A new player is set to enter Israel’s eastern Mediterranean waters after the Greek firm Energean Oil & Gas signed a $148.5 million deal to purchase the Karish and Tanin gas reservoirs on Tuesday.
Energean will buy the reservoirs from Delek Group subsidiaries Delek Drilling and Avner Oil Exploration, as well as pay the Israeli companies royalties from future sales of gas and condensate.
The sale of Karish and Tanin is a first concrete step toward advancing Israel’s gas industry, following the recent approval of the contentious “gas outline” that rattled the sector for all of 2015.
“We are very pleased to gain a foothold in Israel, a strategic market for us, and to sign a deal that will lead to the development of Karish and Tanin,” said Mathias Rigas, CEO and chairman of Energean.
Located in the north of Israel’s exclusive economic zone, the two reservoirs jointly contain about 58.7 billion cubic meters of gas and 14.3 million barrels of condensate in contingent resources, the Greek and Israeli firms said in a joint statement. In addition to these quantities are prospective resources with high chances of success, including approximately 25.6b. cu.m. of gas and an additional 4.3m. barrels of condensate, according to the companies.
Contingent resources are estimates of hydrocarbons that have been discovered but not yet reached commercial development, while prospective resources are potentially recoverable estimates that have yet to be discovered.
The sale of Karish and Tanin was a requirement of the gas outline, which all but froze Israel’s hydrocarbons sector from December 2014 through the beginning of this year. The goal of the deal was to settle disagreements between the country’s developers and the government, following a dispute with the antitrust commissioner.
Prime Minister Benjamin Netanyahu signed off on the outline in December 2015, after a year’s worth of revisions, Knesset debates and policy changes. Yet in March, the High Court of Justice rejected it due to a stability clause that would have barred regulatory changes for a 10-year period. After further revisions that made this clause more flexible, the cabinet approved a new version of the outline at the end of May.
A far-less contentious part of the outline, however, was the mandatory sale of Karish and Tanin within 14 months of the deal’s initial December activation.
Houston-based Noble Energy, which had originally owned a 47-percent stake in the reservoirs, sold its rights to Delek and Avner in November 2015, so that the Delek Group subsidiaries would have a 100% hold over the assets prior to their sale to an outside party.
Noble and the Delek firms are currently the dominant shareholders in Israel’s eastern Mediterranean gas industry – a monopolistic landscape that the natural gas outline was aiming to break down.
“We welcome Energean’s joining the Israeli oil and gas sector,” said Yossi Abu, CEO of Delek Drilling and Avner Oil Exploration.
“In recent months, we have examined several offers, and I believe that from among all of the possibilities on the table, the present deal provides the best guarantee of the development of Karish-Tanin already in the coming years,” Abu said.
“We are determined to continue promoting the development of the Leviathan reservoir and the expansion of Tamar, in accordance with the partnership’s goals,” Abu added, referring to Israel’s two largest gas reservoirs.
The 282b. cu.m. Tamar reservoir has been providing natural gas to Israel since March 2013, while the 621b. cu.m. Leviathan has yet to be developed. As part of the gas outline, the Delek Group subsidiaries will need to sell their shares of Tamar within six years, while Noble will need to dilute its current 36% share to 25% within the same time period.
As far as Karish and Tanin are concerned, Rigas, the Energean CEO, expressed his company’s commitment to the development of the reservoirs. The firm’s 35 years of experience in offshore oil and gas, and its ability to raise funds in challenging market conditions, would “guarantee that the development of the reservoirs for the benefit of the Israeli market will be accomplished quickly,” he stressed.
“Within six months from the signing of the agreement, Energean will submit to the government a development plan for the reservoirs that will enable the promotion of the project, which plays a significant geopolitical role in the creation of the regional ‘energy triangle’ shaped by Cyprus, Greece and Israel,” Rigas said.
Yehonatan Shohat, a research analyst for Leader Capital Markets, described the sale as a “good deal for the Delek partners,” particularly due to the quick sale and promised royalties. In addition, he said the entry of a new foreign player into the market would make it increasingly difficult for the country’s regulators to continue to make changes to the gas industry.
Although Karish and Tanin are sizable assets for Energean, Shohat nevertheless emphasized that at the moment, prior to the development of the much larger Leviathan reservoir, the company would find it difficult to offer competitive gas prices and acquire customers on a significant scale.
“It is unlikely that the development of these reservoirs will precede the development of Leviathan and pose a significant competition for Tamar and Leviathan,” he explained.
Unlike Shohat, Miki Korner, a private energy consultant and former chief economist for the Natural Gas Authority, said he felt the deal would generate competition. He emphasized, however, that this would not “happen tomorrow” or “out of the blue.”
A competitive environment would likely materialize only after about three years, once development of the reservoirs has occurred, Korner told The Jerusalem Post
on Wednesday night. But ultimately, he explained, the deal could lead to many positives, including redundancy, increased infrastructure and another player in the market.
“It’s a happy event. It’s a good event,” Korner told the Post
. “Let’s hope it will hold. Let’s hope that the government will help these fields to be developed. I think it will be good for everybody.”
For energy consultant Dr. Amit Mor, although the sale of the fields to Energean is a critical step toward bringing new players into the Israeli gas market, the company's entrance is also a reminder of the difficulties that this sector still faces.
“Now there's a big challenge to the Israeli government to take the necessary steps to ensure that there is a sufficient domestic market for both the gas from the Leviathan fields and the Karish and Tanin fields to enable the financing of those projects,” said Mor, CEO of the Eco Energy Financial and Strategic Consulting firm and a lecturer at the Interdisciplinary Center Herzliya.
The independent development of both the Leviathan and Karish and Tanin fields, for the provision of gas to both the Israeli and export markets, is critical to national security considerations, he told the Post, also on Wednesday night.
“Now at peak demand hours, up to 70% of the electricity in the country is produced by natural gas from one field, the Tamar field, which is subject to possible technical faults or needless to say, strategic threats,” Mor said.
Despite the fact that gas is only coming to Israel from one field, entering the domestic market as a new player could be difficult, due to the ample supply already coming from that field. Nevertheless, with some government involvement, Mor said he felt that this problem could be surmountable.
"Government intervention can be done via direct financing infrastructure or by supplying a safety net for natural gas purchase from those fields,” he said. “Otherwise, the increase in demand in the saturated domestic market could not provide the initial demand required for bond financing for both projects."
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