Israeli Government Under Pressure to Deliver Security

The High Court of Justice's ruling that rejected the stability clause of Israel’s natural gas regulatory framework caught everybody off-guard, from the prime minister Benjamin Netanyahu down to the lowliest official at the energy ministry.

Now Netanyahu, the energy minister Yuval Steinitz and senior officials in the energy ministry and the treasury are under pressure to strengthen Israel's low level of energy security.

The Tamar gas field is the country’s only meaningful gas resource, providing 60% of the energy for power generation in Israel. Tamar, a deep water resource about 80 km offshore Israel, is connected by only one pipeline; there is only one offshore gas treatment facility; only one onshore reception facility; and no backup to those systems.

Israel lacks gas storage facilities and if the gas flow is stopped, for any reason, even maintenance work, it will be immediately felt country wide. The only backup is an FSRU vessel that can supply gas through an offshore terminal, equal to about half the gas supply from Tamar. Not the perfect recipe for a high-level energy security.

The day after the court's ruling was published, Netanyahu convened a consultation with officials. On March 29, Steinitz, convened a consultation with energy ministry and treasury senior officials. Possible ideas being discussed would include:

• Bringing the framework as a whole package for discussion in parliament.
• Enacting a law that would enable stability clauses to become part of long-term national infrastructure projects.
• Granting the developers indemnities in case the gas fields become unprofitable.
• Using government funds to get the projects off the ground.

Geopolitics and funding main issues

So far the Leviathan Partners have said little. Delek Drilling CEO Yossi Abu said in an analysts’ conference call that the partners would act with the government to find an alternative solution to the stability clause. Noble Energy’s reaction was more aggressive but less constructive, restating its intention to defend its investments in Israel, which suggests arbitration.

The problems facing Leviathan Partnership and Tamar Partnership are deeper than just legal obstacles. The first is the lack of potential buyers owing to the country's geopolitical stance and the second is the low gas price, which has no end in sight.

The geopolitical obstacles are reflected in Leviathan's Partnership's latest development program that was submitted to the energy ministry last month and the lack of interest in Tamar's expansion program. Union Fenosa and BG, now Royal Dutch Shell, which were supposed to be among the anchor customers for Tamar expansion and Leviathan development respectively, have vanished.

The Leviathan development is based on other anchor customers. However those customers are more imaginary than real. Dophinus Group, an Egyptian consortium, is an unknown and unproven entity in the energy market and it is unrealistic to expect it to purchase 4bn m³/yr for 15 years. Another, Jordan also cannot be counted on, because of hostile public opinions and supply of LNG, which nowadays can compete with what Leviathan partnership hopes to get for its gas. The third anchor customer is supposed to be the Israeli market, but the slow pace of the natural gas pipeline network deployment is another obstacle.

Noble the biggest winner

So the court's ruling is playing into the hands of the main partners in Leviathan and in particular Noble Energy. Noble lost $2.4bn last year. Its main goal according to the company is to remain cash neutral as long as energy prices remain low. It has cut its 2015 capex by half for 2016 to $1.5bn following a cut by 40% in 2015. Last year it sent back home $858mn intended for foreign investments and said it will not invest in Leviathan equity.

It plans to finance its part in Leviathan by issuing debt, citing the successful debt issue by Delek Group. However that debt, known as Tamar Bonds whereby Delek Group raised $2bn in 2014, is secured against revenues from Tamar gas field. Tamar Partnership sells its gas only in the Israeli market for an average $5.5/mn Btu and going up every year.

Last year Noble's operating profit from its operations in Israel stood at $318mn, a staggering 64% operating margin. It will not be able to achieve anything like that in Leviathan. If Noble is to issue bonds or raise funding based on the current gas price, it would never develop Leviathan without guarantees from either financial organizations such as the US Ex-Im bank or the government of Israel.

If Israel wants to increase its energy security and lure Noble Energy into developing Leviathan, the government may have to dangle financial inducements before its eyes.

Ya'acov Zalel