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Leviathan off the starting blocks

By Charles Ellinas

Phase 1A of the Leviathan gasfield is finally off the starting blocks. Noble Energy and its partners reached FID on 23 February for Phase 1A, which involves the production of 12bcm/yr starting end of 2019. This can only be seen as positive news for the Leviathan partners and the Israeli gas market.

Leviathan was discovered in 2010 and it is estimated to hold 622bcm of recoverable gross natural gas resources. It is owned by Noble Energy with 39.66%, Delek Drilling with 22.67%, Avner with 22.67% and Ratio with 15%.

In the following, I analyse the FID decision, describe the deal and its potential impact on Energean and discuss the implications on East Med gas.

Leviathan FID

After months of pressure, the Leviathan partners announced on February 23 that they have taken the final investment decision (FID) on Leviathan to fund the development of Phase 1A, estimated at $3.75 billion. This undertaking comes after months of delay, while the partners were attempting to secure firm gas sales.

This effort was partially successful. The key gas sales and purchase agreement (GSPA) was signed last September, with the Jordanian National Electric Company (NEPCO), to supply 3bcm/yr gas over 15-years, on an oil price-linked and take-or-pay basis, reported to worth about $10billion. However, this is still subject to political risks. Resistance to it in Jordan is still strong.
In addition, the partners last September reached a gas sales agreement with Israel’s PAZ Oil worth $700million, involving the supply of 3.12bcm over 15-years.

Earlier last year Israel’s Ministry of Energy authorised the sale of 0.25-0.4bcm/y to the Palestinian Authority (PA), but this has not progressed.

Finally, during the last 12-months deals were announced with three forthcoming IPPs. A deal was signed in May with Israeli company IPM to supply it with 13bcm gas over an 18-year period, worth $3bn. Another deal was signed last November with Or Power Energy for 8.8bcm gas over 20-years at $2bn. A deal was also signed in January this year with Israeli company Edeltech, and its Turkish partner Zorlu Enerji, to supply it with 14.8bcm gas for 17-years.

Even if all the above deals were to become firm, the total volume of gas would come to about 5.4bcm/yr – substantially less than the Phase 1A capacity of 12bcm/yr. But none of the IPPs has progressed yet and the PA deal is still far from concluded. As a result, at this stage the FID is highly dependent on the politically challenged GSPA with NEPCO.

It has been reported that the Leviathan partners declared FID as a result of intense government pressure, but also in order to safeguard the stability of the NEPCO deal.
But there may be another factor that eased the decision. The Leviathan partners demanded to be granted a permit to construct and operate the gas transmission pipeline to the shore. Steinitz granted this permit on 21 February, 2 days before Phase 1A was signed-off.

In some respects, this resembles the successful launch of Tamar. When the FID was declared, there were no firm gas sales agreements in place. Once development started in September 2010, momentum was created and, by March 2012, the first major GSPA was signed with Israel Electric Corporation (IEC).

The Leviathan partners may be hoping to repeat this success, by taking the risk to declare FID on February 23 without sufficient firm GSPAs in place. But the situation is somewhat different now than it was in 2010. Most gas demand in Israel is taken up by Tamar and Leviathan depends strongly on the IPP deals becoming firm. The Israeli government can assist this by following-up on its decision in August 2016 to shut down coal-fired units at the Orot-Rabin and Hadera power plants and replace them with natural gas. That remains to be seen. Past calls to shut these plants down have not so far been very successful.

Nevertheless, Phase 1A is now firmly off the starting blocks. Welcoming the deal, Prime Minister Netanyahu said “this is a good day for the Israeli economy and for the citizens of Israel. This is a step that will give Israel security of gas supply”.

 

What is the deal

By the end of 2019, Israel will have assured security of gas supplies and electricity, eliminating the risk of gas shortages in future. This is excellent news, even if there is still some way to go to secure firm GSPAs.
Phase 1A involves the development of 4 subsea wells producing 3bcm/yr each. The gas will be exported through two 117km subsea pipelines to a gas treatment and production facility, located 10 km from the shore, from where it will be piped to the shore and connected to Israel’s National Gas Transmission System.

Noble confirmed that gas sales secured to-date total 5.4bcm/yr, with combined gross revenues estimated to be about $15billion over 15 years. Sales prices are quite attractive, even in global terms, estimated to be between $5.50-$6/mmBTU based on current Brent oil pricing. At such prices, the full Phase 1A development cost can be recovered in about four to five years, even with the limited binding and non-binding gas sales secured so far.

Phase 2 will involve the development of an additional 9bcm/yr, completely earmarked for exports. Delek made it clear that it will not proceed until firm gas sales agreements are signed.
Potential sales for Phase 2 include exports to Turkey and Egypt and to Greece through the much-talked-about East Med pipeline. But all of these are challenged geopolitically and commercially and their chances of success are not high. These options are covered in more detail in my article in the Cyprus Weekly of December 2.

 

Impact on Energean

The key question for Energean is will it still be able to secure agreements to sell 3 bcm/yr natural gas from Tanin and Karish, required to reach FID? If not, the risk for Israel is that the Noble/Delek monopoly will continue.

Minister Steinitz said last week that the decision to develop Leviathan is not bad news for Energean, despite the limited gas demand that exists in the Israeli market.

The challenge is that, even if gas demand in Israel increases to 16bcm/yr by 2020, close to 12bcm will be provided from Tamar. Energean will then have to compete for the remaining 4bcm. With Leviathan coming on-stream end of 2019, ie earlier than Tanin and Karish, Noble and its partners may corner all remaining demand and leave nothing for Energean.

However, Energean believes that with the support of the Israeli government, committed to break the gas-supply monopoly, and lower prices, up to 25% less, it will succeed in securing the 3bcm/yr sales it needs.

 

Implication for East Med gas

Exporting East Med gas outside the region is still challenged by persistently low global gas prices, something which may carry on in the longer term. With exports challenged, the FID for Leviathan Phase 1A demonstrates that domestic and regional gas markets may be the best way forward to monetise East Med gas, but the options are fast becoming limited.

In the meantime, with Egypt forging firmly ahead, as I showed last week, Leviathan off the starting blocks and low global gas prices, Cyprus is left watching with nowhere to go for now.

Dr Charles Ellinas is a non-resident Senior Fellow Eurasian Energy Futures Initiative, Atlantic Council

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