The natural gas discovered in the Eastern Mediterranean is so expensive to bring to market that it might never reach European consumers, let alone change the policies of EU governments.
Ever since the discovery of the Leviathan gas field off the coast of Haifa, Israel has been dreaming of riches and political influence. A recent Foreign Policy article has taken this to the realms of the unimaginable—arguing that future European dependence on Israeli gas exports could both change the political views of European countries toward Israel and make the EU pro-Israel.
But the article overlooks a more basic question: Can Israeli gas ever make it to Europe or to global markets at a competitive price? With Leviathan about to come onstream, Israel, Noble Energy (as the operator), and its partners are looking for gas sales beyond this first phase of development. As much as 9-10 billion cubic meters per year of gas could be available for export. This is about the same amount as the Southern Gas Corridor pipeline from Azerbaijan to Italy that will be delivering 10 billion cubic meters per year to Europe by 2020.
The main challenge to exporting Israeli gas is commercial. Gas prices are low globally—$3.60 per million British thermal units (mmBtu) in Europe in August—and even though they may rise after 2025, as surplus liquified natural gas (LNG) production is absorbed, prices are still expected to be at levels that challenge the profitability of exporting gas from the Eastern Mediterranean. Israel’s much-hyped expectations are therefore likely to wither in the face of the harsh realities of global markets and prices.
Political will and support from the Israeli government and the United States are not enough to overcome price constraints. Natural gas is, after all, being bought and sold by commercial companies. And these firms and their investors are risk-averse and prioritize profits above all else.
International oil companies are currently facing threats of divestment from investors who are concerned about global carbon emissions caused by fossil fuels. As a result, these companies need to maintain high profitability so that they can maintain their attractiveness to shareholders. This means that they invest in projects with high profit margins and quick returns.
Eastern Mediterranean gas, including Leviathan gas, is located in deep-water reservoirs. This makes it expensive to extract and develop, and the lack of regional infrastructure also impacts the cost of exporting such gas.
Take, for example, the much-talked-about EastMed gas pipeline, to run from Israel’s Leviathan gas field through Cyprus and Greece to Italy. The project has strong political backing not only from Israel, Greece, and Cyprus but also from the European Union and the United States. But it is a very expensive project.
With the cost of the gas expected to be between $4 and $5 per mmBtu at Leviathan, once the cost of the pipeline is added and by the time such gas reaches European consumers, it will be too expensive to attract buyers. The EastMed gas pipeline can become commercially viable if the price of natural gas in Europe exceeds about $8 per mmBtu, which is substantially higher than the average price of $6.50 per mmBtu expected over the next 10 years.
The United States would like to see Eastern Mediterranean gas exported to Europe to lessen dependence on Russian gas. But this can happen only if the region’s gas can compete with prices prevalent in Europewhich is a challenge. To this end, the Eastern Mediterranean Gas Forum (EMGF) was set up—with strong EU and U.S. support—to increase cooperation for the promotion and exploitation of natural gas reserves in the region. But the EMGF cannot really help hydrocarbon development and exports from the region; it will take some time before it progresses from being a regional talking shop into an influential international organization.
The global energy world is very competitive, with a glut of supplies and cheap renewable energy sources—such as wind and solar power—and coal keeping prices in check. There is an increasing demand for LNG but not at any price. This is why the Israeli Leviathan project has not attracted any interest from major international oil companies or investors, despite the fact that Noble Energy and its partners are keen to find ways to export Leviathan gas.
The main options at the moment are Egypt’s two existing liquefaction plants at Idku and Damietta near Alexandria—due to their low liquefaction costs. But the country’s petroleum minister expects both plants to become fully utilized by next year, handling mostly Egyptian gas. Indeed, Egypt has not only become self-sufficient in gas but is also exporting LNG thanks to the discovery of the giant Zohr gas field in the Mediterranean north of Port Said.
The country’s successful implementation of reforms is now being rewarded with record natural gas production, increasing LNG exports, surplus gas and electricity, and lowered fuel subsidies. With Egyptian LNG plants expected to reach full utilization by end of 2019, in addition to cost challenges, there may not be any room for Israeli (or Cypriot) gas at Idku and Damietta.
The extent of the Israeli gas price problem is evident when one considers the price agreed between the Leviathan partnership and the Jordanian National Electricity Company. This is reported to be $6 per mmBtu, when the price of Brent crude oil is in the range of $60-$70 per barrel. The price of Israeli gas arriving in Egypt is likely to be higher due to higher costs for the Leviathan to Egypt pipeline in comparison to the Leviathan to Jordan pipeline. That would make it uneconomical to liquefy and export to Europe.
By the time liquefaction costs, ship transportation, and regasification (converting LNG back to gas) costs are added, such gas will not be able to compete with longer-term gas prices in Europe—expected to average $6.50 per mmBtu between 2020 and 2030. In addition, a glut of gas supplies—mostly from Russia, Norway, Algeria, Qatar, and the United States—is already providing Europeans with adequate energy supplies and keeping gas prices down.
Unless the cost of producing and exporting Israeli gas is brought down substantially—perhaps by the companies reducing their profit expectations and a government prepared to reduce taxes and royalties—it may not be possible to export it. It could, however, be used for domestic consumption, ensuring Israel’s longer-term energy independence. But that will not buy the country global political influence as Jamie Levin and Mieczyslaw P. Boduszynski contend.
This is the main reason why two government calls for bids to award offshore licenses launched by Israel ended up with disappointing results in terms of attracting any major oil company interest, in contrast to projects in neighboring Egypt, Cyprus, and Lebanon that have attracted most majors, including ExxonMobil, Shell, BP, Total, Eni, and others.
Ever since the discovery of Leviathan in 2010, Israel has unsuccessfully been trying to find ways to export its surplus gas; so far nothing has changed to make it any easier. Unless it finds ways to reduce costs, Leviathan gas, or any Israeli gas, will not become a game-changer for Israel’s exports or its relations with the rest of the world.
Charles Ellinas, a nonresident senior fellow at the Atlantic Council, is the CEO of the Cyprus-based energy consultancy e-CNHC. He was previously CEO of the Cypriot national hydrocarbon company (KRETYK), where he was responsible for implementing the government of Cyprus’s development strategy for its hydrocarbons sector.
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