Eni's Egypt gas find limits Israel's export options

Eni installation in Egypt

Experts tell "Globes" that the chances of Leviathan exports to Egypt are slim and suggest Turkey as an alternative.

"The Egyptian discovery changes the entire energy picture in the Middle East;" "Exports from Leviathan to Egypt are no longer possible, but they are still possible from Tamar;" "Exports from Tamar are off the agenda;" "The gas outline agreement must be completely rewritten;" "The gas outline agreement must be implemented as quickly as possible," these are just some of the reactions from Israel's politicians and businesspeople after Italian energy company Eni announced two days ago that it had found a "supergiant" gas field 190 kilometers off the coast of Egypt.

While Israel's Minister of Energy Yuval Steinitz says that the significance of the Egyptian gas discovery is that the gas outline agreement must be approved, energy experts around the world claim that Israeli exports to Egypt are no longer on the agenda and that, "Israel must consider a new path," if it ever wants the Leviathan field to be developed. So what really is the significance of the Egyptian find for Israeli natural gas exports to Egypt, and will it influence Israeli exports to Jordan, what other options are there for developing the Leviathan reservoir and if changes should be made in the gas outline agreement?

The discovery might change the energy picture in the Middle East

In its announcement of a giant natural gas discovery offshore from Egypt, Eni said that it was the largest gas reservoir ever found in the Mediterranean. "After full development, the discovery may supply Egypt's domestic natural gas needs for decades," Eni's announcement said.

Eni said that the Zohr field covering 100 square kilometers contains an estimated 30 trillion cubic feet (TCF) of natural gas. This compares with an estimated 22 TCF in the Leviathan field. Following the news Israel's energy stocks fell sharply.

Dependent on the needs of the Egyptian economy

Egypt has signed three letters of intent to import Israeli gas two of them for the liquefied natural gas terminals of Union Fenosa and British Gas who will then export the gas to their customers in Europe and Asia. The third is with a company called Dolphinus Holdings to provide gas to industrial companies in Egypt. These letters of intent with Egypt were meant to allow development of the Leviathan field and expansion of the Tamar field.

"The discovery may change the energy picture in the Middle East," Sir Michael Leigh, Senior Advisor to the German Marshall Fund of the US told "Globes." "It will perhaps be possible to implement the export deal with Dolphinus, but the LNG deals will be more difficult.

Leigh was in Israel several weeks ago in order to examine a possible gas cooperation deal in the Middle East. "Even before Eni's announcement, the option of exporting gas to Egyptian LNG installations was in doubt, among other things due to falling energy prices and of course following the acquisition of BG by Shell."

According to Leigh, the likelihood of Leviathan gas exports to Egypt now depends on the country's domestic needs. "There is currently a shortage of gas on the domestic market and this will continue through until 2020 and no later than 2025. In that year Egypt will produce enough gas to meet its own demands. At the same time, the demand for gas in Egypt rises every year, so that the gas discovered this week will mainly serve the domestic market and there won't be enough for liquefied gas installations, so that Leviathan still has a chance of signing a contract."

In order to overcome its natural gas shortage, several months ago Egypt began to import LNG containers from gas companies such as Russia's Gazprom and other trading companies. Last April, Egypt's national gas company Egas also signed a five year lease a floating gas installation from Norway's Hoegh.

"Exporting gas from Israel and Cyprus to Egypt was anyway almost impossible," said former Cyprus Natural Hydrocarbons Co. (CHNC) CEO Charles Ellinas. "Before the discovery Noble energy and Delek hoped to sell their gas to the LNG installations at a price of $5-6 per thermal unit but there is no chance that Union Fenosa and BG would be prepared to pay that amount. They would lose on it. On top of the cost of buying it must be added the cost of transporting the gas by pipeline to Egypt, the cost of liquefying it, transport to Europe and converting it back to gas. Currently the price of gas in Europe is $8. In other words, in order not to lose money on their LNG installations they can pay $3 at most, and for that price Delek and Noble Energy would not agree."

However, unlike Leigh, Ellinas insists that Israeli gas exports to Egypt are now completely off the agenda. "The new discovery has buried the option of exports to Egypt. We are talking about a huge discovery. 30 TCF is not only enough for Egypt's domestic needs but also both the LNG terminals. At a simple calculation, 30 TCF is 840 billion cubic meters (BCM) and about 30 BCM of gas per year (if the gas field lasts 25-30 years). The Egyptian economy will consume about 5 BCM of gas annually and the LNG terminals can export about 16 BCM annually. In other words, there will still be a very large surplus of gas. Nobody needs gas from Israel or Cyprus."

Are exports from Tamar off the agenda Delek Group Ltd. (TASE: DLEKG) and Noble Energy Inc. (NYSE: NBL) refused to comment on Eni's announcement. However, a senior source at one of the gas companies told "Globes," that although the option of exporting gas to Egypt now looks more difficult, the Eni discovery does not hurt gas exports from Tamar to Union Fenosa. He said, "The Tamar field is already producing gas, so it will be much quicker and cheaper to build a pipe to the LNG terminal than to develop a new field in which it is still unclear how much gas there is."

Former Israel National Gas Authority chief economist Miki Korner who is today a private energy consultant added that in production terms the new Egyptian field is about 20 TCF so that Israel still has a year or two advantage over the Zohr field. He said, "It will take Eni 5 or 6 years to develop the field so exports are still on the agenda.

However, Ellinas insists that exports from Tamar are already irrelevant. "Eni owns 405 of the LNG installation at Damietta in Egypt. It won't buy gas from Tamar while it can supply itself the gas. The amount discovered is so large that it is reasonable to assume that Eni will consider expanding its LNG facility.

Ellinas adds that it is not only Tamar exports that are off the agenda, Israeli exports to Jordan are also in doubt. Last September the Leviathan partners signed a letter of intent with the Jordanian government's National Electric Power Company (NEPCO) to export 45 BCM over 15 years. Unlike exports to Egypt, which require laying a costly and technically complicated pipeline, exporters to Jordan are a cheaper, faster and surer option that require laying a pipeline over land extending only a few kilometers. "It's possible that Leviathan has also missed the deadline for exporting gas to Jordan. Egypt will now make every effort to encourage the swift development of the reservoir, and Eni can supply gas that will meet the needs of the Jordanian economy using the EMG pipeline," Ellinas said.

In recent months, Egypt has been doing everything possible to develop its gas sector. The government has advertised new gas exploration licenses over the past few months and raised the price of gas for domestic users. Instead of $2.65 per thermal unit, Egypt is signing new contracts for $4.10-5.88 per thermal unit depending on the type of gas field. Eni CEO Claudio Descalzi told the "Wall Street Journal" that in the coming months development and production contracts will be formulated and the first drilling is scheduled for the early months of 2016. Descalzi refrained from saying when gas production would actually begin but the newspaper estimates that this will happen in 2017, based on similar projects. In an interview in the Italian newspaper "La Repubblica," Descalzi said that some of the Egyptian gas could be exported to Italian customers or other markets.

What options remain for Leviathan?

"There is no doubt that Israel need to think of a new path and adapt itself to reality," Nusret Comert, who is considered the top Turkish energy sector expert, told "Globes." "The reality has changed a lot for Israel over the past year: the price of energy has been cut by 50%, Shell announced that it is acquiring BG, and now Eni has declared the huge gas find in Egypt."

According to Comert, Israeli gas exports to Egypt now appear to be completely impossible and the preferred option for developing Leviathan is currently exporting gas to Turkey. He said, "Demand for gas in Turkey is rising at the fastest rate in the world, and Turkey is looking to diversify sources of supply and reduce its dependence on Russian gas. Israeli gas that reaches Turkey can also be exported to Europe. A deal between Israel and Turkey is a win-win situation for the two countries."

For months, the owners of rights in the Leviathan reservoir negotiated with Turkish companies, including Turcas and Zurlu, for the exporting of Israeli gas. Ostensibly, Leviathan could supply Turkey with 7 BCM of gas annually through an undersea pipeline passing through Cypriot waters to the southernmost point in Turkey, located 485 kilometers from the reservoir. In order to lay such a pipeline, however, the consent of the Cypriot authorities is necessary, and they have thus far rejected the idea. Relations between Turkey and Cyprus are tense, due top Turkey's occupation of northern Cyprus in 1974 and the fact that Cyprus wishes to compete with Turkey as a conduit for transporting gas from Asia to Europe.

"The problems between the Greek and Turkish communities today appear nearer than ever to a solution, and a referendum on unification of the island is already slated for next year," says Leigh, who is taking part in the negotiations between the two parts of the island. Comert says, "If agreement is reached, it will become significantly easier to export Israeli gas to Turkey, and there is no doubt that in view of the gas discovery earlier this week, the Leviathan partners should consider this option." Leigh disagrees, however, saying that the political problems between Israel and Turkey must be solved before such export can become possible.

"It's obvious that it would be easier to export the gas to Egypt, but this option has been lost, and the other options for the development of Leviathan and Aphrodite will also be lost if Israel and Cyprus do not act quickly. Turkey is certainly the preferred option, but there are also other options," argues Ellinas, adding, "One option is building a land-based natural gas liquefaction facility, or an off-shore facility."

The advantage of gas liquefaction is clear: the gas can be exported to either Europe, which is seeking to diversify its sources of supply, or the Far East, which needs large quantities of energy, and is currently paying the world's highest prices. The price of transporting the gas is expected to be high, but marine transportation requires the consent of no one. On the other hand, there are also considerable difficulties with this option. Environmental organizations can be expected to oppose construction of a land-based facility, and its construction is not economically viable at today's oil prices. Constructing a facility capable of exporting just under 10 BCM a year will cost $13 billion. Furthermore, such a facility will have to compete with existing liquefaction facilities in Egypt and facilities in the US that currently use imported gas, but which can be converted to exports at 30-40% less cost than the cost of a new facility. In order to prevent opposition by environmental organizations, a floating gas liquefaction facility can be built, but as of now, no such facility exists. Shell is expected to complete the construction of the world's first such facility in Australia with a liquefaction capacity of 5 BCM a year in two years, at a cost of $12 billion.

According to Ellinas, "Another option is to send both the Israeli gas and the gas discovered in the Aphrodite reservoir to Cyprus, and to build a gas liquefaction facility there. It's true that LNG prices are low right now, but by the time the LNG project is completed and Leviathan is developed, the prices will rise."

How will Israel's natural gas plan be affected?

ENI's announcement caught Israel unprepared. While Israel found it difficult to decide when to submit the gas plan to the Knesset for a vote, whether it is at all necessary to do so, and whether Ministry of the Economy Aryeh Deri can be persuaded to sign Section 52 without waiting for the next Antitrust Authority director general to take his position, the largest gas discovery in the Middle East has been found in Egypt. Prime Minister Benjamin Netanyahu has decided not to submit the gas plan for a Knesset vote tomorrow.

Whether or not the plan is a good one, and whether it is eventually submitted to the Knesset for a vote, one thing is clear: the Egyptian discovery will affect the plan. The question now is only to what extent, and what should be done with it.

Under the plan, the Leviathan partners have four years to develop their huge reservoir, and the Tamar partners can export gas to the Union Fenosa and ENI gas liquefaction facility in Egypt even before Leviathan is connected to the coast, in contrast to the government' previous ban. The government also waived its demand that the Tamar partners build a second pipeline connecting the reservoir to the coast. Instead, the partners are to devote their efforts to expanding the reservoir, which will make it possible to both export gas to Egypt and increase the capacity for the Israeli economy.

Now that exports to Egypt are off the agenda, questions are arising about the gas plan, the most of important of which is whether the state is still willing to waive its demand that the Tamar partners construct a second pipeline from the reservoir. If the deal with Union Fenosa is not signed, the Tamar reservoir will not be expanded, and Israel can expect a severe shortage of gas. A shortage was already felt this summer, and both the private power stations and Israel Electric Corporation (IEC) (TASE: ELEC.B22) had to burn highly polluting and expensive diesel fuel.

A second question concerns the restrictions imposed on Leviathan by the plan. The plan allows the Leviathan partners to sign a limited number of short-term contracts in which the TOP rate (the amount of gas for which the customer must pay, even if he does not need the gas) cannot be reduced by 50%. The Leviathan partners must also wait six months after the rights to the Karish and Tanin reservoirs are transferred before signing a gas agreement with Tamar customers, whose contract is opened in 2019-2020. As of now, no one knows when Karish and Tanin will be sold, or if they will be sold at all.

In any case, Steinitz is saying, "We must approve the gas plan and boost the Israeli gas sector." He added, "The discovery of the giant gas field in Egypt is a painful reminder that while Israel is sleeping on watch, delaying final approval of the gas plan, and delaying additional discoveries, the world is changing while we watch, including consequences for our export possibilities." Eco Energy CEO Dr. Amit Mor agrees with Steinitz, saying that it is important to approve the plan quickly, "so that Israel does not lose additional markets, such as Jordan and Turkey."

MK Shelly Yachimovich, on the other hand, considered one of the prominent opponents of the gas plan, says, "The discovery completely eliminates the already dubious grounds for using Section 52 for state and security reasons, especially the argument that the strategic alliance with Egypt requires urgent exports of Israeli gas to Egypt." Yachimovich adds, "It seems that Egypt does not need our gas, and the government is now responsible for formulating a reasonable and sane plan without generating panic and imaginary security reasons."

Published by Globes [online], Israel business news - www.globes-online.com - on September 1, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Eni installation in Egypt
Eni installation in Egypt
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