Despite Favorable Ruling, Leviathan Partners Face High Hurdles to Exports

Questions remain about the partnership, markets, finance and development.

Avi Bar-Eli
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Avi Bar-Eli

Fourteen months after a government committee proposed a framework for Israel's natural gas exports and four months after the cabinet approved most of them, the new regime is ready to go into force. Yet many a hurdle remains before the would-be exporters.

The long and convoluted process came to a conclusion on Monday when the High Court of Justice rejected a pair of legal challenges to how the new export regime was put into law, namely by a cabinet vote rather than in the Knesset.

The stock market celebrated the court decision but it will be a long time before the first gas leaves Israel as the government and the energy companies hash out a series of regulatory, financial, political and environmental issues. Moreover, opponents of the regulatory framework are not giving up. Further battles in court and in front of the regulators can be expected.

Israel's natural gas exports, for now at least, will be coming from a single field – the giant Leviathan reserve. The one major change to the Tzemach committee recommendations the cabinet made was to reserve the Tamar field's gas for domestic use, which means that 75% of Leviathan's output can be sold abroad.

But three years after the first Leviathan discoveries were made, its legal ownership remains cloudy.

Two years ago, the antitrust authorities ruled that the partners – Delek Group (45%), Noble Energy (40%) and Ratio (15%) – are a monopoly because they control almost all of the country's gas reserves. The partners were given a chance to respond to the decision in a hearing last May, but they have not done so yet.

The delay is apparently due to concerns that the Leviathan partners will mount a legal challenge to the decision that could delay the start of production at Leviathan. The two sides, as a result, would rather just wait and see who blinks first.

Broadly speaking, antitrust chief David Gilo has two options. The first is to insist that the partnership be broken up altogether, and the second is to require them to market their gas in the domestic market separately (while exporting gas jointly).

Meanwhile, the cabinet's decision to reserve Tamar's gas for local consumption has upset Isramco and Alon Gas, which hold a combined 33% in the field. They are appealing the decision.

Another question facing the Leviathan partners is who will finance development of the facilities needed to export the gas. At the end of last year, the partners signed an agreement with Australia's Woodside to sell its 30% stake in the field for $2.5 billion. A final accord was supposed to be signed two months later, but the sides waited for the government to decide on its gas export policy.

Meanwhile, Leviathan's estimated reserves have been revised upward by about 20%, raising its value. The two sides have virtually stopped talking in the last several months, but they are now expected to be revived.

Woodside lauds decision

On Sunday, however, a Woodside spokesman praised the High Court decision. "The court's decision adds further certainty to the gas export policy settings on which Woodside based its proposed investment in the Leviathan field," a Woodside spokesman said.

However, Nobel or Delek are divided on Woodside. Delek prefers the cheaper alternative of exporting gas to nearby Turkey, whereas Woodside's expertise is liquefied natural gas and markets in the Far East. Noble, backed by Ratio, still favors the Australian company.

The next item on the agenda is where to site the gas export facilities. In the last several months, both the Leviathan partners and the government have reportedly reached the conclusion that developing them on dry land either in Israel or Cyprus will be impossible.

Finding 1,000 dunams on the Israeli coast to build the facility would run up against environmental obstacles and public opposition. Cyprus, meanwhile, is a major credit risk, its gas reserves are yet proven and the security establishment opposes shipping a major natural resource through the island country.

Over the next few weeks, the Leviathan partners will likely be discussing a short- and long-term alternative. The first would be shipping the gas by undersea pipeline to Turkey, a plan supported by Jerusalem for geopolitical reasons. Such a pipeline could transport eight to 10 billion cubic meters of gas annually.

Assuming that all the political and regulatory obstacles can be overcome, the pipeline would cost about $5 billion and take three years to complete. It would generate income of $3 billion to $4 billion annually for the Leviathan partners and provide the cash flow to help finance the long-term export facility, a floating LNG terminal.

An FLNG facility would solve the problem of locating the facility on land, but it would cost in the range of $4 billion to $5 billion to build a terminal capable of exporting $5 billion of gas annually. Woodside's expertise in the field would be critical.

The Leviathan oil rig.Credit: Albatross

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