a more pragmatic foreign policy and a desire to diversify its energy resources could see it building bridges with regional foes, which was certainly a factor in its rapprochement with Israel. As part of the reconciliation agreement between the two countries in June, Turkey committed to entering negotiations with Israel over the purchase of Israeli gas. The US, meanwhile, would be keen on cooperation between its Middle East allies on pipeline projects, and to see Turkey and Europe shift away from buying Russian gas. Indeed, many observers regard gas exploitation in the eastern Mediterranean as a possible driver of stability and cooperation in the region.
It is hard to predict whether many potential investors will look beyond the present geopolitical obstacles to the proposed pipeline projects, which is why the Israeli government is offering such a favourable regulatory and taxation framework. That should prove to be attractive, but only to those with a significant risk appetite. For exploration companies who believe that countries in the region could in time pull together to export gas to the Middle East and beyond, it might be a gamble worth taking.Yakir Gillis is a senior analyst at Alaco, a London-based business intelligence consultancy. He is a Middle East specialist.
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The diplomatic challenges involved in getting these countries to cooperate on a gas export project of this scale are formidable. Turkey has only just restored diplomatic relations with Israel after years of heightened tension, and still does not officially recognise the Cypriot government. Relations between Turkey and Egypt have also been strained ever since the July 2013 coup, which ousted former Muslim Brotherhood President Mohammed Morsi, who was supported by Ankara. While Egypt and Israel have been on relatively good terms under President Abdel Fattah el-Sisi’s administration, open cooperation with Israel would leave him facing accusations of ‘selling out’ the Palestinians. All of which undermines the business rationale for launching a major exploration operation in the eastern Mediterranean basin.
But while geopolitical conditions might be difficult, they have never been more favourable than now. The Israeli government is keen to promote regional stability, particularly to make the point that it can be achieved without major concessions to the Palestinians. Turkey’s adoption of a more pragmatic foreign policy and a desire to diversify its energy resources could see it building bridges with regional foes, which was certainly a factor in its rapprochement with Israel. As part of the reconciliation agreement between the two countries in June, Turkey committed to entering negotiations with Israel over the purchase of Israeli gas. The US, meanwhile, would be keen on cooperation between its Middle East allies on pipeline projects, and to see Turkey and Europe shift away from buying Russian gas. Indeed, many observers regard gas exploitation in the eastern Mediterranean as a possible driver of stability and cooperation in the region.
It is hard to predict whether many potential investors will look beyond the present geopolitical obstacles to the proposed pipeline projects, which is why the Israeli government is offering such a favourable regulatory and taxation framework. That should prove to be attractive, but only to those with a significant risk appetite. For exploration companies who believe that countries in the region could in time pull together to export gas to the Middle East and beyond, it might be a gamble worth taking.Yakir Gillis is a senior analyst at Alaco, a London-based business intelligence consultancy. He is a Middle East specialist.
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