The development of Israel’s massive Leviathan offshore gas reserve was presented to the public as a national project, but some 85% of the gas it contains is slated to be sold to Egypt and Jordan – for a lower price than the Israel Electric Corporation is currently paying.
The partners in Leviathan – Israel’s Delek Drilling and Ratio, and the U.S.-based Noble Energy, announced Monday that the extraction infrastructure was complete and that gas sales were set to begin.
The Leviathan reserve was discovered about a decade ago. Preparing the site for extraction cost some $3.6 billion and took nearly three years.
The partners said that gas sales to Jordan will start now, and that within a few days it will also start flowing to Egypt.
A smaller reserve, the neighboring Tamar offshore gas site, has been online for several years now. It, too is controlled by Delek and Noble Energy, and it has been supplying the Israel Electric Corporation. Tamar is selling gas to Israel’s national electricity company at a higher price than Leviathan will be selling to Jordan and Egypt.
The gas sales will line the pockets of its owners – Yitzhak Tshuva, who controls Israeli partner Delek Drilling; the Landau and Rotlevy families, who control smaller partner Ratio, and Delek; and the U.S.-based Noble energy.
According to a March 2019 filing with the Tel Aviv Stock Exchange, the Leviathan gas will bring its partners a total of $40 billion in revenue and $13 billion in profit.
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The state stands to receive up to $15 billion in taxes and royalties, but royalty payment is likely to begin only in 2025.
Leviathan’s first main customer is the Jordanian electric utility, NEPCO. Under its contract, it will pay $6 per heat unit for some 3-3.5 billion cubic meters of gas a year. This accounts for a third of the gas slated in Leviathan’s current fixed contracts.
Leviathan’s second main customer is the Dolphinus consortium in Egypt, which is slated to buy up to 4.7 billion cubic meters of gas a year, about 50% of the gas slated in fixed contracts.
These two customers account for 8.2 billion cubic meters of the 9.7 billion cubic meters that Leviathan is currently slated to sell through fixed contracts every year.
Israeli customers will be receiving only a small portion of Leviathan’s gas – 1.5 billon cubic meters a year. The Israeli customers include the Be’er Tuvia power plant; the Paz gas company; the Phenicia Glass Works plant; the IPP power plant in Ashkelon; and the Sorek power plant.
Leviathan also has a contract with the Israel Electric Corporation to sell 3-4 billion cubic meters of gas this year and in 2021. The contract is a non-binding one, and would enable the IEC to purchase gas from Leviathan in place of its Tamar contract, in a bid to reduce costs.
However, the Antitrust Authority is currently reviewing the legitimacy of this contract.
The limited number of contracts with Israeli customers, most of whom were already buying gas from Tamar, indicates that the country did not necessarily need the gas from Leviathan at the moment, and that it certainly should not be considered a “national project.” Tamar, which went online in 2013, could easily have filled national demand, alongside smaller offshore gas reserves Karish and Tanin, which are controlled by Greek company Energean.
Karish and Tanin were purchased by Energean in 2016, after the Antitrust Commissioner forced Delek to sell them.
Had Leviathan signed contracts only with Israeli customers, given the scope of demand, it probably would not have received financing for development.
Delek, Noble and Ratio announced the discovery of Leviathan in 2010 with an estimated 450 billion cubic meters of natural gas, making it one of the decade’s largest natural gas finds. It is thought to contain about twice the volume of gas in Tamar, which was discovered a year earlier.
The companies with the license to develop the reserve decided not to develop it in a limited capacity that would serve the needs of only Israeli customers.
Thanks to a controversial 2015 decision, Israel’s government decided to let Noble Energy maintain holdings in both Tamar and Leviathan, despite the monopoly status these large gas reserves would hold in Israel. Delek was granted permission to have holdings in both through 2022. As part of that decision, the government also decided not to place price controls on natural gas, despite permitting the partners to maintain a monopoly over the Israeli market.
Industry experts say the price that the IEC is paying for Tamar’s gas – $6.30 per heat unit – is a monopoly price some $1.50-$2 above the fair market price. In total, maintaining monopoly status is bringing the Tamar partners an excess $2 billion to $2.5 billion.
Since contracts with smaller customers are based on the IEC pricing, the gas consortium’s monopoly status also brings it an additional $500 million from these contracts.
For political reasons, the gas sale to Jordan is being carried out via Noble’s marketing subsidiary, which is not registered in Israel.
The gas sale has drawn opposition in Jordan. Due to the potential for political volatility, the contract includes a guarantee from the U.S. government, which would be paid out at the expense of U.S. aid money to Jordan. U.S. government involvement also paved the way for the signing of the initial contract.