Israel is sitting on a winning lottery ticket. Since 2009, the country has found over 800 billion cubic meters (bcm) of natural gas off its Mediterranean coast, which is more than a hundred times its current annual consumption. At current market rates, these reserves are valued at almost a quarter of a trillion dollars. Industry sources estimate that there may yet be another 600 bcm of undiscovered natural gas in Israel’s territorial waters. However, the stalling of key energy legislation raises some serious questions as to whether Israel will even be able to cash in on this unprecedented opportunity.
Due to an historic dearth of hydrocarbons, Israel has never developed local expertise in offshore energy development and, as such, requires the support of foreign oil and gas firms. Until now, Israel has relied on US-based Noble Energy to oversee the operation of its largest gas finds. While undoubtedly an important strategic partner, Noble is still a medium-sized player, one that analysts believe lacks the financial resources or technological and logistical know-how to fully exploit Israel’s energy potential.
Recognizing these limitations, the Israeli government and industry have been courting international oil and gas firms, but with minimal success. Ideally, what Israel needs is a commitment from a supermajor, one of the world’s six largest publicly owned oil and gas firms: ExxonMobil, Chevron, Shell, BP, Total, or ConocoPhillips. These companies had collective profits in excess of $300 billion last year, are involved in some of the world’s most complicated offshore drilling projects, and would be well positioned to capitalize on Israeli gas reserves.
Given the potential in this region, it should come as little surprise that supermajors have shown an interest in the Eastern Mediterranean. What is surprising, though, is that little of that interest has been directed at Israel.
Just a few weeks ago, Total, along with Gazprom, ENI, and Korean Gas, which are majors in their own right, bid on four offshore licenses belonging to Cyprus. At present, Cyprus has only found some 200 bcm of natural gas in its territorial waters and has not even neared the production phase. In contrast, Israel has already found four times that amount and is poised to start extracting gas in early 2013.
Which begs the question as to why the supermajors would invest in Cyprus’ inchoate industry and not in Israel’s reserves, which are larger and closer to commercialization? Or why oil and gas companies the world over are looking at Turkey and Lebanon’s economic waters, which have yet to even find a single gas reserve, and not Israel’s proven reserves of several hundred bcm? Or why BP and ENI submitted tenders to supply Israel with natural gas, but seem disinclined to invest in and develop Israeli domestic reserves? When looking at the Israel market one has to wonder – where are all the supermajors?
For one, there are no supermajors to be found in the Israel market because the country has yet to promulgate clear export policy for its natural gas reserves. The issue of exports will be critical in securing the support of a supermajor, as the Israeli market for natural gas is limited and the domestic price – about $5.50/mmbtu – is far less than the $10/mmbtu or the $15/mmbtu that can be fetched in the European and Far Eastern markets, respectively.
Given the salience of the issue, the government commissioned a committee, headed by Shaul Tzemach, the Director General of the Ministry of Energy and Water, to examine the implications surrounding exports. But while the Tzemach Committee already submitted its final report in August, the government seems unlikely to vote on its recommendations until after January 2013 – following national elections. This delay is not only stymieing investment, as few companies would pour billions of dollars into these projects before having export quotas assured, but it is also harming Israel’s competitiveness and potentially devaluing its reserves.
By waiting to authorize exports, Israel is losing valuable time in entering the LNG market. LNG, or liquid natural gas, is the most feasible manner in which to ship natural gas long distances, considering the limited range of pipelines. Industry sources forecast that international demand for LNG will double over the next decade and, given the economic and environmental benefits, peg natural gas to play a key role in the global energy mix for years to come.
In light of these projections, the US and Canada, which both have massive natural reserves, are moving to enter the LNG market: three LNG plants are already planned for western Canada and the US has already authorized one – out of more than a dozen – new LNG export permits. Recently discovered reserves in Eastern Africa, which United States Geological Survey estimates at a staggering 12,490 bcm, may also flood the market in coming years. Not to mention that the leading market players, Qatar and Australia, are also stepping up their export capacities to meet rising global demand. If Israel waits too long in authorizing exports, its gas may be shut out of the market or devalued by countries that bring their reserves online more quickly – at which point the supermajors may reconsider investment in Israel’s natural gas sector.
Israeli reserves may have tremendous potential, but the fate of the country’s natural gas market is far from certain. What is clear, however, is that without policy in place governing export quotas the supermajors will not come; and without any exports, there will be little incentive to continue exploring for new reserves. Israel has an historic opportunity at its doorstep, but delaying decisions in this area could cost the country hundreds of billions of dollars. There is certainly a window of opportunity, but it will start shrinking if Israel does not take the necessary steps to cash in on its winning ticket.