Israeli Gas: Too Soon to Declare Victory

Developing major gas projects is a very demanding and lengthy process. In Qatar, it took 25 years after the discovery of the North field for the first liquefied natural gas (LNG) to be exported (from 1971 to 1996). The Gorgon field in Australia, which will soon come online, was discovered in 1981. The fields supplying the Sakhalin-2 LNG project in Russia were discovered in the mid-1980s, and the first LNG was exported from there in 2009. It took a similar length of time for the Snøhvit field in Norway to be developed (discovered in 1984, first LNG produced in 2007). Gas flowed within seven years of discovery at Pluto LNG in Australia, one of the fastest such projects to be developed. A typical best-case scenario is a decade from discovery to exports. Some world-class discoveries such as the Natuna D field in Indonesia (discovered in 1968), the Prudhoe Bay field in Alaska (1968), or the Shtokman field in Russia (1988) have still not found a path to market. Some may never be developed at all.

The reason for these delays is that gas development is capital intensive and has a long payback period for their investors. As such, project sponsors work diligently to map and address every possible risk. During this process, the development concept might change as proposed pipelines turn into LNG facilities or vice versa; new partners come in and old partners leave; governments change the rules to give the project a boost or to improve their own take; and markets and costs change, prompting project sponsors to revise their plans repeatedly.

This long development cycle is frustrating. Project sponsors want to recoup their original investments; host governments want to deliver the benefits that they have promised to their voters, who, in turn, are eager to see these materialize; and possible buyers, financiers, builders, and service providers all await their share of the promised gains. Meanwhile, there is a chorus claiming that gas must be developed as soon as possible, before a “window of opportunity” closes. After some time, fatigue creeps in as the participants lose faith in the process and the public turns cynical.

Projects succeed when they have capable and committed partners, who engage stakeholders at the local, national, and international level, and who take advantage of a favorable political, commercial, and financial environment to move ahead. Often this process takes years and even decades to complete. Slow progress can be particularly frustrating for Israel given its experience with Mari B and Tamar, which were developed relatively quickly. These fields were geared to supplying the local market and so did not face many of the risks that come with export projects.

Challenges in Developing Israeli Gas

Gas in Israel has its share of advantages and disadvantages. Leviathan and Tamar are large fields, bringing economies of scale. The gas is dry and of high quality, so processing is relatively inexpensive. As the gas is fairly close to national and regional markets, infrastructure costs associated with development should not be prohibitive.

But, for the moment, there is no obvious outlet for all this gas. There are several options but no clear winner. A pipeline to Turkey would tie the gas into a single market where there is considerable competition and that could be affected by changing political relations between Israel, Cyprus, and Turkey. A pipeline to Southeast Europe would be very costly and face competition from the Caspian region and other sources. Any pipeline geared to currently expected production levels would not offer economies of scale if there were additional discoveries; a whole new pipeline would then be required. A liquefaction facility onshore Israel would face obstacles in securing construction permits and would be a major terrorist target. A liquefaction facility onshore Cyprus could be a solution, but this would be the first time in the world when gas produced in one country would be exported as LNG from another. A floating LNG facility at either Tamar or Leviathan would probably be too small for the gas available and vulnerable to attack. In any event, floating LNG is a breakthrough technology without any functioning projects as yet. The market in Egypt for imported gas is limited, while gas for re-export needs a change in commercial structure to be viable and is exposed to changes in the political relationship between the two countries. Finally, exports to Jordan, if they materialize, would be insufficient to absorb Israel’s available gas,

In short, project sponsors are constantly weighing several development paths, trying to find a balance between risk and reward with which they are comfortable. In doing so, they face two additional challenges. First, any option must be durable, which means it needs to survive the changes in politics, economics, and markets that are likely to occur over the next 15 to 20 years. Shocks can come from many sources: Israeli politics could lead to changes in taxation or the amount of gas that is permitted to be exported, despite assurances of regulatory “stability.” Changes in regional politics could threaten the sustainability of exports, as they did with Egyptian exports to Israel. Non-state actors may threaten or attack gas infrastructure, raising the risk premium and thus the cost of development. All these risks need to be managed at a time of lower oil and gas prices worldwide.

The second challenge is specific to Tamar and Leviathan. The project sponsors are upstream companies that focus on exploration and production rather than the mid and downstream aspects of the gas business. In practice, this means that they prefer others to shoulder the risks of building infrastructure and marketing gas while they themselves sell gas at or near the wellhead for a predictable price. This structure, however, shifts many of the risks from the producer to the buyer, who, by guaranteeing a price, bears a disproportionate risk relative to the reward.