The gas outline agreement that was approved by the Israeli cabinet yesterday is a necessary condition for developing the huge Leviathan gas field but not enough in itself. As the field's development will cost $6.5 billion, the only thing that will ensure the reservoir's potential will be realized is gas contracts. According to sources in the natural gas and energy market today, estimate that according to the current low fuel prices on international markets, Leviathan needs to sell at least 8 billion cubic meters (BCM) of gas annually - the equivalent of Israel's annual natural gas consumption being supplied by Tamar.
So far, the Leviathan partners Noble Energy, Delek and Ratio have concluded agreements with neighboring countries but that is not enough. That is at least the estimate of Deutsche Bank Israel CEO Boaz Schwartz and chairman of the Israeli Foreign Banks Association, who sent a letter to the Kandel Committee saying, "The government needs to enlarge gas demand in the domestic economy, so as for example to concert coal-fuelled power stations to gas, and to develop a gas distribution grid that will reach almost all areas of industry and perhaps even homes."
What then will allow the development of the first stage of Leviathan? "Globes" maps out the options in Israel and abroad.
1. Export of 7 BCM annually to Egypt
Last June, the leviathan partners signed a letter of intent with BG (British Gas) to supply 105 BCM of gas to BG's liquefied natural gas (LNG) installation at Idko in Egypt over 15 years. That is to say about 7 BCM annually. This is a huge deal, that if implemented will allow Leviathan to export one six of the Leviathan's gas reserves. In effect, this would be a deal that would allow Leviathan to develop the field, although so far no final agreement has been signed between BG and the Leviathan partners, mainly because of regulatory delays by the Israeli government. Now with the entry of Shell into the picture, following its acquisition of BG, the question arises as to whether the deal can go ahead, among other things because of Shell's major operations in Arab countries and the decision to sell $30 billion worth of assets to finance the BG acquisition.
2. Export of 6-7 BCM annually to Turkey
"We can still create a win-win situation opportunity here. There are there (in Israel) huge amounts of gas and they want to supply gas to Egypt and Turkey," said Turcas Petrol CEO Batu Aksoy in an interview several weeks ago with the Reuters news agency. "Why shouldn't gas be part of the trade between Israel and Turkey?" he asked.
Turkey has no natural gas resources of its own and is currently forced to import gas from several suppliers at high prices. Due to the difficulties in exporting gas to Egypt, Turkey seems an appropriate candidate to serve as an anchor customer for Leviathan about half of its electricity is produced from natural gas, and Turkey's overall gas consumption is seven times larger than Israel's. Moreover, that consumption is expected to grow at a faster rate, and double in the next 20 years.
Theoretically, the Leviathan field can export 6-7 BCM of natural gas to Turkey annually via a pipeline , which would reach the country's southernmost point. However, although there have been talks in the past between the Leviathan partners and Turkish companies Turcas and Zurlu for Israeli gas exports to Turkey, no concrete agreement has been signed.
3. 3-4 BCM exports annually to Jordan
Last September, the Leviathan partners signed agreement with the Jordanian government's National Electric Power Company (NEPCO) to export 45 BCM over 15 years - 3 BCM of gas annually. In contrast to exports to Egypt or Turkey that require construction of an expensive and technically complicated underwater pipeline, exports to Jordan are a cheaper and swifter option that requires a land pipeline covering a relatively short distance.
Jordan, which is crying out for cheap energy, began importing LNG from Qatar several weeks ago, and last May brought in a large marine gas installation.
4. Converting power stations to gas: 2.5-3 BCM annually
Over the years, the Israel Electric Corporation (IEC) (TASE: ELEC.B22) worked towards converting its coal-fuelled power stations but the project is currently frozen, among other things because of the delay in developing Leviathan. If indeed the final power stations will be converted, the expected consumption is an additional 1.5-2 BCM of natural gas annually a substantial amount. For the sake of contrast, the entire industrial sector in Israel consumed 2 BCM of gas in 2014, and the Dorad and OPC private power stations consumed 1.2 BCM.
5. Converting transport to gas 1 BCM annually
The Zemach Committee that formulated Israeli government policy in developing the gas economy and gas exports estimated that by 2040 one third of private vehicles and two thirds of public transport vehicles would be converted to run on natural gas. However, due to obstacles such as an insufficient infrastructure of gas stations and lack of tax policy for operating vehicles with gas, the conversion is not taking place at the planned pace.
In order to encourage domestic demand, the government could lead future gas conversion projects such as electrification of the railway that is expected to add about 500-600 megawatts, needing 0.5 BCm of gas annually. If Israel Railways will be required to purchase electricity from private power stations operated by gas, this would ensure that the electricity it uses is made by gas and not coal, for example.
6. Building an ammonia plant 1 BCM annually
Two months ago, the Ministry for Environmental Protection published a tender to move the ammonia plant at Haifa Bay to Mishor Rotem in the Negev. The factory is due to be built in 2018 and consume 1 BCM of natural gas annually. In the government's gas outline agreement, it was written that the factory would manufacture other products based on natural gas as a main component.
7. Connecting up energy intensive industries: 3-4 BCM annually
Industries are each different from each other in terms of the energy that they consume with the paper, glass, and cement industries for example known as large consumers of energy. In Israel, there are energy intensive factories that are not operated by natural gas, and in order to increase demand for gas domestically the government can be connecting up factories and think about encouraging energy-intensive industries, which could consume 3-4 BCM annually.
8. IEC contract: 1 BCM annually
The contract between Tamar and the IEC includes a Take or Pay (TOP) clause in which the customer must pay for a certain amount of gas even if it is not consumed. This clause is designed to ensure flexibility in the supply commitment on the one hand, and commitment to pay that will allow major investment.
The TOP rate in contracts depends on the type and size of customer, availability of gas, the condition of the infrastructures, the number of hours in the day that the customer needs gas and more. The proportion in the contract with IEC is close to an average of 55% - below the world norm.
If the government would bind the IEC to consume only the TOP rate and not more the company could buy about 1 BCM annually from Leviathan. However, the issue is currently not on the agenda.
Published by Globes [online], Israel business news - www.globes-online.com - on August 17, 2015
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