How Much Gas Does Israel's Leviathan Field Contain? It Depends Who You Ask

The government's latest figure, released last week, is 20% less than the field’s partners claim. A lot of money is at stake in the published figure.

Offshore Leviathan natural gas drilling site.
Albatross

How much gas in there in the giant Leviathan field?

Two years ago, TheMarker revealed that Netherlands-based SGS and HIS-CERA of the United States, two consulting firms retained by the Energy Ministry, estimated the field held no more than 480 billion to 510 billion cubic meters of recoverable gas, 5%-10% less than the 535 BCM the field’s partners were estimating at the time. The Energy Ministry declined to respond to the report in TheMarker and never officially released the figures to the public. The Leviathan partners declared the estimates were wrong and three months later even added another 16% to the reserves.

Last Thursday, when the ministry announced it had approved the development plan for Leviathan, it added as an afterthought that a consulting firm it had retained now estimated reserves as just 500 BCM, 20% less than the 620 BCM the partners have been saying. On Sunday, the Leviathan partners again shrugged off the lower estimate. “There has been no change in the estimate of the resources of natural gas and condensates in the Leviathan field.”

Moreover, according to NSAI, the engineering firm that was providing the data the partners were using, 621 BCM is the most likely assessment, but the firm reported minimum and maximum limits of between 470 BCM and 750 BCM. And the story isn’t over. Exploratory drilling at Leviathan 5 will produce more data regarding the rate of the gas flow, so the estimates are likely to change again, either higher or lower.

Shares of the Leviathan partners were mostly higher despite the government’s downgrade. Delek Drilling and Avner, two units of the Delek Group with stakes in the fields, rose 1.1% and 0.8% to 2.47 shekels (64 cents) and 13.45 shekels, respectively Ratio, another Israeli partner, was down 0.3% at 29 agorot. On Friday, Noble Energy, the operating partner in Leviathan, ended down 2.2% to $34.65 in New York on Friday.

Sensitive numbers

Sources speaking to TheMarker two years ago suggested that the ministry was afraid to publish the lower figures, because of the sensitivity of the issue, particularly as Israel was debating how much of the gas should be exported. If the field has less gas than conventionally assumed, it would mean less energy over the decades for domestic needs.

Meanwhile, Noble sought to clarify the disparities between the estimate it was using and the one the government was getting. A series of meetings with the consulting firms used by the Energy and NSAI failed to reach a consensus on how to calculate reserves. In the end, the Energy Ministry replaced the consulting firm it had been working with and hired RPS to provide another opinion. Several months ago RPS reported its conclusions and they were almost identical to those of SGS.

Again, the Energy Ministry, the consultants and RPS sought to bridge the gaps in the estimates, but in vain. In its response to petitions to the High Court of Justice seeking to block the gas framework, the government said gas reserves in Leviathan had been reexamined but refrained from reporting an estimate.

Only now, less than two weeks after an amended version of the gas framework was approved by the government, has the Energy Ministry revealed what it believes are the actual Leviathan reserves.

One of the reasons for the wide disparity in estimates is the absence of verified information about the expected rate of production from the Leviathan wells. Each expert can have a different opinion about how much gas can be pumped from the field, but those differences narrow as development of the field progresses and more information about gas flow is accumulated through the exploratory drillings.

That is what happened with the Tamar field: Estimates were increased after production began and the partners began getting verifiable data about the flow pressure. TheMarker has learned that according to the latest RPS opinion, Tamar’s reserves may grow by 30 BCM, or 10%, in light of the newest production figures.

But whereas estimates for Tamar were upgraded only when new data came in, those for Leviathan increased repeatedly without data from exploratory drillings and in announcements seemingly timed to influence government policy in favor of the partners.

For example, in 2013 Noble amazed everyone when, just as the Tzemach committee on gas-export policy was about to publish its conclusion, it announced that Leviathan’s reserves were now estimated to be 11% more than previously thought. Coincidentally, the difference corresponded to the minimum amount of gas that was to be set aside for use in domestic consumption, which means exports could reach their full quota of 540 BC.

The calculation of gas reserves made by the Israeli officials was criticized harshly at the time, especially in light of the Tzemach committee discussions in 2011-2013. As TheMarker reported at the time, reserves calculated by the Tzemach committee were based on potential gas, including “virtual” gas fields that had not been drilled, meaning their estimated recoverable reserves were entirely unknown. Had the calculations been determined on the basis of proven discoveries only, estimated reserves for export gas would have to be cut by about two thirds.

The inflation of the “paper” reserves is of critical importance because the companies’ partners want to sign long-term export contracts that will be hard to break in the future if estimates end up being downgraded. For example, a lower estimate of reserves for Leviathan would not only reduce its value but make projects for liquefying gas for exports financially unfeasible. The chances of parallel exports to Turkey and Egypt would be reduced as well.

In effect, the Leviathan partners now have an export quota of 250 BCM, in addition to the export quota of 40 BCM they are taking from the Karish and Tanin fields before they sell them. If we subtract from this overall quota the potential contracts for exporting gas to Egypt, Jordan and the Palestinian Authority, there will be too little gas left to justify building the infrastructure to export to Turkey. In other words, exporting to Egypt is likely to come at the expense of exporting to Turkey, and vice versa.

‘Deceiving the public’

The ad hoc group opposed to the gas framework yesterday accused the government of hiding the true facts from the public for as long as possible. “In addition to deceiving the Knesset and the public, this is an exceptionally serious instance in which the Israeli government knowingly presented false information to the High Court in the context of the legal procedure conducted against the gas framework,” it said in a statement.

For its part, the Energy Ministry vehemently denies it held back from reporting the lower Leviathan estimate. A senior ministry official, who asked not to be named, said internal discussions about the consultant’s report had only been completed in recent days and were published immediately after the decision to adopt them. “No one can say the gas companies took pleasure from the publication of the information,” he said.

Still, the Energy Ministry chose to attach the updated estimate to the announcement approving development plan for the fields. Energy Ministry Yuval Steinitz said approval is “a significant and crucial milestone for the development of the largest natural treasure ever discovered in Israel,” adding that “in these days of a decline in exports and in investments in the economy, the gas from Leviathan will be an important and vital engine of growth for industry.”

In late February, the Leviathan partners submitted a slimmed-down and updated plan for developing the fields to the Energy Ministry after “tightening their belt” due to vicissitudes in the worldwide and regional energy market. The partners have retreated from plans to build a floating platform above the wells to be drilled in the open sea for handling large amounts of gas, mainly for export. Instead, they have suggested making do with a cheaper alternative, including splitting the cost of export infrastructure to Egypt.

The partners will settle in the first stage with drilling four wells (two of which have already been drilled), from which the gas will be channeled to a standard platform for processing to be built no more than 10 kilometers from the coast. From the platform a pipeline will be laid to one of two possible sites on the coastal plain: Emek Hefer or the site of the Hagit power station, which will have an annual capacity of 12 BCM, and will also be used for exports to Jordan and the Palestinian Authority.

Stage II

In Stage II, if political and business conditions permit, an undersea pipeline will be laid from this platform to the idle export facilities in northern Egypt, and the production capacity will increase by an additional 9 BCM annually.

Right now, the partners are planning both stages as a single project with a capacity of 21 BCM. A decision about splitting development into two stages will be made towards the end of this year when the partners make a final investment decision.

The abridged version would save the partners $2 billion to $3 billion of capital spending. They would be able to begin developing Leviathan with a budget of $3.5 billion, with the overall cost of the development project reaching $5 billion to $6 billion. Sources close to the partners emphasized at the end of last week that any reduction in the estimated reserves will not affect the financing of Stage II.

Yossi Abu, the CEO of Delek Drilling and Avner, explained that the partners are advancing in three channels. “On the technical side, approval of the plan enables us to advance the detailed planning of the project; in commercial terms, we’re in the midst of advanced negotiations to sign additional agreements to sell gas domestically and for export; and in terms of financing, we are advancing the financing plan in order to make an investment decision by the end of 2016,” he said.