The group developing Israel’s giant Leviathan gas field is running out of time to clinch binding major supply deals with Egypt and Jordan to ensure government support for developing the resource before a November deadline.
The field, which promises to help build Israel’s regional ties through large-scale energy exports, has lost one of its biggest potential customers, Turkey, in political fallout from the 50-day Gaza war.
And talks with companies, such as Britain’s BG Group which wants to bring in Israeli gas to feed its Egyptian liquefied natural gas (LNG) export plants, hinge on difficult commercial negotiations.
Israel has set a November deadline for Leviathan developers Noble Energy of Texas and Israel’s Delek Group to submit their plans for getting the field to the production stage.
Failure to submit by the deadline a development plan that includes long-term gas sales with mayor buyers, opens the door to production delays beyond its currently envisaged 2018, when a raft of new export projects around the world threatens to depress profits.
Leviathan’s estimated gas reserves of 622 billion cubic metres (bcm) are far too large for Israel’s domestic use, making export deals critical to the project’s viability, with first phase development costs estimated at $6 billion.
“To raise the funding needed for Leviathan I think they would need to get a big anchor customer like BG,” said Eran Yunger, senior analyst at brokerage Meitav Dash.
“If that doesn’t happen this year, the field won’t be developed according to the current schedule.”
In the past six months, renewed tensions with Turkey, a lack of progress on teaming up with a Cypriot gas export plant and tax disputes with Australian LNG specialist Woodside have jeopardised Israel’s access to the world’s biggest gas markets in Europe and Asia.
Plans to export output from Leviathan on LNG tankers to lucrative Asian countries backfired in March when Woodside called off buying a quarter stake in Leviathan.
REGIONAL AMBITIONS
Focus had subsequently shifted to regional relationships, especially a proposed 8-12 bcm a year pipeline between Leviathan and Turkey, a major energy consumer that has links into Europe and sits 470 km north of the gas field.
Turkish opposition to Israel’s treatment of Palestinians torpedoed the initiative put together by Leviathan and private sector buyers in Turkey, including energy joint venture company Enerjisa, half owned by German utility E.ON.
Leviathan partners Noble and Delek are confident that the contracts are moving in the right direction and are sticking to the 2018 timeline, officials have said over the past few weeks.
News early in September of a preliminary agreement to supply Jordan’s national electricity company with gas for 15 years, which could be worth $15 billion, was a step in the right direction. But it still falls short of a concrete supply deal that would help underpin the project.
Only the Palestinian Authority has so far committed to buying gas, agreeing a 20-year deal worth $1.2 billion
The Leviathan group did reach a tentative agreement with BG in June that would involve exporting 7 bcm of gas a year over 15 years to an LNG export plant in Idku, Egypt. It remains stuck at the non-binding stage while BG assesses the multi-billion dollar investment, while at the same time developing deep water fields off the coast of Egypt.
BG is also considering a parallel option to link up its Egyptian LNG plant with British oil major BP’s North Alexandria offshore gas development, using existing infrastructure by 2016, which may provide a quicker and cheaper route to reviving exports, industry sources said.
Negotiations on terms with the Leviathan partners will probably be the deciding factor.
“BG needs Leviathan and Leviathan needs BG, especially as with an Egyptian deal Leviathan would have enough offtake agreements for the first phase of development,” said Amir Foster, a Tel Aviv-based oil and gas industry consultant, who expects the agreement to be finalised soon.
“The (Idku) LNG facility for BG Group is like a sunk cost for them right now, and the investment they would need to make for a pipeline is not so big (as) to make it uneconomic,” he said.
Yet BG is coming under growing pressure to cut costs, while at the same time changes in global gas markets threaten to erode LNG sales profits as rival projects in Australia and the United States near start-up.
