Israel to start pumping gas from Leviathan, making country an energy powerhouse

Fuel flow expected to bring energy autonomy along with exports; but drop in global prices, environmental concerns, and Egypt’s new massive natural gas reserves curb the enthusiasm

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Rigs in the Leviathan gas prospect off the coast of Israel, in an undated photo provided to The Times of Israel. (Albatross Aerial Photography)
Rigs in the Leviathan gas prospect off the coast of Israel, in an undated photo provided to The Times of Israel. (Albatross Aerial Photography)

Natural gas is set to start flowing from the massive Leviathan field off Israel’s shore any day now, an economic milestone for the country that will pave its way to “energy independence” and, via exports, to stronger ties with its neighbors.

Commercial production of natural gas from the field is set to begin before year’s end for the local market, with exports starting shortly thereafter. On Monday, Energy Minister Yuval Steinitz signed permits for the export of gas to Egypt, the ministry said in a statement. “This is a historic milestone for the State of Israel,” Steinitz said.

With the flow of the gas, “Israel will reach energy independence, and become an exporter of gas,”said George Hatfield, VP of Major Projects at Noble Energy, at an energy conference in Tel Aviv earlier this month, when the Leviathan partners confirmed that commercial supply would start “within two to three weeks.”

“These are exciting times for Israel,” Hatfield added.

George Hatfield, VP of Major Projects at Noble Energy speaking at an energy conference in Ramat Gan; December 2, 2019 (Shoshanna Solomon/Times of Israel)

Located in the Mediterranean Sea 125 kilometers (77 miles) west of Haifa, the Leviathan field is estimated to hold 22 trillion cubic feet of recoverable natural gas, and a potential half a million barrels of oil, according to estimates provided by the partners in the field.

“The start of the flow of gas from Leviathan is a significant event for Israel,” said Terence Klingman, chief investment officer at the Heritage Family Office Partners Ltd., which advises wealthy families on where to invest their funds. Klingman is also a former head of sell-side research at Psagot Investment House, an institutional investor.

The gas supply will help phase out expensive and polluting imported coal, he said, and allow for exports. This will lower energy costs, making Israeli industries more competitive, and bring in revenue from the sale of gas to neighboring countries, boosting the country’s current account, an important indicator of an economy’s health, he said.

Houston-based Noble Energy Inc. and its partners in Leviathan — including Delek Drilling LP, a unit of the Delek Group Ltd., and Ratio Oil Exploration 1992 LP — discovered the field, one of the largest deep-water natural gas finds in the world, in 2010. The project is the largest funded by private capital in Israel’s history.

A crane vessel makes its way to Israel to help set up the Leviathan natural gas platform. (Noble Energy)

“Leviathan is very important for Israel, as it gives it the potential to be an exporter,” said Simon Henderson, Baker fellow and director, Bernstein Program on Gulf and Energy Policy at The Washington Institute for Near East Policy, in emailed comments.

Noble and its partners have invested $3.75 billion to date in the first stage of development of the reservoir, the companies have said. The nearby Tamar field —  Israel’s second largest find, also owned by Noble, Delek and Israeli firm Isramco Negev 2, LP — started producing gas in 2013 and has been supplying the country. It holds some 10 trillion cubic feet (tcf) of natural gas, half of the amount held in Leviathan.

These two fields, along with the smaller Karish and Tanin fields that are set to start production in 2021, are seen as a bonanza for a nation that has traditionally been starved of natural resources. They also provide a stable source of locally produced energy from four different fields, leading to a more secure supply that is enough to feed all of Israel’s electricity needs for decades.

According to data provided by the Natural Gas Authority, since natural gas from Tamar started to flow, the Israeli market has saved more than $18 billion by switching from coal to natural gas, which is both cheaper and cleaner.

The nation will also start getting royalties from the fields that will grow over the years, once development costs have been deducted, said Noam Pincu, senior analyst at Psagot Securities Ltd., an Israeli institutional investor.

Noam Pincu, a senior analyst at Psagot Securities Ltd. (Courtesy)

Four production wells at Leviathan, with an average depth of five kilometers below sea level, each have a production capacity of 300 million cubic feet of natural gas per day, with a total annual production capacity of around 12 billion cubic meters (bcm). This will more than double the quantity of natural gas produced in Israel today, and be enough to supply the local market and leave a surplus for exports.

“The connection of Leviathan field is really revolutionary for the Israel energy market. It is the largest reservoir off the coast of Israel, a huge reservoir even in international terms,” said Sarah Hadar, chief economist of the Energy Ministry’s Natural Gas Authority, by phone.

Israel’s annual consumption of natural gas in 2019 will total about 11.3 bcm, she said. The Tamar field alone supplies 10 bcm of this – or 92 percent of the fuel consumed by the local market — and Leviathan will make up the rest, with the excess going to exports, she said. Currently the shortfall in natural gas for electricity production is made up by importing it in liquefied form.

“The Israeli energy market relied on just one connection to the shore from Tamar and this only connection is the main source of energy for power electricity in Israel,” said Hadar. “Now we are going to have two connections from Israeli natural gas fields to the natural gas transportation system and we expect three connections with the Karish and Tanin fields, expected to come online in 2021.”

In 2018, 42% of total Israeli energy consumption came from oil and petroleum products, 39% from natural gas, 18% from coal and 1% from renewables, according to the latest available Energy Ministry data. Electricity production came from natural gas (64%); coal (30%); renewable energy (5%) and other (1%) in 2019, the data showed.

Israel’s expected demand for natural gas is expected to grow by some 12% annually between 2020 and 2040, the partners in Leviathan forecast according to a Delek Drilling presentation, reaching 34 bcm in 2040 from just over 11 in 2019, as the nation plans to phase out imports of coal and more industries connect to the natural gas supply for their electricity needs.

The Energy Ministry said last month that the end of the coal era was being brought forward to 2025 from the original date of 2030. Israel will continue to be dependent on imports of oil, however.

A marine crane vessel en route to Israel to set up the Leviathan natural gas platform 9.7 km (6 miles) from the popular Dor Beach, north of Caesarea. (Noble Energy)

Natural gas from Leviathan will be transmitted through two 120-kilometer (75-mile) subsea pipelines directly to a platform for processing. It will then flow from the platform through a pipeline to the national gas transmission system of Israel Natural Gas Lines.

Leviathan will be competing with Tamar for the local market, and prices are expected to drop from over $6 per MMBTU (million British thermal units) — which the nation’s electricity utility, the Israel Electric Corporation, currently pays for Tamar gas — to below $5 per MMBTU in 2021, Psagot’s Pincu said. “This will lower the electricity costs for consumers and industries.”

Exports to Egypt and Jordan

The Leviathan partners have signed two “significant” export contracts with Egypt and Jordan, which will help strengthen ties with the two neighboring countries with which Israel has peace agreements, Pincu said.

Israel has been exporting gas from the Tamar field to Jordan since January 2017, but the Leviathan deals are considered to be bigger and more significant for the economy.

In the deal with Jordan, the Leviathan partners signed a contract, via a specially set up firm, to supply the National Electric Power Company of Jordan with 45 bcm of natural gas over a period of up to 15 years from the commencement of the commercial supply of Leviathan, according to Delek Drilling.

And in October, the partners in the field said they were significantly increasing the quantity of gas in a contract signed with the privately held Egyptian firm Dolphinus Holdings to a total of some 85 billion cubic meters, to be supplied by both the Tamar and the Leviathan fields starting in 2020.

Signing the export permit on Monday, Steinitz, the energy minister, said, “The export of gas to Egypt, from Leviathan and Tamar, is the most significant economic cooperation between Israel and Egypt since the signing of the peace treaty between the countries.”

One source in Israel’s energy industry estimated the value of the gas to be sold to Egypt under the updated contract at a total value of $19.5 billion, Reuters reported.

The start of Leviathan production is making Israel a regional player in the energy industry, said Yael Ravia-Zadok, head of the Foreign Ministry’s Economic Diplomacy Division, speaking at the energy conference earlier this month. This “energy diplomacy” means discourse about natural gas has become an integral part of the regional agenda, she said.

The potential for cooperation around natural gas is “a factor in our diplomacy,” she said.

And yet

Even so, a number of developments following the Leviathan find are tempering the jubilation around the start of its production. Since 2010, when the field was discovered, the price of natural gas has plunged globally. Today, renewable energy is cheap and is considered the hottest thing in the global, clean-energy push.

In addition, the collapse of the price of crude oil in this past decade also raises the possibility of any potential black gold beneath Leviathan being left underwater. And, to top it all, Egypt too has found massive resources of offshore gas, making it less dependent on Israel for the fuel.

The Leviathan platform reaches the shores of Israel with the world’s largest marine crane (Albatross)

Prices of natural gas have declined by some 30%-40% in Europe since 2010, when Leviathan was discovered, and by some 60%-70% in the Far East, according to estimates.

This price drop makes the Leviathan project less profitable, and may weigh on the partners’ decision to further develop the field and increase its production quotas.

It will also raise questions about whether it is still economically feasible to build the infrastructure needed — such as pipelines through Cyprus and Greece to Italy, the so-called EastMed pipeline — to get the gas to Europe. The price of the gas would need to be high enough to offset these development costs, something that seems unlikely in a highly competitive price environment.

The price drop in natural gas “impacts the viability of the proposal for a pipeline to Europe,” said the Washington Institute’s Henderson. As it is, that pipeline already requires the discovery of much more local natural gas “before it can become credible,” he said.

The lower price of oil and its fall from grace because of environmental concerns also makes it more challenging for the partners in the Leviathan field to consider drilling for oil anytime soon, as they weigh costs and risks versus rewards. Indeed, at the recent energy conference in Tel Aviv, where the start of production of Leviathan was announced, there was no mention of any oil-drilling plans.

And the glut of oil found in Egypt also makes exports to the nation less likely.

In 2015, the “supergiant” offshore Zohr field was discovered by Italian energy company Eni, which touted it as the largest ever found in the Mediterranean Sea, with the potential of 30 tcf of gas, more than Leviathan. The field started production in 2017, less than two and a half years after its discovery.

A detail of the Zohr natural gas platform in Egypt (YouTube screenshot)

Egypt today “has much more gas than Israel,” said the Washington Institute’s Henderson. Even so, he believes Egypt will still need Israel’s fuel to supply two liquefying natural gas plants it has in Idku and Damietta, and this could mean more contracts for Leviathan.

“I expect that Egypt will increase the amount of gas it buys from Israel, but first it needs to expand the pipeline across Sinai or build a new offshore line,” said Henderson.

The green perspective

The Leviathan project has been the focus of bitter opposition from environmentalists and others for years. Residents living near the platform worry that their quality of life will be impaired.

In November, 112 top scientists, including a Nobel prize laureate, called on the government to abort a plan for a new network of gas-fired power stations, and instead put greater emphasis on moving to renewable energy.

“Natural gas is a cleaner fuel than coal and we welcome the reduction in the utilization of coal, oil and kerosene,” the letter said. “Nonetheless, it would be better if the transition was made directly to renewable energy and not to gas. Gas is a fossil fuel whose combustion releases CO₂ into the atmosphere. The most recent research reports considerable emissions as a result of using natural gas.”

The Energy Ministry’s Hadar said that current renewable energy technologies do not allow the storage of energy, and thus renewable energy cannot be relied upon solely.

“Because, when it is sunny you have energy, and when it is dark, you don’t. And when the wind blows you have some energy and if it doesn’t you don’t have energy,” she said. “So, till we have a system for energy storage from renewables — and all the infrastructure needed and the technology to make sure that Israel can rely on renewables — it is not possible in terms of security of supply” to have the whole market rely solely upon renewables.

Henderson, from The Washington Institute, also believes natural gas is here to stay for the next few decades, at least.

“Coal is history; oil will be the next to cease to be acceptable,” he said. “Natural gas is likely to be a popular fuel for several decades. But yes, renewables will be the eventual future.”

Among the partners in Leviathan, cautious optimism

“Before the end of the year we will start supplying the domestic market, and in the weeks right after that we will export to Egypt and Jordan,” said Binyamin Zomer, VP for Regional Affairs at Noble Energy, which holds a 40% stake in the field.

Referring to the lower cost of natural gas, Zomer said that “Leviathan is a reserve for 30 years.” Prices of energy sources like liquefied natural gas, natural gas and oil “may be higher, they may be lower. In the end, when you have a reserve enough for 30 years, all options are on the table.”

Demand for gas in Egypt continues to be high, Zomer said. Each of the LNG plants in Egypt has a demand similar to the local Israeli demand, and it is possible for Israeli gas to reach Europe via these plants, he said.

“The Leviathan project is in the final stages of development of Phase 1A, which will allow for the annual production of 12 BCM of natural gas,” Delek Drilling said in a text message to The Times of Israel.

“The reservoir’s development plan allows for the production of up to 24 BCM of natural gas in the future, depending on the destination markets (domestic market and export) and the agreements to be signed with them,” the text message said.

Regarding drilling for oil, Delek Drilling added: “As we have reported, we are working on a geologic analysis of the seismic surveys related to an exploration drilling into the deep targets of Leviathan, and a final decision on the matter will be made in the near future, based on the geological findings and the economic feasibility.”

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