Leader: Gas exports to Egypt still an option

Tamar

It was reported that exports from Tamar and Leviathan to Egypt were unrealistic.

It was recently reported that the option of exporting natural gas from the Tamar and Leviathan natural gas reservoirs to the liquefaction facilities in Egypt was unrealistic. These facilities have supposedly been authorized to export Egyptian gas to their customers, despite the acute shortage of gas in Egypt. This is obviously a negative scenario for the partnerships in Tamar and Leviathan. I will use following data to explain why I believe that the option of exporting to the liquefaction facilities is possible, as well as exports to Egypt itself.

Two advanced natural gas liquefaction facilities have been built in Egypt. The purpose of these facilities is to turn natural gas into liquefied natural gas (LNG) for exports to various places around the world. Gas exports from the liquefaction facilities were almost completely halted in 2013-2014, however, because of the severe shortage of natural gas in the country and its channeling for exclusive use in the Egyptian economy.

The first liquefaction facility is located off the shores of the city of Damietta, 60 kilometers northwest of Port Said. The facility's annual capacity is 7.56 BCM; with over 90% efficiency, 6.8 BCM of gas can be exported annually from the facility. The partners in the facility are UFG and ENI.

Another liquefaction facility is located in the coastal city of Idku, 140 kilometers west of the Damietta facility and 40 kilometers east of Alexandria. The facility has two terminals, Train 1 and Train 2, with a combined liquefaction capacity of 13 BCM. The partners in the facility include Royal Dutch Shell, Petronas, and NG.

Who is afraid of shipments every 20 days?

Why are the liquefaction facilities important for the Tamar and Leviathan reservoirs and the partnerships in the reservoirs? These facilities could be a significant target market for the Israeli reservoirs, and the pricing of the reservoirs is based on the partners' ability to turn the letters of intent signed in the past for exporting gas into binding contracts.

In May 2014, the Tamar partners signed a non-binding letter of intent with Spanish company Union Fenosa Gas under which the parties are negotiating for the signing of a binding agreement for the supply of 4.5 BCM of natural gas annually for a 15-year period from the Tamar project to the Damietta facility.

The alarming reports in Egypt in early December were anonymous, without any official comment from the Egyptian Ministry of Electricity and Energy or the Egyptian Natural Gas Holding Company (EGAS), which is responsible for the Egyptian natural gas sector. The source was quoted as saying, "Shell targets to export liquefied gas shipments every 20 days according to Edco's current supply rates." Is this true?

Even if this scenario materializes, in a quantitative analysis, if Royal Dutch Shell succeeds in exporting a shipment from the Idku facility every 20 days, that means 18 LNG shipments a year. Each shipment is estimated at 0.072 BCM, making an annual total of only 1.3 BCM. These quantities are negligible in comparison with the Idku facility's production capacity.

Furthermore, it was calculated that in order for the facility to break even, it will have to export 22 LNG shipments a year. This means that there is room for substantial additional quantities of gas for the purpose of restoring the facility to full-scale activity.

If we add a further statement by the source that full exports from the facility will not take place before 2020-2021, , we can understand that the source recognizes the severe shortage of natural gas in Egypt, and does not believe that channeling natural gas from the local market to the liquefaction facilities will be allowed. Again, this means that there is still considerable room for Israeli gas.

In order to examine this question in more depth, attention should be paid to the balance of natural gas supply and demand in Egypt. According to published figures, the local Egyptian economy suffers, and will continue to suffer, from a gas shortage, given the assessment that the surplus of demand over supply is projected to persist.

The analysis of the demand does not include the additional demand from the two liquefaction facilities, and the analysis of the supply uses an optimistic scenario that includes additional gas resources that have not yet been discovered, full production from the recently impressive Zohr discovery, and continued LNG imports. Even in this scenario, there is not enough Egyptian gas to continuously meet the needs of the liquefaction facilities consistently in the long term - essential requirements on the part of energy sector suppliers and customers.

Egyptian gas imports are growing

The shortage of gas in Egypt can be presented using data about the imports of gas to the country, a former gas exporter that has become an importer.

Egypt imported 3.7 BCM of LNG in 2015. The quantity increased by 170% to 10 BCM in 2016. Egypt recently published the world's biggest tender for imports of LNG shipments, which is projected to make 2017 gas imports larger than those in 2016.

Another factor supporting the letter of intent becoming a binding contract is the recovery of global energy prices, in particular a substantial rise in LNG prices. For example, the price in Southeast Asia has soared 150% to $10 per mmbtu since early 2016.

To sum up, we believe that the recent reports that "the chance of exporting natural gas from Israel to the liquefaction facilities in Egypt has been eliminated," are exaggerated. Most of the factors still support the existence of an option to export gas to the liquefaction facilities. These factors include the balance of natural gas supply and demand in Egypt, which proves that the Egyptian economy has an enormous shortage of gas; the increase in Egyptian gas imports; and the recovery of global energy prices.

Turning the letters of intent into binding contracts will enhance the value of the Tamar and Leviathan reservoirs , with our preference being for exposure to Leviathan through the Delek Drilling Limited Partnership (TASE: DEDR.L) and Ratio Oil Exploration (1992) LP (TASE:RATI.L) partnerships.

The writer is an analyst at Leader Capital Markets.

Leader Capital Markets provides services to the partners in Tamar and Leviathan, and from time to time holds their securities. The contents of this report do not constitute a substitute for personal investment marketing that takes into account the specific particulars and needs of each person. It should not be regarded as a recommendation or invitation to make any investments and/or transactions whatsoever.

Published by Globes [online], Israel Business News - www.globes-online.com - on January 30, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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