For embattled Israel, a Leviathan Massive gas find could transform economy

The headlines in Israel are focused elsewhere, but the country’s long-term prospects may be determined not in Gaza but in the western Mediterranean waters beyond the Palestinian enclave.

An energy-starved country in a region of petrostates, Israel has an economy and strategic position that could be transformed with the 2010 discovery of a natural gas field off its Mediterranean coast. Dubbed the Leviathan gas field, it is the largest exploratory find in the world in the past decade and, based on increased estimates released a week ago, contains nearly 22 trillion cubic feet of natural gas.

News of the expanded deposit estimate was enough to trigger the biggest one-day rise in the Israeli stock in six months, even with clashes with Hamas in full swing.

“As Israel’s natural gas production increases, some of that will go to increasing domestic consumption and natural gas will likely increase its share of overall energy consumption,” said Alexander Metelitsa, an economist with the Energy Information Administration.

“Some gas will be exported. Israel’s government ruled that only up to 40 percent of production can go to exports, so this will not be a major new source of gas to the global market,” he said.

However the gas is used, Leviathan has radically changed Israel’s energy outlook. Major deals to exploit the find already are taking shape.

Houston-based Noble Energy Inc. has the largest stake in the Leviathan region at 39.66 percent. Israel’s Delek Drilling LP and Avner Oil Exploration LP both have 22.67 percent working interest. Ratio Oil Exploration Ltd. is operating with a 15 percent stake.

“The dramatic increase in Leviathan’s gas reserves gives a wide range of export options and bases Israel’s position as a leading player in the international energy map with gas reserves of 1,000 billion cubic meters,” Delek Drilling CEO Yossi Abu told the Reuters news agency.

Early this year, Israel approved plans for the Leviathan to supply natural gas to the Palestinian Authority. Noble Energy has signed agreements with two Jordanian companies to supply natural gas from the Tamar field for a 15-year period that begins in 2016.

Last month, Noble Energy, with oil interests in places from West Africa to the Gulf of Mexico, announced a nonbinding letter of intent with BG International Ltd. to supply natural gas from the Leviathan field to BG’s natural gas liquefaction facilities in Egypt. An estimated gross sale of 3.75 trillion cubic feet of natural gas is expected over a 15-year period, or 700 million cubic feet per day over that term.

’Making all the right moves’

Other customers are still in talks, Noble Energy Chairman and CEO Chuck Davidson said in a call with analysts discussing the company’s latest earnings report last week.

Expressing optimism about Leviathan’s long-term prospects, Mr. Davidson touched on the increasing Palestinian-Israeli violence in Gaza. He said Noble Energy will continue to provide “an uninterrupted supply of natural gas to Israel.”

“I’m extremely proud of them, and we all hope for a rapid resolution. Our facilities are well-protected, and they remain unaffected,” he said. “However, we do feel that it is appropriate to slightly reduce our estimates for near-term sales volume there due to the situation.”

Analysts say Noble has done well in its early efforts to tap the giant natural gas field in a difficult operating environment. Motley Fool, an online investing community, said this month that Noble Energy is “making all the right moves to secure long-term customers and ensure the project is brought online.”

Although revenue increased by 20 percent, Noble’s position in Leviathan could not be more timely. The company last week reported $192 million in net income in the second quarter, compared with $377 million the previous year.

“We’re in the midst of a multiyear increase in our deliverability based on continued growth and demand in Israel and in various regional markets nearby,” David L. Stover, Noble Energy president and chief operating officer, said in the earnings call. “Our expansion plants between now and 2018 highlight the more than tripling of today’s capacity.”

Other fuels still in the picture

The EIA’s Mr. Metelitsa said Leviathan could radically alter Israel’s energy picture, although its overall profile will remain complicated.

“While Israel will likely become a net natural gas exporter once these fields develop, the country will continue to be a significant net importer of other fuels, including crude oil, coal, and petroleum products such as liquefied petroleum gases,” Mr. Metelitsa said.

The 2000 discovery of the Mari-B field met up to 40 percent of Israel’s natural gas demand, but that declined in 2012 as the field reached depletion, the EIA said.

Commercial production of the Tamar field began last year. With hopes of a floating a project to draw natural gas from the Tamar and Dalit fields, an estimated 3 million tons of natural gas are expected by 2017.

With these fields in production, plus the largest production of natural gas still to come from the Leviathan, the EIA called Israel a “significant exporter of natural gas in the next decade.”

In 2012, Israel consumed 15.4 million short tons of coal to generate electricity. The EIA estimates that the use of coal will decline with the growth of natural gas from the offshore fields and an increase in natural gas-fired generating capacity.

Israel is hoping for the same, pushing for natural gas because of its seemingly never-ending reservoirs and the benefits of eco-friendliness. The Israeli Ministry of National Infrastructures, Energy and Water Resources estimates that the use of natural gas as a primary fuel will stand at 60 percent in 2027 and 68 percent by 2040.

But political and economic factors remain deeply intertwined in Israel as it tries to line up buyers for Leviathan exports. A study by the Institute for National Security Studies, which has ties to Tel Aviv University, said rising tensions between Turkey and Israel in the midst of the Gaza violence could complicate a deal with potentially the largest customer for Leviathan natural gas.