Israel will permit the export of natural gas beyond a basic amount that it will retain as a national reserve, under the recommendations of the Tzemach committee on the structure of the future gas economy. The recommendations are due to be published in the next few weeks.
Discussions have been taking place recently between the Ministry of Energy and Water Resources and the Ministry of Finance in an attempt to decide how much gas will be allowed to be exported. Sources inform "Globes" that the Ministry of Finance is pressing to enlarge the amount beyond 10 billion BCM annually, seeking to maximize the economic benefit of the gas and to encourage further developers to come into the market.
For its part, the Ministry of Energy and Water Resources estimates that some 400 BCM (about half the amount of gas discovered so far) should be retained. This is the quantity that the Israeli economy is expected to consume by 2040. The export question is the most intriguing of the matters that the committee is dealing with, and arouses great interest among foreign companies considering whether to enter the Israeli market. The Ministry of Energy and Water Resources said that "the ministry does not comment on leaks from the committee."
The committee, headed by the director-general of the Ministry of Energy and Water Resources, Shaul Tzemach, will shortly release its interim report. The final report will be published after a public hearing. The committee's main recommendations are reported here for the first time.
The committee determines that the government has four main goals for the gas economy: maintenance of reserves for the local market (assured supply), making the market economically attractive, keeping a low price to the consumer, and raising the state's revenue from taxation of gas profits. The committee introduces a new concept: "a national reserve of natural gas" a basic quantity of gas that it will be forbidden to export. The committee believes that setting the requisite level of the reserve is a political decision that requires determination of the order of priorities between conflicting interests: future generations versus the present generation; assured supply versus economic interests and the desire to encourage the growth of the energy exploration industry.
Competition between suppliers
The committee notes that in most of the world's markets there is no genuine competition between gas suppliers. In most countries, 1-3 suppliers hold 75% of the market. In the Israeli market, Noble Energy and Delek Group Ltd. (TASE: DLEKG)) control 100% of the reserves discovered so far, and 55% of the potential gas reserves. The committee accepted the Ministry of Finance's main argument that permitting exports will encourage the entry of additional suppliers and develop competition. “Permitting exports from the Leviathan field will encourage faster development of the reserve and make room for additional suppliers in the Israeli economy,” the report finds.
On ‘Tamar’, the committee recommends examining the possibility of conditioning exports from the reserve on a reduction in the quantities of gas to be supplied to the Israeli economy. In addition, the committee recommends that the Antitrust Authority should examine the possibility of obliging each of the partners in the reserves to sell a proportionate share and to oblige the developers to construct a transport pipelines with extra capacity so that they will be able to serve additional suppliers in the future.
The committee notes that studies in the US and Australia have shown that the export of gas ultimately contribute to higher gas prices in the local market. However, it points out that the Australian model, which makes it mandatory to allocate to the local market only 15% of each reserve, is considered a success.
How much gas is left to discover?
In recent years, two large reserves (‘Tamar’ and ‘Leviathan’) have been discovered in Israel, and several smaller ones (‘Mari-B, ‘Dalit’, ‘Dolphin’, and ‘Tanin’). In the next two years, 19 exploration drillings for gas and oil are due to take place in Israel’s exclusive economic zone, costing an aggregate $2 billion. The committee’s experts estimate the total quantity of gas in Israeli territory to be almost double the quantity discovered so far.
The great unknown: transport
The committee expects that, in 2020, Israel will reach a situation in which up to 75% of its electricity will be produced using natural gas. The committee warns that, as Israel’s dependence on natural gas grows, correspondingly the risk will grow that a series of small breakdowns will cause part of the power production system to be cut off from supply.
Apart from power production, two main additional markets are expected to develop for the natural gas. Industry, which currently consumes about 0.8 BCM annually, is expected to raise its consumption to 4.4 BCM annually in 2025. A more interesting area expected to develop in the coming years is transport. Firstly, electric vehicles will raise the amount of gas consumed for power production. Secondly, vehicles could be directly powered by technologies based on natural gas products, which will be especially suited to public transport and trucks, such as methanol, compressed natural gas (CNG), and gas to liquid (GTL).
Export installations
In the past few months, Delek and its partner Noble Energy have been promoting a venture to set up a liquefaction plant in Cyprus for exporting the gas from 'Leviathan' and from Cyprus's Block 12. This is an ambitious project, costing $10-15 billion, that would employ 5,000 people in its construction and hundreds in operating it. It has won a warm welcome from the Cypriot government, but it seems as though the committee's recommendations will prevent it from going ahead. The committee recommends setting a government policy whereby exports of natural gas will take place exclusively from Israeli territory. The committee believes that the huge costs of constructing an LNG plant justify state assistance to the tune of 10-15% of the cost, as well as in planning and regulation.
The committee recommends obliging the owners of the rights in each reserve that produces gas to link up to mainland Israel, even if the gas is for export. The link will be direct or via a marine pipeline of another reserve. The committee also recommends that the state should reserve the legal power to use the gas in the reserves in an emergency.
Onshore installations, pipelines, and storage containers
One of the most sensitive areas that the committee examined was onshore entry points for the gas, in addition to the point at Ashdod via which it flows today. Strong public objections stymied an attempt to set up a northern entry point near Dor Beach two years ago, and the government is currently promoting a new national outline plan for the matter.
The committee recommends setting up two systems, a northern one and a southern one, and splitting the supply network among four entry points. Each will be operated by at least two suppliers. In addition, it recommends the completion by 2015 of the construction of a line to Ashkelon that will make it possible to raise the flow capacity of the existing system from 7 to 9 BCM annually. The committee finds that it will be necessary to invest billions of shekels in doubling the existing transport system in order for it to be capable of carrying the quantities of gas that the economy will consume.
It will also be necessary to construct a storage system based on onshore and offshore reserves. The Mari-B reserve, which is close to empty, will in the future serve as an operational reserve that will provide an immediate answer to consumers' needs. The committee believes that the 'Dalit' reserve too, which is 60 kilometers offshore and contains about 15 BCM, is suitable for use as a strategic reserve.
Another recommendation of the committee is to examine the possibility of collecting the state's royalties in kind, i.e. in gas rather than in money, by keeping back 12.5% of the gas in each reserve as a national gas supply for strategic storage.
Noble Energy will discover gas reserves amounting to over 200 BCM
The committee sets out in rare detail the expected discoveries in the various license areas. The forecast is based on geological information submitted by the drilling operators to the Petroleum Unit at the Ministry of Energy and Water Resources information that has been kept a close secret.
Noble Energy, the company that has been responsible for all the discoveries up to now, is expected to play a dominant role in future discoveries as well. The committee estimates that, in the expected drillings in the 'Alon' and 'Ruth' licenses, Noble Energy will discover additional gas reserves of over 200 BCM, 59 BCM this year, and 147 BCM in 2013. Norwegian company AGR, a partner in the six Pelagic licenses (with Beny Steinmetz and Teddy Sagi), and in the 'Benjamin North' license (with Coleridge and Lapidot), is expected to discover 118 BCM of gas this year, and 46 BCM in 2013. GGR, a partner in the 'Myra' and 'Sarah' licenses of ILD Energy and Modi'in, is expected to discover reserves amounting to 129 BCM in 2013, and ATP, the partner of Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) in the 'Shimshon' license, is expected to discover reserves amounting to 60 BCM this year, and 33 BCM in 2013.
The committee estimates Israel's total reserves of gas at 1,400 BCM, of which 750 BCM have been discovered to date. The current discoveries put Israel in 29th place worldwide. The total amount would currently put Israel in 24th place worldwide.
Published by Globes [online], Israel business news - www.globes-online.com - on March 20, 2012
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