Israel - Major Natural Gas Producer? Not Yet

The year 2011 has proved a mixed blessing for Israel’s energy industry. 
On the down side, on 10 November Egypt’s Oil Ministry said that Egypt's $500 million East Mediterranean Gas Company Ltd. (EMG) pipeline, which transports Egyptian natural gas to Israel and Jordan, was damaged by two explosions and put out of commission. It was the seventh such attack since February, when a popular uprising began that eventually overthrew Egyptian President Hosni Mubarak.

Before the latest incident the EMG pipeline supplied Israel with about 40 percent of its natural gas needs.
 
In the face of such supply concerns Israel is attempting to press forward to the swift development of its Mediterranean natural gas assets, the Tamar field, discovered in 2009 and Leviathan, discovered the following year. In June an Israeli company announced the discovery of two new natural gas fields, Sarah and Mira, about 45 miles off the city of Hadera. Noble Energy announced in January that its drilling in the 125 square mile Israeli Leviathan-1 offshore Mediterranean natural gas field had “the potential to position Israel as a natural gas exporting nation.” Initial prospecting estimates of the Tamar and Leviathan fields, off Haifa, concluded that the two sites between them could hold as much as 688 billion cubic meters of recoverable natural gas, while last year the U.S. Geological Survey estimated that the Mediterranean’s Levant Basin Province, covering offshore waters of Israel, Lebanon, Syria, and Cyprus, could contain as much as 3.4 trillion cubic meters of gas and up to 1.7 billion barrels of recoverable oil.
 
That’s the good news. The unanswered question is who will pay for the offshore fields’ development.

Noble Energy Inc. and Delek Group Ltd., the two main partners developing the Leviathan field, have stated that they need $10 billion to develop the site and its attendant infrastructure to be able to export the reserve’s natural gas, and hope to interest investors from Cyprus and possibly China and the Russian Federation.

Noble Energy Inc. owns 39.66 percent of Leviathan, Delek Group Ltd.’s units Avner Oil and Gas LP and Delek Drilling LP each own 22.67 percent, and Ratio Oil Exploration LP owns the remaining 15 percent.

The firms are not seeking an inconsiderable investment – to put it into context, the United States provides Israel each year with roughly $3 billion in aid. A Delek employee candidly told Israel’s Globes business journal, "The project is simply too big for Noble Energy and us."

Noble Energy Inc. and Delek Group Ltd. are optimistic that either/or include China's China National Offshore Oil Corporation (CNOOC) and the Russian Federation's state natural gas monopoly Gazprom, which already have business contacts with Delek Group Ltd. The Electricity Authority of Cyprus has also expressed interest in joining any venture as a junior partner.
 
Such optimism may run aground on the volatile politics of the Middle East. Both CNOOC and Gazprom already have expansive dealing with a number of Arab countries and Israeli arch enemy Iran, and Gazprom furthermore is deeply embedded in exports to Turkey. For better or for worse for Tel Aviv, the Arab spring has produced winds of change throughout the Arab world and brought the Palestinian issue increasingly to the forefront for many Arab nations, whose populations would loathe to see foreign investment in Israel’s energy infrastructure. Lucrative current CNOOC and Gazprom contracts throughout the region could be put in jeopardy by signing on board to the project. Furthermore, Israel’s 31 May 2010 attack on the Gaza-bound “Freedom flotilla,” during which Israeli Shayetet 13 Naval Special Forces commandos killed eight Turkish citizens and an American, Furkan Dogan, have brought Turkish-Israeli relations to their lowest point in years.

Nor is Israel’s sovereignty of the sites uncontested. In August Lebanon’s Parliament passed an 18-article draft legislation demarcating its maritime borders with Israel, the direct result of Israel's cabinet the previous month having approved a map of Israel's proposed maritime borders with Lebanon. Israel then submitted for meditation to the United Nations, which conflicts with a map submitted in 2010 by Lebanon to the UN that gives Israel less territory.

Beirut maintains that their map is in line with an armistice accord drawn up in 1949 and not contested by Israel as well as challenging Israel's assertion that a 2007 accord between Cyprus and Lebanon sets the same boundaries as those agreed between Israel and Cyprus last year. Lebanese President Michel Suleiman subsequently cautioned the Israeli government against taking unilateral actions of "the kind that Israel commonly makes in violation of international law."

Last month the Jerusalem Post reported that Israel has deployed drones to keep watch on its offshore natural gas fields off its northern coast, worried about attacks by Hezbollah militia based in Lebanon, hardly a prescription to assure investors. Accordingly, Israel’s best interim hope would seem to be that Egypt repairs the EMG pipeline as soon as possible. As for waiting for either Moscow or Beijing’s check, if Israel is serious about developing its natural gas fields, domestic investors would seem a better bet at this point.

By. John C.K. Daly of Oilprice.com