What political 'sensitivity'? How Turkey, Cyprus, and Egypt are playing an intense round of tug of war over Israeli gas
Cyprus has asked Israel to agree to allocate one quarter of the gas in the Leviathan reservoir for export via Cyprus. The idea, which was discussed by government officials from Israel and Cyprus, is to dedicate a LNG train at the planned liquefaction facility on the southern part of the island, at an investment of $12 billion. Approval by the Israeli government would open the door to the possibility of a commercial deal between Cyprus and Leviathan’s partners, Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG, and Ratio Oil Exploration (1992) LP (TASE:RATI.L). The deal could total an estimated $12 billion, based on current LNG market prices
Cyprus’ proposal arose in the context of the many options for gas export from Leviathan, which were raised in the wake of the “green light” for exports that the High Court of Justice gave the government last week. The ruling placed decision makers in Israel in a complicated situation - there are many offers, totaling many billions of dollars each, that are entangled with business interests, and occasionally personal interests, of senior politicians. “There are serious doubts in the professional ranks, and for good reason,” a source close to the parties told “Globes.”
Cyprus is dependent upon Leviathan
Significant progress has been made between Israel and Cyprus in recent meetings. Following three years of negotiations to establish a unitization agreement to open joint fields, the agreement is expected to be signed within 6 months. Cyprus’ position is straightforward in comparison to Israel’s considerations. The financial crisis into which the country was thrust does not leave many options. A strategic partnership with Israel is considered the best possible conduit to draw foreign investors to the island, and to deter Turkey from harming Cyprus’ interests.
Cyprus, whose domestic gas consumption is very low, is hoping to become a major natural gas exporter. Time is a critical factor in the export plan in light of the drop in liquid gas prices that is anticipated towards the end of the decade. Cyprus’ government recently announced that they intend to sign an agreement by the end of this year to establish a liquefaction facility with condensers, in which both Delek Group and Noble Energy will be partners. The target date for operation is 2020, and already it seems there will be delays of 18-24 months.
However, the liquefaction project cannot begin without the Israeli gas. At the start of October, Noble announced that the Aphrodite reservoir contains only 100-170 BCM (Billion Cubic Meters) of natural gas. Such a quantity is sufficient to establish a liquefaction facility with only one LNG train - liquefaction facilities around the world have at least two LNG trains. Cyprus, which planned to establish a facility with three LNG trains, is convinced that more fields will be discovered in its waters. Block 12 alone contains, according to reports, at least two more fields, containing an estimated 100 BCM, and the energy majors Total, Eni and Kogas hope to discover additional fields in exploration sites near Block 12. However, in order to get underway without delay, Cyprus’ liquefaction initiative needs available gas, and such gas is currently available only in Israel’s Leviathan. The cost of establishing the land-based liquefaction facility with two LNG trains, with an output of 5 million tons each, is roughly $12 billion. The accepted price that the liquefaction facilities pay for feed gas is $2-2.5/MMBTU. According to a MIT report, ordered by Cyprus’ government, the owners of the liquefaction facility will need to sell the gas for at least $7.25 in order to justify the cost of building it.
The Turkish option beckons
The minimum volume of gas that Cyprus has requested is 7 BCM/year, or 150 BCM in total. This is a little more than 25% of the gas in Leviathan, which is estimated at 550 BCM today, and may grow in the future. Such quantities leave Israel with additional options for gas exports. The most attractive option, economically speaking, is laying a pipeline to Turkey. Such a project, which would cost a mere $3 billion, could deliver a return on the investment within two years, in light of the volume (10 BCM/year) and the prices ($7-9/MMBTU) that were discussed with Turkish companies. The Turkish groups (6 in total) have offered to build transport infrastructure from the reservoir to the Port of Mersin or Jihan in southern Turkey, at their expense.
The problem with the Turkish deal is twofold: the delicate political relationship between Israel and Turkey, and the handling of the negotiations on the parts of the corporate bodies in Turkey. The Turks are treating the matter as though they have all the time in the world, and the deal is a much greater Israeli interest than Turkish. The Kurds of northern Iraq and the Iranians may also compete for the Israeli gas, as the threat of sanctions against them dissipates.
The Turkish option is especially attractive to the Israeli partners in Leviathan - Delek Group (45.33%) and Ratio (15%) - who need the cashflow that the deal would bring to finance their part in bringing Leviathan to the local market, particularly if it is decided that a floating liquefied natural gas facility (FLNG) will be established. The idea of a floating liquefied natural gas facility has largely supplanted the idea of establishing a land-based liquefaction facility, which is considered impractical today. However, the price of a FLNG is still unknown, as it involves very new technology.
Another option that has been pushed forward enthusiastically in recent weeks is selling gas to the international companies that have land-based liquefaction facilities in Egypt. The Egyptian Petroleum Minister responded sharply to Israeli Minister of Infrastructures, Energy and Water Resources Silvan Shalom’s insinuations on the topic, and denied that Egypt is interested in buying Israeli gas. The Egyptian government’s position does not rule out the possibility of the gas being bought by international companies, however, laying a pipeline from Leviathan to the facilities in Egypt will require an agreement between the two countries.