Nine years after it was discovered offshore Israel, the Leviathan field is expected to begin producing natural gas by the end of the month. That’s both good and bad news.
Leviathan has proven reserves of 540 billion cubic meters, a figure that could grow to 605 bcm, and will initially produce 12 bcm annually. For comparison’s sake, Tamar has 280 bcm of natural gas and is producing 10 bcm annually. It has contracts to sell 40 bcm to the domestic market and another 100 bcm to Egypt and Jordan.
Leviathan is 45.33%-owned by Delek, which is controlled by the Israeli billionaire Yitzhak Tshuva, and 39.67% by Noble. The rest is owned by Ratio Oil Exploration, an Israeli company. It’s located 120 kilometers west of Haifa in deep water (1.7 kilometers).
A 130-kilometer pipe will deliver the gas to a treatment rig 10 kilometers offshore, opposite Zichron Yaakov. The treatment facility has been the object of protests by residents living closest to it on environmental grounds. Late Tuesday, media reported that a Jerusalem court had issued a temporary order barring the treatment rig from starting operations, a decision that could delay the start of Leviathan production. The Leviathan partners have spent about $3.5 billion in the first phase of developing the field, which will give the capacity to produce 12 bcm annually. To bring that up to 21 bcm would require another $1 billion.
First and foremost on the side of good news, it will boost Israel’s energy security. The country will no longer be dependent on a single source of gas, the Tamar field, and the single pipeline that connected the offshore platform to Israel’s gas distribution pipeline network. In addition, in 2021 the Karish field will go on line with its own pipeline.
The other good news is that Leviathan is the biggest gas reservoir ever found in Israeli waters, making it a strategic asset that can supply energy for decades to come.
Leviathan was discovered in 2010 but development of the field didn’t begin until seven years later. There were three reasons for the long delay.
For one, Leviathan’s main partners, the U.S. company Noble Energy and Israel’s Delek Group preferred to concentrate on getting Tamar up and running first.
In addition, the sharp drop in world gas prices gave the partners little incentive to rush development. Finally, there was the problem of regulatory clarity in connection with the structure of the Israeli gas market and the reservoir’s ownership.
Those issues were only resolved, allowing development of Leviathan to proceed, after the bitterly contested gas framework agreement was signed between the government and the partners.
The two sides compromised on a deal under which the state agreed not to compel Noble and Delek to divest Leviathan, even though their holding it violated competition laws. In exchange, the two partners agreed to sell the much smaller Karish and Tanin fields. The state also agreed not to impose price controls on natural gas for the domestic market, a condition that was necessary for the partners to line up financing to put it into production.
The result was that development on the giant reservoir finally got under way, but at the cost of sacrificing genuine competition in the natural gas market and keeping prices high.
Israel uses about 11 bcm of gas annually, mainly to fuel power stations; the rest goes to manufacturing plants. Demand is projected to increase over the next several years, as small generating plants are installed at factories and in urban areas, to complement the big power stations in use today. In addition, Israel Electric Corp. plans to convert its coal-fired stations to run on natural gas.
Besides IEC, Israel’s main electric utility, the biggest customers the Leviathan partners have lined up for the reservoir’s gas are the Jordan Electric Power Company and the Egyptian company Dolphinus Holdings.
It also has contracts with Israeli customers like the private electricity companies IPM and Edeltech and industrial companies Israel Chemicals, Phoenicia and Paz Oil.
The price they are paying is believed to be in the area of $4.80 per million British thermal units, far less than the $6.30 IEC is paying for Tamar gas.
Leviathan and Tamar are effectively owned by the same companies. Delek has divested part of its stake in Tamar and is required to sell the rest by the end of 2021 to help encourage competition, but Noble will be able to keep its holding in both fields.
Thus the real competition in the domestic gas market is coming from the Greek company Energean, which bought to Karish and Tanin fields. Energy industry sources believe that Energean has been signing contract for gas at a price at least 10% lower than what Leviathan is getting.
One piece of evidence about how little true competition there is from the unofficial “auction” IEC conducted at the start of this year to buy 3.5 bcm-4 bcm for a limited period, October 2019 to the end of 2021. Tamar and Leviathan both submitted bids but they were for an identical $4.79 per million BTU. IEC chose Leviathan in order to diversify its gas supplies.
Zvi Agmon, a lawyer who represents the partners, admitted in a court case about the bidding in May that there would be no real competition in the domestic gas market until Delek sells its remaining Tamar holding.
“Today Delek and Noble have 85% of the Leviathan reservoir and retain 50% of Tamar. Who expects me to compete with myself on my own gas? IEC? Anyone?” he asked.
Meanwhile, the natural gas industry believes that if Leviathan successfully begins exports to Egypt and Jordan, it will give a boost to future energy exploration in Israeli economic waters. Although Israel has sought bids for permits, there has been little interest because there were no attractive export markets for the gas.
That said, it’s not at all certain that the overland pipeline delivering Israeli gas to Egypt through Sinai won’t be the target of terror attacks. The Islamic State movement has carried out hundreds of attacks in the past year and Israeli intelligence sources say the pipeline will almost certainly be a target once it begins operating.
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