When Noble Energy and Delek Drilling announced a year ago they had contracts to sell $15 billion in natural gas from their Tamar and Leviathan fields to the Egyptian company Dolphinus, the deal was celebrated as a new era in regional energy.
Prime Minister Benjamin Netanyahu hailed the agreements as a way to “strengthen our economy [and] strengthen regional ties.” Energy Minister Yuval Steinitz called it the most significant export deal with Egypt since the 1979 peace treaty.
A year later, however, exports face a daunting obstacle: How to get the gas from Israel to Egypt.
The first of the two contracts call for “firm” annual deliveries starting by the end of this year of 3.5 billion cubic meters from Leviathan. The second is for another 3.5 bcm from Tamar as so-called “interruptible” deliveries, meaning Dolphinus will be sold the gas when capacity is available.
The gas is supposed to be shipped by pipeline in three stages. From the two offshore Mediterranean fields, the gas is expected to be pumped through Israel’s domestic network to the pipeline of the Egyptian company EMG; that conduit runs from Ashkelon to Egypt’s El-Arish. From there, the gas would go through Egypt’s domestic pipeline network to its final destination.
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In September, the partners agreed to buy a controlling stake in EMG for $518 million to ensure that this link in the chain was secure. But as TheMarker reported a month ago, the first leg of the journey still presents a problem.
The southern pipeline of the Israeli network, which is owned and operated by state-owned Israel Natural Gas Lines, doesn’t have the capacity to ship all the gas under the Dolphinus agreements. Sources say the capacity is between 2 and 3 bcm, less than half the amount the gas partners agreed to sell.
Last week, Israel’s Natural Gas Authority added to the problem after it made clear that the pipeline couldn’t handle even that amount. In an announcement, the authority said that it couldn’t promise continuous access to the pipeline, but only when capacity was available, meaning weekends, holidays and “transition periods.”
Israel’s Energy Ministry estimates that the amount of gas that can be sent through the domestic pipeline network this year is about 500 million cubic meters, though it says that in the future more capacity will become available.
Noble, which is based in Texas, declined to discuss the capacity of the Israel Natural Gas Lines pipeline, but said in a statement that it is not concerned about the capacity constraint.
The company said that with close knowledge of the exact numbers and the options it has to undertake the agreement, it has no doubt that the Dolphinus agreement will be fully implemented and that the gas will be delivered to customers in Egypt according to its terms.
The capacity of the Israel Natural Gas Lines pipeline could be expanded, or the partners could lay a new line that delivers gas directly from Leviathan and Tamar to EMG. But both options would require approval and financing and take years to complete.
Moreover, the pipeline constraints aren’t limited to the INGL leg. The Egyptian domestic pipeline that is supposed to carry the gas from EMG’s endpoint in El-Arish is now being used to export Egyptian gas to the Jordanian power company – thus the pipeline is running in the wrong direction when it comes to Israel’s needs.
In the meantime, Noble has reduced its exposure to Tamar. In January 2018 it said it was selling a 7.5% stake in the field for $800 million in cash and shares to Tamar Petroleum, an Israeli company formed to buy shares being divested by the field’s two lead partners to meet the terms of the government’s gas framework.
Shortly after the EMG deal was announced this past September, Noble sold its 43.5% stake in Tamar Petroleum to Israeli institutional investors for $200 million. Delek Drilling, which is controlled by Israeli tycoon Yitzhak Tshuva, is trying to divest its 22% stake in Tamar Petroleum.