Delek Chief Expects Egypt To Be Anchor Customer For Israeli Natural Gas Production Expansion

Mr. Tadmor, chairman of Delek Drilling and the CEO of Avner, said at the centre of his vision is a production target of 40 billion cubic metres (bcm), most of it for export, from Israeli assets.

This week Delek Drilling and Avner, both controlled by Delek Group, a partner to the monopoly in Israel natural gas market, reported a surge of 66% in net earnings for the 3rd quarter 2015 to $76 million. The earnings put the companies amongst the best performers in the industry right now.

In the first 9 months of 2015 net earnings amounted to $185 million, a 90% improvement over the same period in 2014. The improved financial results are attributed to an increase in natural gas sales and a drastic reduction in financing costs. The results were possible due to the fact that all of the two companies' revenues come from natural gas sales in Israel with a fixed price of about $5.5 MMbtu. 

Mr. Tadmor's fundamental assumption for the next few years is that demand for natural gas in Egypt will increase as supply from new Egyptian fields, like Zohr, will not be sufficient to close the gap between demand and supply. Therefore, he depicts Israel as "an island of available gas in an ocean of unsatisfied demand."

The background for his vision is an industry in crisis mode, reeling from a 16-month price crash and burdened by $53 billion impairments in just the last quarter. "That it is only the start," Mr. Tamor said. He envisages further "significant reduction in CapEx" across the industry in order to retain dividends. "Companies are making very aggressive divestments of assets (...) in order to stay. We are talking about small companies, with their nose above the water."

Mr. Tadmor expects prices to begin to rise by 2017-2018. That makes development of Israeli assets crucial, he said.

"All those assets--Tamar, Leviathan, Aphrodite [a Cypriot asset, owned by Delek Group and Noble Energy]--are over 1,000 bcm of discovered natural gas, [most of them] in the Israeli EEZ. This is exactly the opportunity that we intend in Delek and Avner to exploit in the years to come."

Mr. Tadmor described the regulatory problems that afflicted the industry in Israel though those are almost behind him now. "The comprehensive framework is so important to create a stable environment that will enable us to invest," he said.

By 2020, Mr. Tadmor wishes for three independent projects to be completed, Tamar, Leviathan, Karish and Tanin, which will produce natural gas for the domestic Israeli market as well as for export from two gas fields with a production capacity of 40 bcm annually. "This is a vision within our reach," he said.

In the near future, however, Mr. Tadmor expects to kick start export to the Jordanian Potash facility, and a bigger contract, exporting gas to Egypt under Dolphinus contract. Then will come Tamar expansion that, if sanctioned by 2016, is expected to be online by 2018, transmitting gas to Egypt's Damietta LNG plant. That expansion should cost $1.5 billion and is contingent upon a contract with Spain's Union Fenosa Gas. Then Noble and Delek will turn their attention to Leviathan, which Mr. Tadmor describes as "a mega project with a $6-7 billion investment utilizing FPSO either on top of the reservoir or near the shore."

The Turkish market will be targeted in phase 2 of the project. "The geopolitics have changed, bringing it [the Turkish option] back to the table," Mr. Tadmor said. "All of a sudden Israel becomes a unique opportunity and becomes a key player in the overall strategy of companies like Eni S.p.A, BG Group Royal Dutch Shell plc, and others."