A Supergiant Gas Field Was Found Off Egypt's Coast – What Does It Mean for Israel?

Why we were surprised by Eni’s huge gas find, why the find sent share prices of the Tamar and Leviathan partners tumbling and how the gas monopoly deal has become irrelevant - all your questions, answered.

AP

What is all the fuss about?

Italian energy giant Eni reported on Sunday the discovery of a supergiant gas field off the Egyptian coast that could hold a potential of 30 trillion cubic feet (850 billion cubic meters) of natural gas. That is 40% more than what was discovered in Israel’s Leviathan gas field.

Is the report reliable?

The report is an initial one but a giant like Eni would not risk its global reputation on a false report.

Why was the discovery received with surprise?

It came as a surprise because Israel had not reported on the explorations along the Egyptian coast. Eni’s drilling, as well as the $12 billion deal BP signed with Egypt to invest in developing it potential gas fields, were not covered by Israeli government ministries and did not appear in the financial reports of Israeli gas companies. The Foreign Ministry and National Security Council did not even note their existence in presentations they prepared two months ago on the regional gas market for security cabinet ministers who were asked to approve the gas deal with Israel’s gas monopoly.

Why did the Israeli government not mention the chance of discovering gas in Egypt?

It's unclear, but the need to urgently approve the compromise the government worked out with the gas monopoly rested, among other things, on the argument that Egypt has no gas resources and thirsts for Israeli gas, and that not supplying it could undermine the stability of a friendly regime that would have to deal with Iranian gas as an alternative.

The Movement for Quality Government called on Prime Minister Benjamin Netanyahu on Monday to do a thorough house cleaning regarding the so-called expert testimonies presented to the ministers.

How does the Egyptian gas discovery impact the Leviathan field?

The impact is very negative. Leviathan’s marketing strategy relied on the assumption that it would export 75% of its gas. Its owners, Delek, Noble Energy and Ratio Oil Exploration, were required to sign on at least one anchoring contract for widespread, long-term export of gas from the field in order to secure the needed $6-7 billion of financing from the banks.

The partnership hoped to accomplish this via a contract with British BG, with which it signed an agreement of principles in June 2014 to export about 18% of the field’s capacity (105 billion cubic meters) over a 15-year period.

Leviathan on ice?

BG owns a facility in northern Egypt dedicated to exporting Egyptian liquid natural gas, but it has been shut down because Egypt’s gas reserves have yet to be released. The discovery of an Egyptian gas field even closer to the facility will make it harder for the Leviathan field to compete.

Lacking an Egyptian anchor client and considering the relatively limited demand in Jordan as well as the Israeli market being blocked mostly by the Tamar gas field and the diplomatic freeze with Turkey, Leviathan will have a hard time obtaining the delivery sale contracts necessary for securing the funding for development. Thus, its development is liable to be postponed.

How does the discovery impact on the Tamar gas field?

The Tamar gas field owners signed an agreement of principles last year to export a quarter of its capacity (some 80 billion cubic meters) for the Union Fenosa Gas liquefaction facility in northern Egypt. The 15-year contract was valued at $15 billion. This facility, too, which was designated for exporting Egyptian gas mainly to Europe, was shut down in the last few years due to the lack of available Egyptian gas. Its owners hoped that starting in 2017 they would be able to be helped by Israeli gas in order to operate it and market it as liquefied natural gas in Spain and Italy.

However, Eni is a 40% stakeholder in the facility. Eni will likely prefer exporting its own gas and at most to suffice with Israeli gas in the interim until it develops its newly developed field in approximately 5-7 years.

Shortening the contract period and reducing the price, which Eni is expected to demand of the Tamar owners, is liable to undercut the economic feasibility of the export project, expected to cost $1.5-2 billion, and could possibly thwart it.

How does the Egyptian discovery impact the gas deal?

It should impact the deal dramatically on a number of levels.

First, the fact that developing the Leviathan field is expected to be pushed back significantly past the latest target date of March 2020 as set in the gas framework, changes the playing field with the Tamar gas monopoly.

The gas cartel has no solutions for the new scenario because it presumes a competitive reality between the two large fields off the Israeli coast. As such, the Noble energy monopoly was not dismantled, no supervision was levied on Israeli gas prices and the gas companies were promised regulatory exemption for 15 years to boot.

By the way, the Leviathan owners are also likely to demand revisiting the time schedules set in the deal for developing the field and to request postponing them in the wake of the new regional circumstances.

Export expectations

Second, the compromise worked out with the gas companies was meant mainly to fulfill their export ambitions. Thus, for example, in order to implement the Tamar Union Fenosa deal, the Israeli government agreed to share in funding an additional pipeline to deliver the exported gas, gave up laying an additional pipeline from the field to the Israeli coast, canceled the ban on exporting gas from Tamar —even before developing Leviathan — and canceled the tax limits meant to prevent exporting cheap gas, at the cost of selling expensive local gas.

If this deal is now in doubt, one wonders whether the incentive package is even necessary and especially whether there is place for yielding on the partnership to lay an additional pipeline to Israeli beaches to resolve the enormous danger of relying on a lone gas pipe that leads to the entire country through Ashdod.

The Egyptian gas discovery also poses a difficult legal-technical question for the sides to the gas deal: If the antitrust commissioner is prevented from ordering the dismantlement of the monopoly for political reasons, which now turn out to be baseless, and if the security cabinet approved bypassing him out of fear of Iranian gas control over Egypt – what validity is there to these decisions now, when it turns out the Egyptian need for Israeli gas has no basis in reality?

If the gas deal had been approved six months ago, would the Egyptian gas discovery have had less of an impact?

Definitely not. With regard to Leviathan, export deals from this field are at such an early stage that they don’t even contain pricing mechanisms yet. Moreover, to guarantee that the deals actually go through, the foreign banks are demanding that they be backed by an Egyptian-Israeli diplomatic agreement, and the two countries are liable to take years just negotiating that.

Thus even if Noble Energy had overcome the financial difficulties caused by the global collapse of the drilling industry, it and its partners would still have had a long road to travel to develop the field.

As for Tamar, it’s doubtful that Eni would have bound itself for 15 years to a rival gas supplier even as it was embarking on a promising drill of its own off the coast of Egypt. Moreover, even if the Tamar-Fenosa deal had been signed two years ago, it would surely have included exit points. And of course, anyone who thinks Egypt would honor an expensive import agreement to the detriment of the local gas it has just discovered should recall Egypt’s demands in 2009 to reopen its contract to export gas to Israel and raise the price of the gas.

Could the Egyptian gas compete with the locally produced gas in Israel?

Ostensibly, the El Arish-Ashkelon pipeline already exists (thanks to the EMG company). And the demand certainly exists, on the part of both the Palestinian Authority and Israeli customers who want to restrain the power of the local gas monopoly. Nevertheless, it’s hard to envision Egyptian gas being sold in Israel nowadays.

How is the Egyptian discovery liable to affect my pocketbook?

Delaying the development of Leviathan is expected to significantly delay the state’s expected revenues from taxing the gas, while the renewed negotiations over Tamar’s export contracts are expected to reduce these revenues, since the price is expected to go down. But at the same time, it’s hard to see how the government could now accept a gas monopoly with no price controls. That will result in lower prices for the gas, which in turn will lower our electricity and water bills, for example. And in the more distant future, the fact that the supply of gas exceeds the local demand is likely to force an addition drop in its price.

So what do we do now?

Ironically, the Egyptian discovery provides us with an opportunity to negotiate a new gas deal here in Israel, and this time, the Israeli government won’t be the one negotiating from an inferior position.

The moment any chance of Leviathan being developed on time disappeared, the monopoly lost the strongest card in its hand. For the first time, the government is free of the devastating threat that “it mustn’t undermine the companies’ interests, because if it does, it won’t get the second reserve.”

Thus the government can now pull its original plans out of their drawer – the ones drafted to ensure competition, a surplus supply and a fair price, which it was forced to put aside. Now, it can dismantle the gas monopoly by altering the composition of Leviathan’s ownership and demanding the immediate sale of the Karish and Tanin fields; it can force Tamar’s owners to lay another gas pipeline to Israel’s coast; and it can back all these moves with aggressive supervision – even if only temporary – over the price of the gas.