Measuring Israel’s Progress on the Leviathan Gas Field
The Leviathan natural gas field was supposed to be the ultimate game-changer for historically energy dependent Israel. When the reservoir was discovered in December 2010, then-Minister of Infrastructure Uzi Landau called it “the most important energy news since the founding of the state.” Leviathan—the world’s largest deepwater natural gas discovery over the past decade—would satisfy Israel’s energy needs for decades to come and potentially change relations with its neighbors, while filling state coffers with tens of billions of dollars in new revenue.
As of mid-2015, Leviathan has clearly not lived up to these expectations. The Tamar field began production in 2014, but regulatory hurdles continue to delay the development and production of Leviathan as prospective clients in Egypt and Jordan consider alternative suppliers. Contrary to Prime Minister Benjamin Netanyahu’s recent proclamation that Israel “will extract this gas from the depths of the sea,” it has become clear that there are no guarantees.
Leviathan’s development has been held up by a slew of regulatory issues. Israel’s government had to build a regulatory infrastructure essentially from the ground up, as the Petroleum Law of 1952 did not anticipate that the country would someday have its own hydrocarbon resources. This required the formation of committees, led by Prof. Eytan Sheshinski and former Energy and Water Resources Ministry director general Shaul Zemach, which examined corporate taxation and import and export quotas.
Policy recommendations were made and voted on by the Cabinet. When the Cabinet voted in June 2013 to allocate 60 percent of Israel’s natural gas for domestic use and 40 percent for exports, members of the parliament responded by filing a petition with the Supreme Court, which delayed the resolution of that issue until October. The Court sided with the Cabinet, but the process was another setback for Noble and Delek’s timeline. These costly bureaucratic hurdles continued, and in May 2014 Australia’s Woodside terminated its memorandum of understanding with the Leviathan partnership to acquire 25 percent of the field for $2.5 billion.
Noble and Delek remained invested in Leviathan, but Israeli Antitrust Commissioner David Gilo sent the industry into a tailspin at the end of December when he announced that he intended to classify Houston-based Noble Energy and Israel’s Delek—which together own majority shares in both the Tamar and Leviathan fields—a cartel, reversing his previous position. Noble announced that it was freezing investment in Leviathan as a result of regulatory uncertainty.
After months of negotiations between both the companies and the government and within the government itself, no agreement has been signed, despite Gilo’s announcement that he will step down in August. The latest version of the proposed agreement allows both Noble and Delek to keep their stakes in Leviathan, but production will begin in 2019 at the earliest, according to the companies.
Leviathan’s development, of course, also remains contingent on exports, as the estimated phase one cost of $6.5 billion requires concrete and lucrative contracts with clients willing to pay a high price. There are letters of intent to export 45 billion cubic meters (Bcm) of gas over 15 years for $15 billion to the Jordanian Electric Power Company (JEPCO), and to supply BG Group’s Egyptian LNG export facility 7 Bcm annually for 15 years for a $30 billion. Due to regulatory uncertainty in Israel, however, neither of the agreements, which were both announced in 2014, have been signed into contracts.
Aware that the window is closing, the Israeli government is reportedly considering excluding Jordan from the overall export quota in order to save that deal. Unfortunately for Israel, this is not stopping Egypt and Jordan from considering other gas supply options. Both countries have already begun importing LNG cargoes and intend to buy tens more over the next few years. Cyprus and Egypt signed an energy cooperation agreement in February that calls for Cyprus to pipe 8 Bcm of gas per year from its Aphrodite field via underwater pipeline. Jordan also has plans to sign an agreement to purchase 150 million cubic feet (Mcf) of gas per day from Cyprus, according to Jordanian Energy Minister Mohammad Hamed. Now that Aphrodite has been declared commercially viable it is not implausible that it could secure and implement export contracts ahead of Leviathan.
Despite the promise of Levant Basin gas, the reality is that Noble is the only international company interested in investing in Israel’s hydrocarbon resources. Leviathan may be the largest discovery of its kind in the last decade, but it pales in comparison to larger reservoirs like Kazakhstan’s Karachaganak, which holds an estimated 48 trillion cubic feet (Tcf) of gas. Israel simply does not have enough gas to legitimize taking on the risk. As former Royal Dutch Shell president John Hofmeister recently told Israeli business newspaper Globes, “They [companies] look at whether they will be able to stay in the country for decades. The truth is that there is simply not enough gas in Israel to attract these companies.”
Indeed, even though the estimated size of Leviathan’s reserves was increased by 16 percent from 19 Tcf to 22 Tcf in 2014, a report recently prepared by Dutch auditing company SGS for Israel’s Ministry of Energy calculated that Leviathan only has 16.5 Tcf—20 percent less than originally estimated. If proven, this reduced volume could translate into a $30 billion cut in revenue, making it even less attractive to investors, and generating less profit for Israel.
With Israeli natural gas demand declining and the emergence of major new gas exporters like the United States, the picture certainly looks bleak for Leviathan. According to the Paris-based Mediterranean Energy Observatory, energy consumption in the Mediterranean region will increase by 50 percent by 2040, but not necessarily in the form of natural gas. Rather, the Observatory estimates there will be three nuclear power plants in the region by 2030, and some southern Mediterranean countries will adopt coal. Europe remains committed to diversifying its own energy supply, but there will likely be no need for piped gas from Leviathan once the Southern Gas Corridor begins transmitting supplies from Azerbaijan.
Four and a half years after its initial discovery, Leviathan’s development is at a major impasse. Any production before 2020 is highly unlikely. Cautious optimism is warranted, but so is pragmatic pessimism.
Allison Good follows developments in Israel’s gas sector. She has worked in strategic communications consulting for the oil and gas sector and previously interned at Noble Energy. Her views are her own and do not reflect those of any former employers. Follow her on Twitter at @Allison_Good1.