Israeli Eastern Mediterranean Gas Finds Offer New Opportunities
Geopolitics in Region Could be Impacted
Recent natural gas discoveries off Israel’s eastern Mediterranean Sea are reversing its role of importer to that of exporter. According to the Energy Information Administration (EIA), the larger finds — the Tamar and Leviathan fields — hold estimated reserves of 10 trillion cubic feet (Tcf) and 18 Tcf respectively. These fields are part of the Levant Basin, with probable oil reserves of 1.7 billion barrels and probable natural gas resources of 122 Tcf.
In the past, Israel imported most of its natural gas supply from Egypt. “Until early in 2012, the country received 40% of the gas it needed — 90% for electricity generation — from Egypt via a marine pipeline between El Arish and Ashkelon,” notes Oil & Gas Journal. Egypt, facing gas shortfalls, is planning to import gas via LNG, though pipeline deliveries from Israel are likely cheaper. Spot LNG in the east Mediterranean region is currently priced around $12.00 per million British thermal units.
In 2010, Israel imported 74 billion cubic feet (Bcf) of natural gas, and 25 Bcf in 2011, with consumption of 117 Bcf in 2011. Now Israel plans to export 40% of its natural gas reserves, as they have far more supply than demand can support. This story has repeated itself in the U.S., with the gas boom, followed by falling prices that has been a drag on oil and gas sector profitability.
The American firm Noble Energy is credited with most of the natural gas discoveries in the region. Noble is also the explorer attributed with the discovery of the estimated 7 Tcf Aphrodite field in Cypriot waters. Other smaller discoveries, the Dalit and Tanin fields, will come online at some point as well. To compare, Texas’ Barnett Shale has proved reserves of 32.6 Tcf and the Fayetteville gas play is 14.8 Tcf, according to EIA estimates.
This chart reflects the estimated reserves in the East Mediterranean and when first volumes are expected to be online:
Israel’s gas demand will grow over the coming decades. Natural gas is now used in nearly half of Israel’s power generation, versus 38% in the recent past. The overall economy will gain from the cheaper gas supply, mirroring the impacts seen in the U.S. economy, such as benefits to manufacturing and industrial activity, reduced carbon emissions, and lower energy bills. This one-time boon may help reverse the monopolies held in numerous industrial sectors in Israel. In 2011, citizens waged a Facebook protest in dissatisfaction with the cost of living and socioeconomic inequalities, called the “cottage cheese protests.” The economic boost provided by gas may redress this to a degree; in the U.S., disposable income increased $1,200 via reduced energy bills and the energy savings passed through to other goods and services.
At a recent presentation at the Dallas Committee on Foreign Relations, Hillel Schuster, senior fellow at Bar-Ilan University and head of corporate finance at KPMG Israel, noted that Israel will be building considerable infrastructure in the years ahead to develop and distribute the gas supply. Noble and Israeli partner Delek estimate total investments of $5 – $15 billion to develop the Leviathan field’s needed pipelines or LNG facilities to export. Export markets could include piping gas to Turkey, Greece, Jordan, the Palestinian Authority, and possibly Egypt. A Delek executive says electricity tariffs could fall 40-50% by using Leviathan gas. If it manifests, an undersea pipeline to Turkey could involve $2 – $3 billion in investments.
The risks to the Eastern Mediterranean boom for Israel would be that production is stalled owing to unforeseen technical difficulties, new manifestations of violence, or a policy reversal. The government in Israel passed the gas export legislation expediently, but policy is headed toward a favorable direction for developing the resources. Additionally, the purchase of Israeli gas exports by other Middle Eastern countries could be politically charged. Turkey needs more gas imports but diplomatic relations are cool since a May 2010 incident. At the same time, gas exports by Israel could smooth relations over time among some neighboring countries.
(The Dallas Committee was part of a three-city U.S. tour organized by Bar-Ilan University.)