Cyprus ends tender bid to import gas from Israel's Leviathan

Noble Energy, Delek Group representatives in Egypt for export talks

By
February 2, 2015 13:42
Map of Leviathan gas field

Map of Leviathan gas field. (photo credit: REUTERS)

As Cyprus nixed a tender bid to import gas from the Leviathan gas field, the island country may stand to benefit from Israel’s ongoing indecisiveness over the large basin’s future.

The Cypriot Natural Gas Public Company (DEFA) has elected not to extend a proposal regarding the future purchase of natural gas from Israel’s Leviathan reservoir, the basin’s shareholders reported to the Tel Aviv Stock Exchange on Sunday. At the same time, representatives of Noble Energy and the Delek Group – the main partners in both Israel’s Leviathan and Tamar reservoirs, as well as Cyprus’s Aphrodite reservoirs – are in Egypt for talks regarding gas export agreements, industry sources confirmed to The Jerusalem Post on Sunday.

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“At this time, to the best knowledge of the partners, the Cypriot government is examining various options to supply natural gas to the domestic market in Cyprus, in addition to this tender, including the option of supplying natural gas from the Aphrodite reservoir in Block 12 of Cyprus,” the TASE report said.

The Leviathan partners first bid on Cyprus’s natural gas import tender in April 2014 for the supply of 0.7-0.95 b.cu.m. of gas annually through a pipeline from Leviathan. The bidders and the Cypriot government stipulated, however, that a binding agreement would need to be reached by August 21, 2014, and would be subject to financial closings on the Leviathan project and on the pipeline connection, as well as the receipt of regulatory and tax approvals, according to information from the Delek Group.

At the 621-billion cubic meter Leviathan reservoir, about 130 km. west of Haifa, Houston-based Noble Energy owns a 39.66% stake, while Delek Group subsidiaries Delek Drilling and Avner Oil Exploration each hold 22.67% of the reservoir. Ratio Oil Exploration, meanwhile, has a 15% share.

Noble Energy holds 70% of Cyprus’s 100-b.cu.m. Aphrodite reservoir, while the Delek Group owns 30%.

Originally, the partners had planned to develop the reservoirs simultaneously, with Leviathan initially expected to be online already by the end of 2017 or early 2018. Because the Cypriot domestic market demands only about 1 b.cu.m. of natural gas per year, developing the Aphrodite reservoir for the local market would not have been feasible, yet the reservoir is too small to develop alone for export purposes.

Despite the minimal demands of the domestic Cypriot market, the country does urgently need a cheap gas supply, and had been depending on receiving gas from Leviathan by the end of 2017, industry sources told the Post.

However, after Antitrust Authority Commissioner David Gilo announced in December that he would be reconsidering the status of the Delek Group and Noble Energy in the Leviathan basin – and perhaps reevaluate their exemption from “restraint of trade,” or cartel status – the development of the Leviathan reservoir was frozen.

As it would now be impossible for Cyprus to receive gas from Leviathan within their necessary time frame, the country decided not to extend the tender, the industry sources said.

Representatives of the Delek Group and Noble Energy are now in Egypt to meet with representatives of British Gas as well as the Dolphinus Group.

In June, the Leviathan partners signed a letter of intent with the British Gas Group for the 15-year supply of 105 b.cu.m. of natural gas to its empty liquefaction plant in Idku. Worth approximately $30b. in total, such an agreement could generate more than $20b. in income for the state, sources told the Post at the time of the signing.

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.

Liquefaction plants in Egypt have experienced difficulties in carrying out activities as a result of the fact that the Egyptian government has needed to divert gas to the domestic market. As a result, liquefaction plant owners have been seeking other resource options for their facilities.

As a result of the current uncertainty regarding Leviathan’s fate, and due to the fact that the Delek Group  and Noble Energy are also the main shareholders in the Aphrodite reservoir, the partners are providing the British Gas consortium with a Plan B should Leviathan exports not occur on schedule, industry sources told the Post.

The plan stipulates that “if Leviathan is not be developed on schedule, Aphrodite will supply them with the gas they need,” the source said. Such an agreement would also enable the commercial development of Aphrodite, due to the external customer in addition to the small Cypriot domestic market.

Regarding the second meeting in Egypt, with Dolphinus, the parties are convening to discuss another letter of intent, signed several months ago. In October, the partners of the 282-b.cu.m. Tamar reservoir – of which the Delek Group and Noble Energy are also the largest shareholders – signed a letter of intent to sell 2.5 b.cu.m. annually to the Egyptian firm Dolphinus Holding Limited. At the time, the partners said that the gas could begin serving private industrial consumers already in 2015.

The move would revitalize Egypt’s East Mediterranean Gas Company pipeline that for several years carried gas from Egypt to Israel, by reversing the flow of gas through the pipe from Israel to Egypt. In 2008, EMG began supplying Israel with about 40 percent 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 EMG and Israel in April 2012.

“You don’t need to put in any infrastructure, just reverse the flow,” industry sources told the Post. “Then the Egyptian market can be provided with gas on a very tight schedule.”

Adding that the Egyptian government has already given the green light for this arrangement, the sources said they expect to see a full-fledged agreement pan out in the coming months.

While this agreement between the Tamar reservoir partners and Dolphinus may be moving forward, similar such advancements cannot occur at the moment regarding the Leviathan reservoir.

Regarding the Cypriot government’s move to discontinue the Leviathan partnership’s tender bid, Prof. Brenda Shaffer, an expert on energy policy in the University of Haifa’s School of Political Science and a visiting researcher at Georgetown University, stressed that the decision “is an important reminder that Leviathan doesn’t have any binding supply contracts at this point.”

“The Israeli press and politicians often talk about the ‘canceling’ of supply agreements,” Shaffer told the Post on Monday. “But all of the different memoranda of understanding and other related agreements have been non-binding, thus not real contracts. Leviathan has a number of hurdles to pass before the investing companies can sanction the development of the field, and the anti-trust issue is only one of them.”

Because no binding supply contracts have been formulated, producing gas from Leviathan by 2018 would not be realistic, Shaffer argued.

“The decision in Cyprus is not connected just to developments in Israel related to Leviathan, such as the anti-trust challenge,” she continued.

“After the disappointing results in other blocs offshore of Cyprus, they may be starting to understand that at this juncture they will not have a export project that will incentivize the development of the Aphrodite field and therefore need to think of ways to incentivize its development for the domestic market alone – thus not wanting commitments to other gas imports.”


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