Bank of Israel Warns Government May Need to Help Fund Leviathan

Central bank study sees obstacles to raising capital by the gas field’s partners, leaving economy reliant on a single source of gas.

Offshore Leviathan natural gas drilling site.
Albatross

A Bank of Israel report released on Tuesday warned that the prospects for developing the giant Leviathan natural gas field and the much smaller Karish and Tanin fields were in jeopardy and that it may have to intervene to help finance Leviathan.

“If no financing to develop Leviathan is forthcoming and the government wants to advance it and reduce the economy’s reliance on the Tamar field alone, it will have to invest its own capital in development or at least provide those who do with guarantees or aid them in raising private capital,” said the report, which was written by Yoav Friedman of the central bank’s research department.

Tamar is currently Israel’s only gas field in production, leaving the economy vulnerable to an acute energy crisis if the fields were to suffer a technical failure, natural disaster or terrorist attack.

The security vulnerability of Israel’s offshore Mediterranean gas reserves was apparent on Tuesday when the Movement for the Quality of Government was told its request to see Leviathan’s development program had been turned down on national security grounds.

“The development plan includes drilling locations, the route of the pipeline, gas supply volumes, the exact location of the rig, gas volumes produced from the drilling and delivered to the coast – data whose disclosure could jeopardize the ability to protect a strategic objective like Leviathan,” the Energy Ministry said.

The Bank of Israel report come as Texas-based Noble Energy and Israel’s Delek Group, the main partners in the Tamar and Leviathan fields, await a High Court of Justice ruling on the gas framework, a controversial agreement with the government that sets into place the final elements of natural gas regulatory.

At the same time, plunging world energy prices have hindered Noble’s ability to finance Leviathan’s approximately $6 billion development costs. Noble CEO David L. Stover is in Israel this week to discuss the Leviathan development program announced three weeks ago that sees the first gas flowing in 2019.

“Noble has expressed confidence that despite the shocks in the world energy market, it can compete Leviathan’s development in the timetable set in the gas framework and perhaps even faster,” the Energy Ministry said Monday.

But Friedman expressed doubt about the Noble-Delek group finding the financing. He also said it was unlikely that Karish and Tanin – two fields that are supposed to be sold off by the Noble-Delek group to help loosen their grip over the gas market – would be developed anytime soon because whoever buys them will be barred from exporting their gas.

“This requirement exposes the conflict of interests between the state and potential operators: The state in interested in the reserves being developed to serve the domestic market, to create redundant capacity and encourage competition while no operator will be interested in redundancy, especially if it is clear that developing them will create excess capacity in the domestic market.”

Friedman also was critical of one of the gas framework’s so-called “stability clauses” that commits the government from initiating any regulatory changes in the gas industry for the next 10-15 years.

Friedman said the stability clause was the price Israel had to pay for the government’s zigzagging on issues like taxes and export quotas for the gas industry. But he also expressed concern that it would tie the government’s hands on critical issues like gas prices.

“Government intervention is needed in any market where competition is absent and there is a fear that the players will exploit their power to raise prices and engage in discriminatory pricing between consumers,” he said.