Gov't mulls building marine gas pipeline network

The government is considering plans to assume responsibility for financing and building a national marine pipeline.

In January 2011, Egyptian gas deliveries to Israel were first halted. Israel Electric Corporation (IEC) (TASE: ELEC.B22) was left without sufficient natural gas, and has been forced to spend billions of shekels to buy diesel and industrial oil to generate electricity. The estimated damage to the economy is NIS 15 billion - NIS 12 billion for diesel and industrial oil, and NIS 3 billion in health and environmental damage from the burning of more polluting fuels than natural gas by IEC's power stations at Ashdod, Haifa, and elsewhere.

The crisis caught Israel before it could connect the Tamar offshore gas field to the mainland, before the government could consider emergency storage options, and before additional gas fields could be developed. What has happened since and have the lessons been learned?

The national gas pipeline network

Israel's gas reserves are offshore, dozens of kilometers from shore. Prior to the gas crisis with Egypt, the Israeli government preferred to build an onshore gas pipeline network, mainly due to budget considerations, but left it to the gas fields' developers to build the marine pipelines from the production platforms to the onshore terminal. Connecting the Tamar field to the shore will cost an estimated $3 billion, which will be fully financed by Tamar's partners - Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG), Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), and Alon Natural Gas Exploration Ltd. (TASE: ALGS). However, the Tamar pipeline was planned on the basis of business, not national considerations.

The Ministry of Energy approved the Tamar development plan in July 2010, before the Egyptian gas crisis broke out, and the Tamar pipeline lacks the capacity to make up for the shortfall from the non-delivery of Egyptian gas. This limitation carries a cost: some independent power producers (IPPs) are liable to lack gas for generation electricity, and the conversion of small and mid-sized enterprises to gas for manufacturing is liable to be stuck for years. The government has not been able to compel the Tamar partners' to increase the pipeline's capacity. The Tamar partners' monopoly on the undersea pipeline is also liable to cause difficulties for new gas suppliers, who will want to hook up their fields to the existing pipeline, to save costs.

This reality has prompted the Ministry of Energy and Water Resources to rethink its positions. The committee for the gas industry's future structure, chaired by the ministry's director general, Shaul Tzemach, is drawing up a plan for the government to assume responsibility to build and finance a national marine pipeline.

The proposed pipeline network would serve future gas fields. The government will build a pipeline from shore to offshore production rigs, which will be built in advance in areas of future large natural gas discoveries. Instead of planning and building a pipeline on the basis of what is good for a specific gas field, a pipeline will be built on the basis of what is good for the national gas economy. Developers would be able to hook up their gas fields to these rigs at their own expense on an equitable basis. Government-owned Israel Natural Gas Lines Ltd., which has already built the onshore gas pipeline network, is the natural candidate to build the offshore network.

In the best case, the marine gas pipeline plan will only be built by the early 2020s. Gas field owners would have to come up with interim solutions until then. One solution is to use the unused pipeline of Egypt's East Mediterranean Gas Company (EMG). IEC and gas exploration partnerships such as Isramco are currently examining the possibility of buying use rights to the pipeline, as the sole alternative to the Tamar pipeline.

Another entry point

Prime Minister Benjamin Netanyahu claims that the damage from the Egyptian gas crisis could have been avoided had the Israeli bureaucracy permitted in time the construction of a northern gas terminal. In July 2010, the National Planning and Building Commission rejected the plan to link the Tamar field to shore via a terminal in the Dor Beach area. Netanyahu's claim is false: the plan was disqualified during the environmental impact stage. Even if the commission had approved it, 2-3 years were still needed before the Tamar partners could have obtained a building permit for the terminal. Meanwhile, the government has assumed the planning of future gas terminals.

In the aftermath of the Dor Beach failure, Netanyahu decided to shorten the approval procedures for critical gas infrastructures. The cabinet has since approved a fast-track approval process drawn up by a team headed by Prime Minister's Office director general Harel Locker. The team's goal is to obtain approval for four gas terminals within a year. The fast-track approval process will now face the test of reality, but Locker is already preparing for failure: in a media interview, he warned that the government would take legislative measures in case of failure.

Natural gas storage

Until the Egyptian gas crisis, Israel did nothing about storing natural gas for an emergency. "Gas isn't water," said an expert. "Gas can't be stored". But, in fact, the laws of nature make it possible for other countries to store natural gas. Several European countries have emergency natural gas reserves to meet their needs for months. Had Israel had such storage facilities when the Egyptian gas stopped flowing, the damage to the economy could have been greatly reduced.

Ironically, Israel has a suitable natural gas storage facility, at Rosh Zohar outside Arad in the Negev. The reservoir was held by Lapidoth Israel Oil Prospectors Corporation Ltd. (TASE: LAPD) until its rights expired and the government has dithered about what to do with it. The Ministry of Energy wants to transfer the facility to government-owned Petroleum and Infrastructures Ltd., which specializes in the management of such facilities, but the Ministry of Finance is demanding a tender process. But what business would want to invest in such a facility? Maybe the Ministry of Finance knows.

Meanwhile Minister of Energy and Water Resources Uzi Landau has ordered a comprehensive review of marine and land-based natural gas storage options on Israeli territory. Sources inform ''Globes'' that one suitable storage site is the Mount Sodom salt caves. The chances of anything happening on this point seem zero at this time. The Ministry of Finance said, "In cooperation with the Energy Ministry, we are examining alternatives for the handling of the gas facility near Arad, including holding a competitive process, as required by law."

Small gas fields

There are several small natural gas discoveries close to the Israeli coast, which have not been developed because it is not worthwhile. The Egyptian gas crisis made two of these reservoirs, the Yam Tethys satellite fields of Noa and Pinnacles, worthwhile, because the cost of diesel and industrial oil is five times the cost of natural gas. The Ministry of Energy ordered the fields' owners - Noble Energy and Delek Group to develop these fields only a few months ago. Development was completed on time, thanks to the proximity of the two companies' Yam Tethys field, and gas flow began this month.

This seems to be the only lesson implemented from the Egyptian gas crisis.

Published by Globes [online], Israel business news - www.globes-online.com - on June 27, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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