February 28, 2017

First Phase of Leviathan Gas Field Gets Financial Backing

Stratas Advisors

This report and others like it are available to subscribers of Stratas Advisors’ Global Natural Gas and Middle East services.

Partners in the Leviathan gas field have reached a positive FID on phase-one development of the project, paving the way for Israel to make its mark as a regional player in the natural gas market. Delek Drilling and Noble Energy have approved a $3.75 billion budget to develop the site, which the two hope to bring into operation in 2019. In doing so, Israel has positioned itself to become an energy supplier to the region, provided geopolitical hurdles can be overcome.

This first phase of development will make available 12 billion cubic meters of gas annually (about 1.15 Bcf/d) to the Israeli market, which consumed 0.77 Bcf/d of natural gas in 2014. As such, the first phase of development should be enough to satisfy growing domestic demand for several years. The project partners expect the returns from this first investment phase to be enough to satisfy a second round of development, which would yield another 9 billion cubic meters, or roughly 0.9 Bcf/d. This second round would be targeted for export – probably within the region by pipeline.

The Middle East has not historically been an importer of natural gas, with virtually all of its consumption being satisfied by domestic production. Pipelines have played a very minor role, and LNG imports only began in the last decade. While domestic production will continue to fulfill nearly all of the demand in the region, Leviathan could play an important role, even accounting for the geopolitical tensions at play between Israel and several of its neighbors.

Leviathan’s partners are currently negotiating to sell some of the gas from either phase of development to Egypt, with the potential to have it used to restart the currently inactive LNG export trains in the country. Israel and Egypt have been at odds over the past several years following a dispute over a gas supply deal that two Egyptian gas companies backed out of. After losing the arbitration hearing, Egypt threatened to stop all energy negotiations, including those involving the Leviathan field. While Egypt has recently turned to FSRUs to alleviate its energy shortage, a deal between the two countries would go a long way towards providing Egypt with a long-term gas solution and helping Israel develop closer ties to a much needed potential ally in the region.

The biggest deal to-date involving the field is the $10 billion agreement signed by Natural Electric Power Co. of Jordan (NEPCO), a 15-year deal slated to deliver 45 billion cubic meters of gas in total. In addition to pursuing opportunities in Egypt, Leviathan’s partners are also seeking to sign Turkey as a long-term customer, as the latter seeks to expand even further on its growing status as the connection between suppliers and consumers in Russia, Europe and the Middle East.

As the US and Australia become major gas suppliers on the global stage and other regions such as East Africa begin their development toward a similar status, it is evident that the global natural gas is moving beyond its reliance on only a handful of large LNG-producing countries and huge pipeline suppliers. The development of the strategically located Leviathan field, along with other East Mediterranean gas, will add even more flexibility and liquidity to a market that is increasingly becoming less centralized, both from the supply side and the demand side.