Israel's Natural Gas Sector - Opportunities, Challenges and Strategic Outlook
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Israel’s Natural Gas Sector
Opportunities, Challenges and Strategic Outlook
Executive Summary..................................2
Israel’s Natural Gas Landscape................2
National Energy Policy.............................3
Regulatory Environment..........................4
Looking Forward.......................................5
A ccording to a 2010 United States Geological
Survey (USGS) assessment, the Levantine Basin
in the Eastern Mediterranean contains approximately
3,455 billion cubic meters (bcm) of natural gas.
Estimates regarding the full potential of Israel’s
gas reserves range from 1,400 to 2,500 bcm — of
which 800 bcm have already been discovered, with a
current market value of $240 billion.
These reserves, if recoverable and commercially
viable, will be an economic game-changer with
immense strategic implications for Israel. Not only will
they provide the state with billions of dollars in tax
revenue and generate new business opportunities
across multiple sectors, but they will also provide
the country with a deeply needed level of energy
autonomy and geopolitical influence within the region.
Israel was unprepared for the breadth of these
discoveries and has rapidly been working to establish
a regulatory framework that would support resource
development in a responsible and sustainable
manner. The country is actively seeking out partners
to assist in achieving these goals, presenting an
increasingly attractive business environment. Yet to
leverage the opportunities expected to arise over
the next five to 10 years, international companies
would benefit from a deeper understanding of the
interests and concerns affecting the development of
Israel’s natural gas market. >>
1
EXECUTIVE SUMMARY
• Israel is poised to capitalize on massive natural gas • The recent discoveries present significant opportunities
finds in the Eastern Mediterranean that will make the for companies operating across all streams of the
country energy self-sufficient for several decades, and natural gas economy, including in the development,
a likely energy exporter. construction and operation of resource extraction
• A current energy shortage, due to a halt of natural operations, pipelines, LNG plants and storage facilities.
gas imports from Egypt and diminishing production • Government analysts forecast that the majority
from existing reserves, has created a pressing need for of domestic gas consumption will be slated for
Israel to rapidly expand its energy infrastructure and power-generation purposes, although projections
domestic energy production. Natural gas from recently also indicate increased usage in the petrochemical
discovered fields is scheduled to be connected to the industry and the transportation sector. With stable
grid in mid-2013 and exported by 2016-2017. prices, ample supply and limited competition, these
• Israel is in the process of constructing a sectors could present lucrative opportunities for firms
comprehensive regulatory framework for the operating in these spaces.
development of its natural gas reserves, which aims
to provide investors with clear policies concerning the
country’s natural gas industry.
Israel’s Natural Gas Landscape
A decade ago, the Israeli natural gas market was field, which is estimated to contain 246 bcm. According
virtually non-existent. That changed once the Yam to current consumption rates, Tamar alone will have
Tethys reserves went online in 2003 and a natural gas enough natural gas to meet Israel’s domestic demand
import agreement with Egypt was signed in 2005. for the next two to three decades.
By 2011, the Israel market was consuming 6.7 bcm
of natural gas a year — a number which is projected However, Israel’s most significant find has been the
to grow to 25.4 bcm a year by 2040. This anticipated Leviathan field. Discovered in December 2010, and
increase is largely due to Israel’s newfound natural gas housing an estimated 480 bcm, the Leviathan reserve is
reserves in the Eastern Mediterranean. valued at as much as $90 billion. While it is not expected
to go online until 2016-2017, these reserves will change
In 2009, Noble Energy, Delek Group, and a consortium Israel’s status to that of an energy exporter.
of other Israeli companies discovered the Tamar gas
Israel’s Largest Natural Gas Reserves
Reserve Size Estimate1 Partners2
Delek Group (45%)
Leviathan 480 bcm 2c Noble Energy (40%)
Ratio Oil (15%)
Noble Energy (36%)
Delek Group (32%)
Tamar 246 bcm 2p
Isramco (29%)
Dor Gas (4%)
17 bcm (2c) Delek Group (53%)
Tanin 31 bcm
14 bcm (best estimate) Noble Energy (47%)
Delek Group (53%)
Mari B 30 bcm 1p
Noble Energy (47%)
Isramco (60%)
Shimshon 15.6 bcm 2c
ATP Oil & Gas (40%)
Noble Energy (36%)
Delek Group (32%)
Dalit 14 bcm 2c
Isramco (29%)
Dor Gas (4%)
Delek Group (45%)
Dolphin 2.3 bcm 2c Noble Energy (40%)
Ratio Oil (15%)
Delek Group (53%)
Noa 1.3 bcm 1p
Noble Energy (47%)
Delek Group (53%)
Pinnacles 1.3 bcm 1p
Noble Energy (47%)
1
The SPRE-PRMS uses three uncertainty categories, or scenarios, to identify estimates of recoverable resources: reserve scenarios are categorized as proved (1P), proved + probable (2P) and proved +
probable + possible (3P); contingent resources are categorized as 1C, 2C and 3C; and prospective reserves are categorized as low estimate, best estimate and high estimate.
2
Percentages have been rounded. Totals may not add up to 100%.
2NatIONAL ENERGY POLICY
Cheaper than oil and cleaner than coal, Israel is openly upon natural gas. In summer 2012, Israel had a peak
embracing the economic and environmental benefits of demand of 12,370 megawatts (MW) but a power
natural gas. Since 2006, consumption in Israel has grown production capacity of just 12,800 MW. The country
by more than 300 percent. Recent events have further was operating with just a 2 percent to 3 percent reserve
deepened Israel’s commitment to natural gas. Regional margin, which resulted in sporadic brownouts across
unrest and a domestic energy crisis have underscored the country.
the country’s need for energy security — a theme
underlying much of the decision-making concerning While the state has tried to provide relief by rapidly
national energy policy. bringing smaller reserves online, arranging for the
import of liquid natural gas, constructing new power
The 2005 import agreement with Egypt was a major plants and subsidizing renewable energy, a permanent
stepping stone in the growth of Israel’s natural gas industry. fix will not materialize until there is additional natural
According to the agreement, Egypt would provide Israel gas production. As the below chart from the Ministry
with 1.7 bcm of natural gas per annum, which would be of Energy shows, the government has pegged natural
imported via a pipeline operated by the jointly owned East gas to play an increasingly significant role within Israel’s
Mediterranean Gas Company (EMG). By 2010, Egypt was power generation mix.
supplying Israel with 43 percent of its natural gas needs.
The cancelled gas accord and the susceptibility of the
However, in the wake of the Arab Spring, the EMG EMG pipeline to attack has reinforced the perception
pipeline was sabotaged more than a dozen times, making within Israel that the country is an “island” within an
the flow of gas erratic. In March 2012, the Egyptian unstable region, and, as such, must look to control
government cancelled the agreement, bringing imports its energy production capacity and critical energy
to a grinding halt. infrastructure. Therefore, the primary driver behind
the expansion of Israel’s natural gas market is, and will
The result of this shortage has been an energy crisis, as continue to be, energy security — both the security of
40 percent of Israel’s power generation capacity relied infrastructure and security of supply.
Israel NG Demand Forecast, no Coal Conversion, 10% RN by 2030
Source: Ministry of Energy website: http://energy.gov.il/English/Subjects/Natural%20Gas/Pages/GxmsMniNGEconomy.aspx
3REGULATORY ENVIRONMENT
Natural Gas Exports • Increasing the number and capacity of distribution
Nowhere are the considerations of energy security more lines connecting IPPs and other industrial plants to the
apparent than when discussing the development of national distribution system.
Israel’s natural gas export policy. Indeed, much of the
debate surrounding this issue is about how to implement Not only will these steps ensure security of supply, but the
policies that balance the country’s long-term energy proposed expansions will also bolster industry by enabling
security with the need to establish concrete export access to greater volumes of natural gas. This would be
quotas demanded by investors. critical for growth in the petrochemical sector, which uses
natural gas as a basic feedstock, as well as the transportation
sector, which would require a robust supporting infrastructure.
Existing and Proposed Expansion
of Israeli Natural Gas Pipelines
Liquid Natural Gas
To capitalize on its natural gas exports, Israel will most
likely look to Europe or Asia, where natural gas prices can
reach $12 per mBtu and $16 per mBtu, respectively. That is
compared to the local market, where the baseline price is
closer to $5.50 per mBtu.
Pipelines can only transfer natural gas about 4,800 km,
which means that to access distant markets Israel will need
to facilitate the construction of a liquid natural gas (LNG)
plant. Yet the construction of an LNG plant will require
addressing the following points:
• Regulatory approval. Several proposals for LNG import
facilities were already rejected due to environmental
considerations and nimbyism. Similar obstacles can be
expected with the development of an LNG export facility.
• Securing financing. Massive amounts of initial capital
Source: The Rand Corporation’s Report “Natural Gas and Israel’s are required to build the plant, with costs typically
Energy Future” Page 30 http://www.rand.org/content/dam/rand/pubs/
monographs/2009/RAND_MG927.english.pdf
above $5 billion.
• Strategic partners. Israel’s dearth of experience in this
field means that it will need to partner with international
To develop this policy, the Israeli government mandated firms with expertise in the construction and operation of
the creation of an inter-ministerial committee, which is an LNG plant.
being headed by the director general of the Ministry of
Water and Energy, Shaul Tzemach. In August 2012, the These challenges, however, are not insurmountable.
Tzemach Committee released a final report, which issued Indeed, two state-owned enterprises already submitted
the following recommendations: a joint proposal in March for the construction of an LNG
• Allow up to 50 percent of reserves greater than 200 export facility in the southern port city of Eilat. The cost
bcm to be exported. of the plant was estimated at $6 billion. The facility would
• Allow up to 60 percent of reserves between 100-200 require 7 bcm of natural gas feedstock a year, would
bcm to be exported. produce 5 million tons per annum (mtpa) of LNG, and fixed
• Allow up to 75 percent of reserves between 25-100 costs were estimated at $3.20 per mBtu — numbers that
bcm to be exported. largely fall in line with industry standards. The company
• No limitation on exports for reserves smaller than 25 bcm. projected a 10 percent return on investment, using a
conservative pricing structure of $8–$12 per mBtu in Asia.
The committee also recommended that the country
expand its natural gas infrastructure, including: THE ECONOMICS OF LNG
• Constructing additional sea-to-shore inlets, natural Cost of facility: Cost of LNG transport tanker:
gas intake and handling facilities. ~$1000 per ton of LNG exported $200 million
• Constructing strategic reservoirs and storage units.
Cost of liquefaction, 1 ton per annum (mtpa) of LNG
• Connecting all offshore reserves to the national transport and regasification: production requires 1.38 bcm
distribution system. $4 to $7 per mBtu of natural gas per year
4LOOKING FORWARD
Israel’s discovery of these massive reserves, coupled Lastly, it will be important to remember that Israel’s
with a growing domestic demand for natural gas and the national energy policy will be heavily informed by its
rapid development of a policy framework, has signaled a volatile history with energy imports and geopolitical
number of approaching business opportunities: outlook. These considerations can come to bear on the
• Upstream: Firms with expertise in the extraction, development of Israel natural gas economy in a few ways:
transportation and sale of natural gas to both foreign • Domestic reserves. Israel will move to ensure
and domestic markets. that sufficient reserves are maintained for the
• Midstream: Firms capable of aiding in the domestic market. While final quotas have not yet
development, construction and operation of an LNG been decided, it is likely that Israel will maintain
plant, processing units and the expansion of the a minimum of 25 years of natural gas reserves, or
country’s gas-supporting and export infrastructure, between 450–500 bcm.
including pipelines and storage facilities; companies • Israeli control. Israel will be reluctant to allow
with the expertise to convert existing power stations key energy infrastructure, such as a liquid natural
to natural-gas compatible or build new power stations; gas (LNG) plant, to be constructed outside of its
companies with expertise in pollution controls; territory. While there have been discussions about
companies capable of developing Israel’s gas-to-liquid constructing a joint LNG plant in Cyprus, it is unlikely
(GTL) industry. that Jerusalem would allow the control of such critical
• Downstream: Petrochemical companies interested in infrastructure to be ceded to an outside party. This
entering the local industry to take advantage of low- also makes the option of a floating LNG plant (FLNG),
end natural gas rates and ample supply; companies which is more susceptible to attack, far less likely.
capable of introducing natural gas vehicles and the
supporting infrastructure to the Israel market.
The country’s current energy crisis and limited
experience with resource development has also led
to a number of realizations that are fostering a more
favorable business environment:
• It will need help. As a country with historically little
petroleum resources, Israel has little expertise in
natural gas development — this is especially true with
regards to deep-water extraction, which is decidedly
more challenging. To fully develop its natural gas
potential, Israel will need assistance and investment
from top-tier foreign companies, especially at the
up- and mid-stream stages.
• It will need to export. With growing but limited
domestic demand, Israel is looking to authorize
natural gas exports, providing financial incentives for
foreign investors and developers. The creation of an
export market — with limited competition — presents a
unique and lucrative opportunity.
• It will need to develop a balanced energy policy.
Israel will have to balance the need for export quotas
with a growing demand for natural gas in the domestic
market. Natural gas is slated to play an increasingly
important role in the country’s power generation
sector, and will also be diverted for use in the country’s
petrochemical and transportation sectors.
5aBOUT APCO
APCO is a global communications, stakeholder • Tracking market developments. APCO is able to
engagement, and business strategy firm with more closely monitor developments in the natural gas
than 600 consultants located in more than 30 locations economy, alerting companies to any changes and
worldwide. We provide a full range of integrated trends that could impact their business interests.
services across multiple industries, with clients • Stakeholder engagement. APCO builds
that include large multinational companies, trade relationships for its clients in key circles of influence.
associations, governments, NGOs, and educational Our energy clients have met and partnered with the
institutions. Our staff includes former elected prime minister’s office, heads of NGOs, leaders in
politicians, government officials, political advisers and academia, and C-Suite executive in industry. We have
seasoned business advisers. a broad and constantly growing network within the
local market that can be put to work for you.
APCO’s Tel Aviv office has a comprehensive and
incisive understanding of the most pressing energy • Issue and regulatory management. APCO assists
issues currently dominating policy discussions in Israeli its clients to understand the regulatory environment
decision-making and opinion circles. With several and engage regulators as needed. Our inside ability
energy sector clients, APCO Tel Aviv is well placed to accurately track, analyze and engage at the earliest
to provide extensive stakeholder engagement and stages of regulatory development allows clients to
media outreach support. The office’s efforts have be well prepared and address opportunities and
successfully garnered nationwide media attention on challenges as they arise.
behalf of its clients, helped raise public awareness • Media relations. APCO has long-standing relationships
around key sector issues, and positively influenced the with all of Israel’s leading energy and environment
development of national energy policy. It has also led journalists. Experience with both local and international
to many durable relationships with key stakeholders in media has given our team a strong background in
the Israel energy market. branding, positioning, as well as crisis management.
• Communications strategy development.
Through direct advocacy, relationship building, coalition
Accounting for local issues and trends is critical to
building, landscape analysis and strategic counsel,
the construction of a successful communication
APCO helps its energy sector clients convey their
strategy. APCO has the deep market knowledge and
messages to elected leaders and government officials.
experience to help craft a strong and unique message
that will promote our clients’ goals.
Some of the main services we can offer companies
looking to enter the Israel market are: • Thought leadership. Creating a durable local presence
• Identifying business opportunities. Long-standing is important, especially when looking to achieve or
relationships with key officials and an intimate maintain market influence. APCO can help build this
understanding of the local business environment foundation by developing tailored content, featured
enable APCO to identify new opportunities ahead on multiple media platforms, that engages a range of
of the curve. audiences on issues of importance to your company.
For more information on APCO Worldwide in Tel Aviv please contact:
Roi Feder
managing director, Tel Aviv
APCO Worldwide
Bet Zamir
22a Raoul Wallenberg Street
Ramat Hahayal 69719
Israel
Phone: +972.3.766.2600
rfeder@apcoworldwide.com
www.apcoworldwide.com
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