Striking it rich

The discovery of natural gas offshore is a defining moment for Israel

Tamar (photo credit: Courtesy)
(photo credit: Courtesy)
Golda Meir once remarked that “Moses dragged us for 40 years through the desert to bring us to the one place in the Middle East where there was no oil.” Even as Arab countries discovered massive oil fields and thereby catapulted themselves onto the world stage, Israel was figuring out how to make a dry, dusty, mostly barren country bloom. We succeeded, mostly through back-breaking labor and bright minds.
Yet the hope of discovering oil here has never completely gone away. While nearly 500 drillings on land produced little usable oil, geological surveys indicated that there were potentially large natural gas reserves off the coast.
Despite 60 years of attempts, the first commercial natural gas find was a mere 11 years ago.
Part of the problem was that the Arab-Israeli conflict hampered efforts at development, Delek Energy president and CEO Gideon Tadmor told The Jerusalem Post. Companies could either work with Israel or work with the Arab countries; and since the potential finds were so much greater in the Arab world, an international oil company with ultra-deep water drilling experience was hard to lure here.
“We had been looking for years for a partner with the right experience. We had some leads in Houston, Texas, and I had sent an advance man there for a few months [in 1998] to lay the groundwork. Finally, he had narrowed the field to just a few choices, so I decided to fly over with my lawyer [to hopefully sign a deal],” Tadmor said.
That trip was to be a fateful one.
In Texas, Tadmor inked a deal with Noble Energy, an international oil company with ultra-deep water drilling expertise. Noble and Delek are the major partners in all of the country’s gas finds – from Mari-B and Noa to Tamar, Dalit and now Leviathan.
The world began appreciating the value of natural gas only about 20 years ago. Often located with oil reserves, it was even burned off before a use was found for it, Alon Natural Gas Exploration general manager Eli Misgav said. However, it is fast catching up to oil as a major energy source.
“Some 85 million barrels of oil are used a day around the world. The gas and the oil are usually found together, but most of the world didn’t know how to utilize it. As soon as they figured it out, they moved to use it - 30,000 billion cubic meters, or the equivalent of 70 million barrels of oil a day, are now in use,” he said.
Finding such a significant natural resource as gas has tremendous implications for this country’s economy and society. It would not be overstating matters to call the gas finds – and potential future finds – one of the top five events in Israel’s history.
While Israel’s annual use is about five billion cu.m. right now, in a few years it will likely nearly triple and replace two million to three million barrels of oil, Misgav predicts.
Finding natural gas has already affected the country. Electricity production has phased out fuel oil and replaced it with natural gas. In the years to come, half of electricity will be produced from natural gas. As a result, the Israel Electric Corporation has already saved some NIS 55 billion since 2004.
Water prices are also affected as electricity becomes cheaper for pumping stations and desalination plants.
Second, natural gas is significantly cleaner to use than fuel oil or coal.
While coal will still make up a basic energy source in the years to come, fuel oil purchases for electricity production have been drastically reduced and will be eliminated altogether in the relatively near future. That represents a significant pollution reduction, especially in heavily industrial areas such as Haifa Port.
Having a large domestic energy source also provides tremendous energy security. Prior to the Israeli discoveries, the sole supplier of natural gas was Egypt. Given the vicissitudes of the relationship, having to rely on it for fuel for a significant amount of electricity production was a tricky proposition.
In addition to the macroeconomic implications, the gas finds also have geopolitical ones. Tamar and Leviathan, once tapped, will turn this country into a natural gas exporter.
Even should annual domestic natural gas use triple, Tamar would still be able to meet that demand for at least the next two decades. Leviathan, twice as big as Tamar, therefore would be largely given over to export. There are markets in Europe and even larger ones in the Far East, National Infrastructures Minister Uzi Landau pointed out to the Post.
Given the geopolitical power Arab countries have reaped with their oil sales, the natural gas finds, while nowhere near the same magnitude, will most likely vastly improve our global standing. While environmentalists champion the switch to renewable energies, the reality is that the world will still be running on fossil fuels for the foreseeable future.
The likelihood is high that Tamar and Leviathan represent only a portion of the natural gas below the eastern Mediterranean. Looking ahead, the US Geological Survey reported in early 2010 that there was theoretically potential for 3.4 trillion cu.m. of gas there and 1.7 billion barrels of recoverable oil. Two-thirds of the gas would be in Israel’s economic waters, according to the final report of the Sheshinski Committee. Such numbers represent staggering amounts of gas. Tamar holds 240 billion cu.m. and Leviathan 453 billion.
While not easy to reach, since it is often five kilometers below the surface of the sea, it is relatively close to shore. Although the infrastructure investment for Tamar alone is estimated at $3 billion, the potential profits reach the hundreds of billions of dollars. According to estimates, the gas finds could be worth as much as $500 billion.
Four decades after Golda Meir, her words no longer hold true.
THE COUNTRY’S first oil well was drilled by the British during the Mandate period in 1947. However, the UN partition plan overtook exploration efforts, and when Israel deepened the well at the Heletz site south of Ashkelon in 1955, it discovered only a small quantity of oil. It remains the largest onshore find thus far, with 17.5 million barrels produced, mainly between 1955 and 1967. Other gas and oil fields were discovered in the 1950s, but none were commercially viable.
For the next several decades, exploration efforts yielded little, although nearly 500 wells were drilled onshore and some 60 at sea.
Some fields were found in Sinai, but exploration was discontinued with the peace treaty and the Sinai’s return to Egypt.
In 1999, Delek and Noble discovered the first commercial gas field off the coast of Ashdod. The country suddenly had a domestic energy source aside from the sun.
Noa is estimated to hold 7.6 billion cu.m. and has yet to be developed; Mari-B held 28 billion. While modest, it nevertheless sparked a transition to natural gas as a source of electricity in place of oil.
Noble and a number of Delek subsidiaries formed the Yam Tethys consortium and began supplying primarily the Israel Electric Corporation with natural gas in 2004. In 2008, after protracted negotiations, an Egyptian- Israeli conglomerate – EMG – began providing Israel with gas as well.
Encouraged by the Noa and Mari-B finds, Delek and Noble continued to search offshore. In January 2009, the Tamar partnership announced it had discovered a very large gas field 90 km.
off the coast of Haifa at a depth of some 4,900 meters, or 1,680 meters under the sea floor.
The Tamar field was the biggest discovery of 2009 and one of the top 10 discoveries of the decade. A smaller field, Dalit, was discovered a while later.
In December 2010, the test results of the exploratory drilling at Leviathan revealed the world’s largest gas find of the decade. Leviathan is located some 130 kilometers off Haifa and 47 km.
southwest of Tamar. The gas was found 5,170 meters beneath the sea, or 1,645 meters under the sea floor. Drilling will continue down to 7,200 meters to examine two more possible layers that may have natural gas or oil, though the chances are relatively slim.
In late June, the Israel Land Development Co. Energy Ltd., holders of the exploration licenses to the new offshore fields Sara and Myra, also announced that a seismic survey showed they may hold another 6.5 trillion cubic feet of natural gas.
Still, the natural gas finds may be small in comparison to estimates of as much as a half trillion barrels of oil in the form of oil shale, that has been estimated to be lying under parts of Israel’s Negev and Galilee regions and just waiting for the proper technology to extract it. Extracting liquid petroleum from rock-hard oil shale is not easy, but some experts claim those fossil fuel deposits may rival Saudi Arabia’s oil reserves.
COGNIZANT OF the potential windfall for government revenues from the new gas finds, Finance Minister Yuval Steinitz hastened to appoint a committee to reassess the state’s tax policy for natural resource exploration and drilling.
Not content with a government take of about 30 percent, in April 2010 he appointed an expert committee, headed by Hebrew University economist Eitan Sheshinski, to examine the issue from an economic perspective. The government take is the total amount of profit, taxes and royalties the exploration companies must pay the state.
All natural resources are considered state property by Israeli law, and companies must have licenses and leases to produce natural gas or oil.
A government take of 30% is one of the lowest rates in the world. The average in the OECD is about 50%; in other places, it can reach as high as 75% and in some places be almost totally owned by the state.
The committee issued two sets of recommendations – an interim set in November 2010 and a final set in January 2011. Both times, the committee recommended significant changes to the tax regime by increasing the government take and reducing the exploration companies’ deductibles.
The final recommendations, however, were far more conciliatory to the gas companies.
The state generates revenues from gas finds in a number of ways: royalties at 12.5%, which will likely remain unchanged, corporate income tax, and a tax on profits. A tax on profits means that once the companies have recouped their investment, the profits would be split between the investors and the state.
The final report of the Sheshinski Committee created a mechanism that increased the government take to 52%- 62%, a near doubling of the government take. The committee also recommended that the tax regime be applied to all current fields, not just future ones.
Prime Minister Binyamin Netanyahu decided in January to adopt the Sheshinski Committee recommendations in their entirety.
Israeli social NGOs had been lobbying the government hard to create a fund to finance education, environment and social welfare programs. But the high government take for security and social needs did not sit well with the gas companies or Landau.
Delek’s Tadmor told the Post that the “committee had been born in sin.” He pointed out that its original mandate ordered it to develop recommendations solely for future finds and not retroactive to existing ones. They accused the government of discriminating against local gas in favor of imported gas.
Tadmor and his co-investors are furious that the recommendations include Tamar retroactively. At present, no infrastructure has been built at Tamar. Estimated at $3 billion, it will become the largest infrastructure project in the country. With those kinds of costs, Tadmor and his colleagues require heavy financing from the banks.
In March, by a sweeping majority of 78-2, the Knesset approved the Sheshinski Law, increasing state benefits from natural-gas and oil resources.
The gas industry in Israel is still in its infancy, but the future is looking brighter for the gas and oil exploration and production companies, as well as the Israeli public. •