When Texas based Noble Energy and Israeli partner Delek struck gas off the coast of Israel in 2010 it was hailed as a game-changer for Israel. The Leviathan gas field is found 5000 metres deep in the Levantine Basin. US geological survey data from 2010 suggests the entire basin could contain up to 122Tcf of recoverable gas. The 22Tcf Leviathan natural gas is contained in several sub-salt Miocene intervals.
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The discovery had the potential to give Israel energy independence and bring in significant revenue for the Israeli government through export to regional neighbours.
The optimism was soon overshadowed by a plethora of regulatory, political and financial issues as Noble and Delek struggled to gain government sign off on a deal to develop the huge offshore deposit. These issues centred around a potential monopoly, pricing for domestic provision and levels of export.
The Israeli government was accused of changing the goalposts by offering attractive terms for gas exploration and production to the consortium, which were swiftly changed once gas was discovered.
“You see this phenomenon over and over where host countries will tear up their original agreements and demand better terms,” says Jim Krane, fellow for energy studies at Rice University’s Baker institute. “From Mexico in 1938, across the Middle East in the 1970’s and even in Argentina in 2012, Leviathan seems to be another example of this.”
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By GlobalDataThe phenomenon, known as the obsolescing bargain, may have had short term benefits in allowing the Israeli government to renegotiate, but Krane asserts this may not be worth it in the long run. He says “While there is a short-term gain for the host nations, long term there is serious reputational damage which undermines the investment climate”
A game of political monopoly
Progress in negotiations stalled in a stand-off between the commissioner of the Antitrust Authority David Gilo and the government. Gilo resigned in August 2015, citing in a statement, “I do not think that it would be fitting or correct for the regulator in charge of competition to implement unilateral actions in the face of the overwhelming opposition of other government agencies, and without any support on their part”.
Gilo’s resignation, coupled with the stepping down of economy minister, Aryeh Deri in November allowed Netanyahu to green light the deal using a piece of national security legislation. Clause 52 of the Restrictive Trade Practices Law allows the Economy Minister to exempt Noble and Delek from laws preventing monopoly if deemed necessary for foreign policy or national security.
As Deri had resigned, Netanyahu adopted his power to push the deal through. “Some of the deal’s opponents stated that Netanyahu actions were unconstitutional” says Oxford University’s energy scholar, Justin Dargin. Indeed, opposition parties have filed four petitions with the Israeli high court over the deal, further increasing uncertainty.
The deal is in the detail
The finalised deal, officially signed in December 2015 involved some concessions for Noble and Delek, who together own 50% and 85% of the Tamar and Leviathan fields respectively. Both companies agreed to sell portions of their other holdings in the region, including selling the small, undeveloped Karish and Tanin fields to lessen their monopoly of the Israeli gas market. Delek will have to sell all of its 31% stake in the neighbouring Tamar gas field within six years; Noble will reduce its stake to 25%.
The Tzemach Committee, set up to form policy regarding the gas reserves, capped export from Israel’s East Mediterranean gas reserves at 40% in order to ensure domestic energy supply for the next 25 years. It argued this would still provide enough revenue to fund the $6bn development of the site. Domestic pricing for Leviathan gas will be given a price ceiling of roughly $5.40 per million BTU.
Noble’s senior vice president of the Eastern Mediterranean, Keith Elliott commented, “We are pleased that the Government of Israel, under the leadership of the Prime Minister and Minister of Energy, has recognised the importance of natural gas development to the security and economy of Israel and the region..”
The partners released a development plan on February 25, detailing eight planned wells in the field, connected by a pipeline, with two exit points. One of these is intended for Israel and its immediate neighbours, the other purely for export purposes.
On March 28, the Israeli Supreme Court largely approved the deal, but took umbrage to a stability clause which ensures the deal will stay in place for 10 years. It has given the government, Noble and Delek Group a year to negotiate an alternative, adding to the uncertainty already surrounding the agreement.
Do not pass go: Israel’s citizens push back
In Hebrew, Leviathan means sea monster and it is certainly living up to its name as even with a deal now signed, the issues surrounding extracting its treasure continue to escalate.
Israeli civil society is still concerned with the risk of monopoly. According to Haaretz news agency, 10,000 people took to the streets in Tel Aviv to protest the deal in November. Public opinion may not have the opportunity to be swayed by cheaper energy either. “In order to make Israel a ‘gas nation’, it would have to foster a type of switch-over to a gas-run economy.” says Dargin. “However, at the moment, low oil prices grant no inducement nor encouragement to Israeli industrial consumers or the transport sector to switch over to natural gas.”
The security situation in the East Mediterranean may also influence the price of gas from Leviathan. Jim Krane says “The Leviathan offshore field and production platforms are going to need an extra measure of security that should be added into the cost of production”. This will push the price toward the maximum agreed for supply to Israel, and may risk Noble and Delek losing out on export business when they cannot match competitors like Qatar.
Another pressure for the consortium to spring into action is the discovery of the Al Zohr ‘supergiant’ gas field by Italian oil company Eni off the coast of Egypt. Believed to contain 30Tcf of natural gas, it could significantly lessen the amount of natural gas Egypt needs to purchase from Israel, forcing the consortium to look for less convenient buyers for its gas.
In order to meet Egypt’s demand before Al Zohr comes online, the consortium has to raise the $6bn necessary to develop the Leviathan site. However, director of energy consultancy Crystol Energy, Dr Carole Nakhle says “several factors have created a difficult investment climate; from the political infighting, to continuous tinkering to tighten regulations, to changing the fiscal regime, and implementing new export policies, then to the technical and commercial challenges.” Recent deals with Jordan and provisional deals with Egypt should be enough to push the development forward, but other buyers would help.
Not all bad news
The way the deal between Noble and Delek and the Israeli government was struck and the challenges the consortium still faces may paint a gloomy picture, but there may yet be benefits for Israel, its people and the consortium.
In an effort to ease the potential monopoly issue, the Antitrust Authority are encouraging others into the market. In a statement released just days after the Leviathan deal was signed it said “Partnerships in natural gas exploration between companies that do not hold rights in the Leviathan or Tamar reservoirs should benefit from a more accommodating regime, so as to maximise the possibility of discovering a gas reservoir that can compete with the existing monopoly”.
On the 17th January the Times of Israel reported that Isramco Negev and Modiin Energy had discovered 8.9Tcf of gas off the coast of Israel. Although the field is in the early stages of discovery it will be good news for opposition parties concerned about the monopoly Noble and Delek now have over Israeli gas.
Israel may also be able to use the export potential of Leviathan’s gas to forge positive economic relations with its neighbours. The consortium has agreed a $10bn deal with Egyptian group Dolphinus for Egyptian domestic gas provision over 10-15 years and is currently in talks with Jordanian industrial companies to supply gas to them via the Eastern Mediterranean Pipeline.
At the official signing of the deal between the consortium and Israeli government Netanyahu stressed the importance of the deal, saying “This is essential for our foreign relations. Many countries have expressed interest.” He then went on to name Greece, Cyprus, Jordan, the Palestinian Authority, Turkey and Egypt as interested parties.
Back at home, multi-billion dollar tax revenue will be good for the government, and may sway support for the deal, if the populous can see positive effects from the additional income.
Arguably, the most significant benefit to Israel is the potential to become energy independent. “Israel is a natural gas importer and puts itself in a vulnerable position having to import energy,” says Dargin. “Over the long term, the Israeli consumer would definitely benefit from having an indigenous and consistent energy source”. In a world of uncertain markets and shaky political alliances, providing your own energy is the holy grail. This is why overcoming the obstacles is so important.
