Leviathan's export window is closing

Amiram Barkat

If the government does not make a decision soon, the international gas market will do its work for it.

Antitrust Authority director general David Gilo's decision on Leviathan will probably mostly discuss the domestic market. Gas exports from Leviathan do not create a problem of competition against other Israeli reservoirs, but raises objections from other quarters.

The government has not yet decided whether to permit gas exports, and if it allows them - under what terms. Delek Group Ltd. (TASE: DLEKG) and Noble Energy Inc. (NYSE: NBL) are not waiting for the government, and they are already in advanced negotiations to export gas from the Tamar reservoir. The two companies, together with their partner in Leviathan, Ratio Oil Exploration (1992) LP (TASE:RATI.L), have also agreed to sell 30% of the reservoir to Australia's Woodside Petroleum Ltd. (ASX: WPL) for $1.25 billion. Woodside, an expert in liquefied natural gas (LNG) facilities, is due to assume responsibility for exports from Leviathan and build the multibillion dollar infrastructure needed from them, as well as finding customers in Asia.

The deal's main payment depends on the government's green light for exports. The Tzemach Committee's recommendations have been submitted to the government; it recommends permitting the export of 50% of gas from each reservoir. Reservoir owners can trade export rights to increase gas exports from a reservoir to 75%. The committee allowed such large exports on the assumption that Israel has enough gas reserves to meet its domestic needs for 25 years. It assumed that gas discoveries in the coming years would reach at least 150 billion cubic meters. But a string of disappointments by the wells at the Myra, Sarah, Shimshon, and Ishai licenses since the report was published has undermined confidence in the committee's assumptions, and raised loud voices calling for a reassessment of them.

The government will be in no hurry to decide on this sensitive issue. Labor Party chairwoman MK Shelly Yachimovich has already said that she opposes gas exports in principle, and outgoing Minister of Environmental Protection Gilad Erdan has called for postponing a decision by three years.

But if the government does not make a decision soon, the international gas market will do its work for it. The pending entry of the US into the gas export market will cause a revolution. Breakthrough technology has tripled US gas reserves, turning it from an importer to a possible leading exporter. LNG is already sold at $20 per million BTU. US gas costs $2-3 per million BTU to produce, and liquefaction raises the price to just $7-8. President Barack Obama will decide whether to allow gas exports over objections by environmentalists and industrialists, who fear that gas exports will raise domestic prices. They are faced by US developers who have invested billions of dollars in LNG facilities for imports, and now want licenses to convert them for exports. Last week, "The Economist" lent the developers support by calling on Obama to allow exports.

The US entry into the LNG export market will have far-reaching consequences. Current demand for LNG exceeds the supply, but this will reverse in a few years. LNG prices are liable to plummet rendering many projects not worthwhile. When? Until recently, energy experts predicted the change would occur in 2017-18, but a new study by "Bloomberg" brought the date forward to 2015.

Gas flows from Leviathan are only due to begin in 2016, and will face a big problem if "Bloomberg's" forecast proves accurate.

Published by Globes [online], Israel business news - www.globes-online.com - on March 5, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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