Gina Cohen
Israel’s Ministry of National Infrastructure, Energy, and Water Resources postponed the oil and gas licence exploration tender for a second time in June, giving a new deadline of November 15. The Ministry of Energy is not at fault. It gets an ‘A’ for having the courage of its convictions, for holding the tender under very difficult circumstances, and for the work, effort and professionalism put into the marketing process. Yet despite the fact that some of the world’s major companies have bid in the tenders held this year in Cyprus, Egypt and Lebanon, they decided to give Israel a wider berth. We must therefore conclude that, under the current circumstances, nothing is about to change that will entice companies to bid by the new deadline of November 15. We need to adopt a new path, as postponing the tender and adopting a ‘more of the same’ approach is unlikely to lead to different results. There are around seven pertinent reasons behind the ongoing postponements of the tender.
1. Geological prospects
Israel has proved to be a prolific region with significant proven gas discoveries. The French company Beicip-Franlab hired by the Ministry of Energy concluded there was a potential to discover up to another 2,317 billion cubic metres (bcm) of gas. This compares with the approximately 1,000 bcm discovered to date. However, the geological opportunities in Cyprus, Egypt and Lebanon present potentially easier prospects. Lebanon has low-hanging fruit, such as those to be discovered in their own Tamar and Leviathan sand, and the companies that have taken up licences in Cyprus believe that the Zohr play extends well into the Cypriot blocks.
2. Data packages
The Ministry of Energy provided comprehensive bid packages, including extensive 2D seismic coverage of the licences offered (excluding the North). This package could have been improved by 3D surveys but before seismic surveyors invest in such surveys they would need to ascertain that they have at least 5-10 clients.
The Ministry of Energy provided comprehensive bid packages, including extensive 2D seismic coverage of the licences offered (excluding the North). This package could have been improved by 3D surveys but before seismic surveyors invest in such surveys they would need to ascertain that they have at least 5-10 clients. Since, the majors were unlikely to bid in the tender for political reasons, and since most of the Israeli companies were excluded from the process, 3D surveys were not carried out.
3. Egypt, Lebanon and Cyprus
Other issues differentiate Israel from Egypt, Lebanon and Cyprus. In Egypt, companies have a history and knowledge of operating in Egypt and President Al-Sisi’s administration improved the terms offered to $4-$6 per million British thermal units (mmBTU). In Lebanon, after political paralysis, rival parliamentary parties reached a compromise, which paves the way for elections and the ratification of two key oil and gas decrees. If Lebanon does find gas, it has ready domestic and export markets to sell into. As an EU country, Cyprus has no market restrictions on it to export gas, by either pipeline (except to Turkey) or as liquefied natural gas (LNG).
4. Geopolitics
When I asked an overseas colleague of mine what was the number one reason for the tender not taking off, he responded with no hesitation: the political reasons. Let’s call a spade a spade: the major oil and gas companies with significant Middle East representation, namely nearly all of them, will not come to Israel, in view of the political difficulties. The kind of companies that could certainly be attracted to the area, are mid-size US companies. However, they are probably currently focusing in the US, as US President Donald Trump is re-opening and easing all energy-related operations in the US.
5. Terms and conditions
The licensing terms demanded by the Ministry in the tender include onerous requirements to qualify as an operator. The fiscal terms are also onerous and not in line with the global times or the circumstances in Israel. Although Lebanon also had stringent licensing terms, it also included a “stabilisation clause” and fiscal terms that can be bid on by the contenders (such as maximum state profit).
6. Market
Gas is much more a locally consumed product than oil. Companies will, therefore, consider investment if there is a readily available market for them in Israel (or a credible ability to supply to neighboring countries) before they embark on a new drilling expedition.The government must commit as soon as possible to reduce the use of coal, to bring in compressed natural gas (CNG), to develop new gas based industries (GTL, ammonia, methanol) and establish the pertinent infrastructure. If the Ministry is fully behind the East Med pipeline, it should work with the relevant EU countries and the EC to bring the pre-constructing financing to conduct a study of the technical and commercial feasibility of this project.
7. Timing
The timing is potentially as bad as it gets, because global oil and gas companies have dramatically cut their exploration budgets, the world gas market is glutted with supplies for the next few years and the price of oil is refusing to budge. When November comes, I would advise not to postpone the tender’s due date again.
The Ministry of Energy provided comprehensive bid packages, including extensive 2D seismic coverage of the licences offered (excluding the North). This package could have been improved by 3D surveys but before seismic surveyors invest in such surveys they would need to ascertain that they have at least 5-10 clients. Since, the majors were unlikely to bid in the tender for political reasons, and since most of the Israeli companies were excluded from the process, 3D surveys were not carried out.
3. Egypt, Lebanon and Cyprus
Other issues differentiate Israel from Egypt, Lebanon and Cyprus. In Egypt, companies have a history and knowledge of operating in Egypt and President Al-Sisi’s administration improved the terms offered to $4-$6 per million British thermal units (mmBTU). In Lebanon, after political paralysis, rival parliamentary parties reached a compromise, which paves the way for elections and the ratification of two key oil and gas decrees. If Lebanon does find gas, it has ready domestic and export markets to sell into. As an EU country, Cyprus has no market restrictions on it to export gas, by either pipeline (except to Turkey) or as liquefied natural gas (LNG).
4. Geopolitics
When I asked an overseas colleague of mine what was the number one reason for the tender not taking off, he responded with no hesitation: the political reasons. Let’s call a spade a spade: the major oil and gas companies with significant Middle East representation, namely nearly all of them, will not come to Israel, in view of the political difficulties. The kind of companies that could certainly be attracted to the area, are mid-size US companies. However, they are probably currently focusing in the US, as US President Donald Trump is re-opening and easing all energy-related operations in the US.
5. Terms and conditions
The licensing terms demanded by the Ministry in the tender include onerous requirements to qualify as an operator. The fiscal terms are also onerous and not in line with the global times or the circumstances in Israel. Although Lebanon also had stringent licensing terms, it also included a “stabilisation clause” and fiscal terms that can be bid on by the contenders (such as maximum state profit).
6. Market
Gas is much more a locally consumed product than oil. Companies will, therefore, consider investment if there is a readily available market for them in Israel (or a credible ability to supply to neighboring countries) before they embark on a new drilling expedition.The government must commit as soon as possible to reduce the use of coal, to bring in compressed natural gas (CNG), to develop new gas based industries (GTL, ammonia, methanol) and establish the pertinent infrastructure. If the Ministry is fully behind the East Med pipeline, it should work with the relevant EU countries and the EC to bring the pre-constructing financing to conduct a study of the technical and commercial feasibility of this project.
7. Timing
The timing is potentially as bad as it gets, because global oil and gas companies have dramatically cut their exploration budgets, the world gas market is glutted with supplies for the next few years and the price of oil is refusing to budge. When November comes, I would advise not to postpone the tender’s due date again.
Plan B: ‘the Israeli way’
If my British colleague is correct that the main reason is politics, then we have to come to terms that it is unlikely that International Oil Companies (IOCs) will be banging on our door. This is even more so under the difficult and volatile conditions prevailing in today’s local and global market.
We therefore have to recalculate our path and enable entities that are already active in Israel to bid for rights. Without further exploration, the country will not achieve its goals to play a geopolitical role and any aspiration to initiate regional projects, such as the East Med pipeline, will not mature. This Plan B should be based on a two-phased approach’.
The first phase would be non-invasive 3D seismic and interpretation work (a no drilling reconnaissance contract). A number of experienced and some Israeli-based oil and gas entities would be able to carry this out with a budget of $15-25 million. The second phase would be the actual drilling. If the regulations encourage the development of commercial discoveries, the international companies would be more likely to allocate significant funds for drilling an exploration well. This would require a review of some of the export restrictions or the requirement to connect all future fields to the Israeli market. The government should also give a clear government commitment to convert coal to gas in the power sector.
Conclusion
We need to look out of the box and come up with a new solution for the exploration phase whilst constantly focusing on how to bring the gas to market. Other countries in the neighbourhood have managed to attract contenders because they each received certain positive signals, despite that fact that each country suffers from inherent complexities. Maybe it is time to get on the right track and do it ‘the Israeli way’.
The writer is an Israeli energy expert
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