Israeli Leviathan Field Needs European Buyers
The extremely fast rise of the energy industry in Israel created a mismatch between the regulatory framework and the companies’ requirements to cope with unprecedented complexities, which are not just geopolitical but also financial in nature. The Israeli government, which is going all out to promote the development of the Leviathan field, is trying to create a level playing field, but it needs foreign companies - possibly Europeans - to go there and invest. The Leviathan field requires a buyer, possibly a European buyer. That is the problem hindering the development.
Two factors have to be considered. Firstly, the energy sector is fast-evolving. Secondly, new gas is coming on-stream in the next 3-4 years, with possible gas glut as soon as from 2018. These two elements, coupled with a decreasing gas demand in Europe, mean that Israel should finalise the proper regulatory framework, but that this progress would not automatically translate into opportunities. Israel can be open for business, but if there is no European willing to buy the gas, chances to see the Leviathan field developed are rather slim.
This is the main view that emerged from a meeting of the Brussels Energy Club on Thursday.
The Israeli government is about to finalise its regulatory framework, which would hinge on four pillars. Leviathan stakes should remain as they are. For the Tamar, both Delek and Noble should give stakes away. Israel’s Delek will have to sell all its shares, while US-headquartered Noble could retain a 25% interest in the field. Thirdly, the two companies will have to sell all their shares in Tanin and Karish. Lastly, Tel Aviv is asking for fair pricing, which will be based on a formula and an additional condition - if the partners will sell gas abroad for a price lower than the one set for the domestic consumption, the lower price would then be applicable to Israeli customers too.
If the Government’s proposal becomes reality, the regulatory environment will take one uncertainty away. Still, the domestic market - which is now 7 BCM and could go up to 13 BCM in the next five years in case of new successful efforts to promote gas for transportation and energy-intensive industries in the country - would not be enough, and exports will be needed. Apart from marginal regional markets, Leviathan needs a commitment from a major buyer. But the point here is that companies are probably unwilling to embark on new risks, endangering their assets in Muslim countries.
As emerged during the Brussels Energy Club meeting held under Chatham House rules, the general sentiment of the energy industry is that long-term political risks will be major hurdles for these projects. Additionally, fresh doubts hang over some certainties cemented in the gas industry. Time will test the willingness of South-East Asia countries to remain buyer of LNG at prices 20 to 50% higher than European ones. And this decision is relevant for Israel too, as changes in Asian gas markets could easily have repercussion on the Leviathan field.
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci