The British Gas Group has expressed initial interest in purchasing nearly 20 percent of the Leviathan gas reservoir contents to fuel its Egyptian liquefaction facility – a transaction that could amount to up to $30 billion, according to Israeli energy sources.
While a letter of intent signed over the weekend is still non-binding at this point, a final agreement would entail a 15-year supply of 7 billion cubic meters of gas annually – or 105 b.cu.m. in total – from the 535 b.cu.m. Israeli reservoir, a source in the Israeli energy sector told The Jerusalem Post on Sunday.
Worth approximately $30b. in total, such an agreement could generate more than $20b. in income for the state, the source said.
“The intention is to finish the negotiations in the coming months,” the source added.
Houston-based Noble Energy owns 39.66 percent in Leviathan, while Delek Drilling and Avner Oil Exploration – subsidiaries of the Delek Group – each own 22.67% and Ratio Oil Exploration holds 15%.
In 2008, Egypt’s East Mediterranean Gas Company began supplying Israel with about 40% of its natural gas provisions, until saboteurs began thwarting the flow through Sinai pipeline explosions. Following 14 months of such attacks, the Egyptian government formally terminated the agreement between the East Mediterranean Gas Company and Israel in April 2012.
Calling the weekend’s letter of intent “unprecedented,” the Israeli source said that saboteurs would not be able to destroy infrastructure if the new agreement pans out, because the floating production, storage, and offloading (FPSO) unit would be connected to the liquefaction plant in Egypt through an underwater pipeline.
The Egyptian liquefaction plant at Idku is a two-train liquefied natural gas (LNG) production site, owned 35.5% by the British Gas Group, 35.5% by the Malaysian firm Petronas, 12% by Egyptian Gas Holding Company, 12% by Egyptian General Petroleum Corporation and 5% by Gaz de France.
British Gas is also a primary shareholder in two offshore gas-producing concession areas – Rosetta and West Delta Deep Marine – and three other exploration sites off Egypt’s coast.
This January, the British Gas Group declared a “force majeure” – an event beyond control – in Egypt, due to the country’s ongoing diversions of gas to the domestic market in excess of existing arrangements.
“We are looking at a number of options for increasing the supply of gas to the Egyptian LNG facility and this is one of several currently under consideration,” a spokesman for the British Gas Group told the Post. “While this non-binding letter of intent with the Leviathan partners is a first step, it is very early days.”
An energy source familiar with the Egyptian market told the Post that British Gas and the other companies in the area have been “experiencing some serious difficulties” due to the fact that the Egyptian government has been diverting gas to the domestic market. In addition to taking more gas for domestic usage that was agreed upon, the Egyptian government owes British Gas some $4.4b.
The company is therefore exploring a number of options for the LNG facility, among them the idea of purchasing gas from Leviathan, the source explained. Other options include moving the exploration program at West Delta forward, convincing the Egyptian government to stop taking so much for domestic use or repaying debts to British Gas – which could encourage the company to enhance productivity in existing wells, the source said.
“The rolling blackouts you see in Cairo at the moment means the Egyptian government is in between a rock and a hard place,” the source added.
The major gas shortage in Egypt is very much a paradox, as Egypt has 2.5 times the amount of proven gas reserves than Israel has, explained Dr. Amit Mor, CEO of Eco Energy.
Egyptian energy-pricing policies and natural-gas subsidies have prevented international firms from developing gas in the country, which led to a shortage of the resource at home and to the prioritizing of domestic needs rather than LNG export, Mor said.
“Thus, importing gas from Tamar and Leviathan are economically viable options, since already $10b. were invested in the last decade in those two LNG facilities,” he added.
The letter of intent signed with British Gas is the second such negotiations launched between Israeli gas reservoir partners and facilities operating in Egypt. In early May, the partners of the 282-b.cu.m. Tamar reservoir – which is already online and providing gas to Israel – signed a letter of intent with Spanish firm Union Fenosa Gas for the provision of 71 b.cu.m. to that company’s Egyptian liquefaction facility.
Union Fenosa’s plant at Damietta stopped operating entirely in the past few years, also due to lack of available gas supply. As in the British Gas facility circumstances, purchase of Israeli gas could be one solution toward fulfilling these gaps.
“Export via existing underutilized LNG facilities makes the strongest commercial sense of all the major natural gas export options,” said Prof. Brenda Shaffer, an expert on energy policy at the University of Haifa’s School of Political Science, and a visiting researcher at Georgetown University.
Despite the commercial logic in such a venture, Shaffer approached the situation with caution, particularly because the resource is small and the market is not looking for expensive new projects.
“At the same time, this is a very uncertain period in LNG markets,” she said. “New expensive LNG projects all the world are having trouble getting sanctioned and some have been canceled.
“And trade in pipeline gas continues to gain in comparison to LNG trade of gas, which over the last three years has been in moderate decline,” she added.
Like Shaffer, Mor stressed that the export to Egyptian LNG facilities and through a pipeline to Turkey will be the most economically viable export schemes for Israel.
“Nevertheless, those two projects are facing geopolitical challenges and need to be approved by the Egyptian and the Turkish governments, as well as by the Israeli government,” Mor said.