Winners and losers as energy minister halts gas exploration

Energy Minister Karin Elharrar's announcement that her ministry will not award licenses for natural gas exploration in Israel's Economic Zone in 2022 set off a storm. 

Israel's Energy Minister Karine Elharrar waits for the start of a meeting during the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 2, 2021.  (photo credit:  ALBERTO PEZZALI/POOL VIA REUTERS)
Israel's Energy Minister Karine Elharrar waits for the start of a meeting during the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 2, 2021.
(photo credit: ALBERTO PEZZALI/POOL VIA REUTERS)

The announcement by Energy Minister Karin Elharrar yesterday that her ministry will not award licenses for natural gas exploration in Israel's Economic Zone in 2022 set off a storm. 

Her predecessor at the ministry, Yuval Steinitz, rushed to react on Twitter, calling on her to "reconsider" the decision, and claiming that "in the green USA of President Biden they are continuing to explore for natural gas in hundreds of areas on land and offshore, as they are in Canada and in most countries of Western Europe."

The Association of Oil and Gas Exploration Industries in Israel was also quick to react, and pointed to the energy crisis in Europe as an example of the need "to continue exploring for further discoveries of natural gas."

Elharrar responded that it was a matter of "one year only", during which her ministry will devote its attention to the most important need at this time, which is renewable energy. In her announcement, the minister stated that her ministry was forming a new department to deal with renewable energy.

So how dramatic is Elharrar's announcement? Globes takes stock.

 View of the oil refineries of Haifa and the industrial area, on May 5, 2017 (credit: YANIV NADAV/FLASH90) View of the oil refineries of Haifa and the industrial area, on May 5, 2017 (credit: YANIV NADAV/FLASH90)

How is a natural gas exploration license obtained?

Until 2013, private players could explore for natural gas offshore by applying to the Ministry of Energy. The reason for that is that for many years demand for drilling was low, and so the state was in no hurry to regulate the matter or hold tenders. Discoveries like Tamar and Leviathan changed the picture, and from 2012 to 2016 the Ministry of Energy undertook a process at the end of which the rules of the game changed, and the ministry began to run competitive procedures for distributing licenses.

Can anyone take part in the process of obtaining a license to drill for natural gas?

In principle, yes. But there's a big caveat: the award of a maritime exploration license is part of a competitive procedure held by the Ministry of Energy. The first barrier to participation in such a process is proof of professional and financial ability to abide by the work plans set by the ministry. Since this is a field that requires a high degree of professionalism and substantial financial clout, few entities can participate in such a procedure. In fact, only a very small number of players have been given an entry ticket in recent years.

Have license award procedures taken place in the past few years?

Yes. Two tender procedures that started in the previous decade have just ended. In the first, two companies won: an Indian company, which has since announced that it would not proceed, and Energean, which holds the Karish and Tanin reservoirs, and won a permit to drill in three areas. It has already declared that it intends to start drilling in one of these areas. It has a year in which to give notice of its intention to drill in the other two areas, failing which it must return the license.

In the second licensing round, the winners, which include Ratio, have about year in which to give notice that they will apply for a license and commence drilling, or that they will forego the right.

There is also a third process in relation to what is known as Block 72, in the northern part of Israel's Economic Zone. As mentioned, the nature of the industry represents a substantial barrier to entry, and perhaps that is why only two companies bid for a license, Delek/Chevron and Energean. The companies have not yet been informed of any decision; it is expected within the next few months.

Does the minister's decision apply to procedures already underway (bidding rounds 1-3)?

No. The decision relates only to future procedures, so it may very well be that we shall see drillings for natural gas in various areas in 2022 as well, based on licenses awarded in the past.

So what is the practical significance of the minister's announcement that the award of exploration licenses will not be advanced in 2022?

The Energy Ministry has in the past announced a fourth bidding round, although the announcement did not specify which areas it would cover. Following the minister's announcement, this round will be frozen at least until the end of 2022.

If existing bidding rounds are not being halted, why are Steinitz and The Association of Oil and Gas Exploration Industries in Israel criticizing the decision?

The criticism is twofold. First of all, the decision could cause major global companies that have started looking in Israel's direction, and that understand the economic possibilities latent here, to cool off, and focus on other parts of the world, so that the economy could be harmed. Secondly, processes in the energy industry are very long, and any delay puts off the day on which projects will operational. i.e., produce gas in this case.

What other significance does the minister's decision hold?

As part of the decision to focus solely on renewable energy, it was also decided not to deal with the conclusions and recommendations of the Adir 2 committee. This committee was headed by the director general of the ministry in the last four years, Ehud (Udi) Adiri, who recently stepped down. Among other things, the committee recommended increasing the export quota allowed for the gas partnerships that own the rights in the Tamar and Leviathan reservoirs. In the light of the current decision, the quotas will not change. Nevertheless, this is not a blow to the reservoir owners, since they are nowhere near the permitted quotas, so that a year's delay in implementing the recommendations will make no difference as far as they are concerned.