Cabinet approves plan to switch from oil to gas for transport
The government wants to use compressed natural gas (CNG) instead of gasoline in public transport.
The cabinet today approved a plan to encourage the switch from oil to domestically produced compressed natural gas (CNG) for transportation. The plan calls for an initial use of 15% methanol in gasoline, use of CNG and electric engines by buses, the import of hybrid engine motor vehicles, and the extensive use of mass transit. The plan sets ambitious targets: cut the use of oil for transportation by 30% by 2020 and by 60% by 2025, compared with current projected oil consumption based on business as usual.
Switching to could cut the price of fuel for motor vehicles by at least 25%, Eyal Rosner, the head of the Administration to Reduce Dependence on Oil for Transportation at the Prime Minister's Office told "Globes", last week.
Rosner said that the administration estimates that 80 billion cubic feet (BCM) of gas should be set aside for domestic use through 2040, double the amount mentioned by the Committee for Reviewing Government Policy on the Natural Gas Economy report (the Tzemach Committee). The higher figure would reduce the amount of natural gas available for export by a further 40 BCM.
Gas exports are already under review after a series disappointing wells, which cut 300 BCM from previous estimates of Israel's gas reserves. Asked about this, Rosner replied, "80 or even 100 BCM amounts to just 10% of Israel's natural gas reserves, so we’re not talking about a big number, especially since we do not rule out imports of some of the amount needed."
To achieve the targets, the committee recommends a series of measures intended to lower the cost of fuel for transportation, develop Israel's energy and technology sectors, and improve the environment. The cabinet will order the Ministry of Energy and Ministry of Transport to review instituting a standard of 15% methanol in the first stage, and to gradually raise the standard to 30% and 85%. Methanol can be produced from natural gas and a 15% mix with gasoline does not require the redesign of engines.
Another key recommendation is to encourage the switch to CNG by providing incentives to build a nationwide CNG refueling network. The committee hopes that it will be possible to begin refueling vehicles with CNG by the end of 2014. Rosner says that the cost of Israeli natural gas is currently $6 per million British Thermal Units (mmBTU), almost two-thirds less than the price of oil of $16 per mmBTU. Government experts found that, even after processing, CNG is 25% cheaper than gasoline.
Rosner says that CNG would cost NIS 5.50 per liter, compared with the current price of gasoline of NIS 7.52 per liter, assuming that CNG has the same excise as gasoline. Given, however, that the government intends to levy a lower excise on CNG to encourage its use because it is cleaner than gasoline, the difference could be greater. It is important not a caveat - the cost of converting engines from gasoline to CNG, which is still too high to justify the conversion for individuals, which means that the main beneficiaries would be trucks, buses, and other heavy vehicle users.
The plan which the cabinet will approve, follows on the national plan to develop alternative fuels approved by the government in February 2010. The idea behind that plan was for Israel to lead the development of alternative fuel technologies for transportation. Oil currently is the source of over 90% of fuel for vehicles on the land, sea, and air worldwide, and the finding of alternative fuels would break the OPEC oil cartel, which is dominated by Saudi Arabia, Iran, and Venezuela, and end the world's dependence on Arab oil.
"During the work, we discovered that there is definitely room for a plan for Israel's transportation sector," said Rosner. "We're talking about a plan which will generate growth through the construction of heavy industry for the production of alternative fuels, such as methanol, and through the encouragement of initiatives to develop Israeli technologies which will lower the production costs of alternative fuels and make them more available."
Rosner added, "Implementation of the plan does not require money, but will save the economy costs and improve the environment."
"Globes": Wouldn’t this affect oil refineries?
Rosner: We believe that oil refineries will play a key role in these processes. No one has greater ability to develop methanol or gas to liquids (GTL) than oil refineries."
Published by Globes, Israel business news on January 13th 2013
Ratio Oil's chairman sold shares for almost NIS 28 million in an off-floor transaction.
Ratio Oil Exploration (1992) LP (TASE:RATI.L) chairman Yigal Landau sold shares in the company for NIS 27.7 million in an off-floor transaction, the company notified the Tel Aviv Stock Exchange (TASE) today.
A source close to the deal said that Landau sold the shares after Ratio received an offer from a large investment institution, partly because Ratio's controlling shareholders injected NIS 8 million into the company in the last offering, and would have to invest NIS 25 million to exercise options in two series of warrants which mature in the coming months.
Ratio owns 15% of the rights to the Leviathan natural gas field, and will own 10% after the farm-out to Australia's Woodside Petroleum Ltd. (ASX: WPL). Ratio's share price has risen 48% in the past six months.
Landau sold 80 million Ratio shares at NIS 0.347 per share, compared with Thursday's closing price of NIS 0.354. Following the sale, he owns 41.2 million shares in Ratio, giving him a stake of 0.55%, after selling 66% of his holding.
Yigal Landau's father, Yeshayahu, also sold four million shares in Ratio for NIS 1.38 million, and now owns 344,000 shares.
Published by Globes, Israel business news on January 13th 2013
2013 is going to be the year of gas and oil exploration shares, according to the consensus of investment houses about the sector that will lead the Tel Aviv Stock Exchange (TASE) this year. The "Globes" Big Money survey of 20 investment houses found that the three top stock picks for the year are all in this sector: Avner Oil and Gas LP (TASE: AVNR.L), Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), and Ratio Oil Exploration (1992) LP (TASE:RATI.L).
However, 2013 began poorly for the industry. Last week, Israel Opportunity Energy Resources LP (TASE: ISOP.L), which owns 10% of the Ishai license reported that although the Aphrodite 2 well found signs of natural gas, the gas-bearing strata was only 15 meters thick. In comparison, the gas-bears strata in the Tamar Sands, 50 kilometers southeast of Ishai, are 140 meters thick. This means that the gas at Ishai is less than previously estimated, and it is probably not a commercial discovery.
The market reaction was brutal, sending the price of Israel Opportunity's participation units down 62% in two weeks, although part of the fall preceded the announcement. The share price of Eden Energy Discoveries Ltd. (TASE: EDN), which indirectly owns rights in the license, fell 33% over the same period.
The incident highlights the importance of the response of an oil stock to events in the industry in general, and to events directly linked to a company or partnership. With the help of two investment managers who specialize in the oil and gas exploration sector - DBM Investment House founder and investment manager Shlomo Meir, who heads the DBM Oil and Gas Trust Fund, and Clal Finance shares desk manager Erez Shapiro, who heads Clal Finance Gas and Energy Resources Trust - "Globes" will examine the events in the industry in the coming months, and list the dates the should be marked in the calendar for events that could cause dramatic movement in securities.
February: Drilling of Givot's Meged 6 well
The development plan for the Meged oil field approved by the Petroleum Supervisor states that Givot Olam Oil Exploration LP (TASE:GIVO.L) will begin drilling another well at the Meged oil field by February 15. The company has already hired a foreign drilling company for this purpose. It is worthwhile following reports by Givot, because a postponement in the original starting date of the drilling is routine. In Givot's case, there was huge hype over its previous well, Meged 5, and the company's market cap soared to over NIS 1 billion.
"I think that Israeli investors have matured," says Meir about the possibility of new hype over the Meged 6 well. "After the Tamar well, every company that said that it was interested in oil or gas exploration caused its share price to skyrocket hundreds of percent. There may be gains, because people will pay for a lottery ticket, and usually when people see that there is a prize, you see more purchases of lottery tickets, and the public that wants to gamble can cause Givot to rise."
Meir thinks that Givot is reasonably priced now, like every other company in sectors such as real estate or retail. "There is a resources report, revenue from production, rising production, royalties, management fees to the general partner, and the market knows how to price the data according to a simple economic model, without the element of uncertainty. This element exists only for the future. If the well is successful, we will see rises," he concludes.
Shapiro thinks differently about Givot's current value. "Part of Givot's current value includes expectations of more discoveries, and is even built on a greater success at Meged 6. In view of everything they learned at Meged 5, the results will be better in terms of running and production rates."
As for possible hype ahead of the drilling, Shapiro says that the rumors start with the drilling, but at some point Givot will have to raise more capital, which could delay the enthusiasm a bit. Shapiro, who never included Givot in his fund, says that investors do not calculate what remains after the various payments. "Givot's super royalty is the highest of all limited partnerships, at 20%, and the private investor has to pay a high tax. After doing the math, little is left," he says.
Shapiro doubts that a disappointment in the Meged 6 will affect the industry. "Givot has no effect on Israel's energy independence, and will have only a minor effect on it."
February and May: Shemen well results
In mid-February, the Yam 3 well offshore from Ashdod is due to reach its secondary target strata, which contain natural gas. If there are no delays, in early May, the well is due to reach its primary target strata. At that point it will possible to know the rate of production of the oil discovered in the area by Isramco's well 20 years ago.
"The natural gas is a bonus, and little is built around it," says Shapiro. "We know that the gas is not from the same strata at Tamar, but from older strata, and there is no certainty that the gas production will be possible. If gas is found, it will be a pleasant surprise."
As for the oil target, the well should verify the depth of the oil-bearing strata and the possible rate of production. "If the results are disappointing, and very little oil is discovered, Shemen Oil and Gas Resources Ltd. (TASE: SMOG) could lose most of its value. We saw this in the companies which drilled the Myra and Sarah wells." (Modiin Energy LP (TASE:MDIN.L) and Israel Land Development Company Energy Ltd. (TASE: IE))
If the discoveries are substantial, Shapiro reminds investors not to forget the various costs. "Some investors multiply the price of oil by the number of barrels discovered, but you have to look at the net price, after production costs, royalties, and taxes. It is also important to understand the flow rate: the higher it is, the greater the cash flow, and it comes in less time, which will also affect the value."
Meir says that the results of the Yam 3 well could have a broad effect across the industry. "If there is a discovery, it will be the first time that there is oil in the Mediterranean, and the dream will become a reality. Investors will be ready to risk more in searching for oil offshore, and there will also be greater interest by foreign companies in discoveries in Israel. This will have a direct effect on the companies that own the well - Shemen Oil, Zerah Oil And Gas Explorations LP (TASE: ZRAH), and Gulliver Energy Ltd. (TASE: GLVR) - as well as on Modiin Energy and Adira Energy Corporation (TSXV: ADL; Bulletin Board: ADENF; XETRA: AORLB8), which hold the Gabriella and Yam Hadera licenses along the same geological line."
The coin has two faces, and if the well's results are disappointing, the share prices of other companies could also fall. "These companies are relying on the same strata and hope that oil will be found in it."
If nothing commercial is found, it will cause disappointment, and the air will be let out of the shares, because investors will think that the chances of finding oil in the licenses will be low."
Late February - completion of the Woodside deal
By the end of February, the Leviathan partners - Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG) units Avner and Delek Drilling LP (TASE: DEDR.L), and Ratio - are due to sign a binding agreement with Australia's Woodside Petroleum Ltd. (ASX: WPL) to become a partner in the reservoir for $2.5 billion. The deal will be completed in stages, based on milestones over several years. When the companies announced in early December that Woodside would become a partner, their share prices rose, but Meir says that they should have climbed from prices at which they had been traded long ago.
"There is a problem with Leviathan, because the final Tzemach Committee recommendations for gas exports have not yet been approved, and it won't be possible to export and sell gas from it," says Meir.
Shapiro says, "Woodside took into account the absence of gas exports, and it is prepared to sign even before approval is given, but in that case the payment to the current partners will only be $700 million, which is their current estimate of the reservoir's value. The market assumes that there will be a deal, and it is included in the shares. Do not expect a rally in the shares because of the signing."
Therefore, if the Woodside deal is cancelled, Shapiro expects the Israeli companies' share prices to fall, but since the deal is subject to the results of the Tzemach Committee, he believes that there is little chance that the deal will be cancelled.
After the elections: Approval of the Tzemach Committee recommendations
Ministry of Energy and Water Resources director general Shaul Tzemach heads the committee which has set Israel's natural gas export policy for the coming years. The committee published its final conclusions in late August. It advises allowing the owners of reservoirs to export at least 50% of the gas discovered (the amount depends on the size of the discovery), subject to obtaining an export license.
The Knesset has not passed the recommendations, because of the elections on January 22. However, in the meantime, the calculation of Israel's gas reserves, on which the Tzemach Committee based its recommendations, has been undermined because of the dry holes at the Myra and Sarah wells, and the uncertain gas reserves at the Ishai license.
"The lack of a decision on gas exports, deters more foreign investors from entering the Israeli market," says Meir. "There are already signed contracts for the Tamar discovery with Israel Electric Corporation (IEC) (TASE: ELEC.B22) and private companies, and the recommendations will affect Tamar's owners less. As for the partners in Leviathan, the recommendations will affect the future of the discovery, and the TASE, irrespective of oil and gas shares, undershoots in conditions of uncertainty."
Shapiro believes that the decisions and approval of the recommendations will be made after the elections, and the big question is whether there will be changes in the recommendations in view of the disappointment at the latest wells. "There is definitely a chance that the exports quota will reduced to less than 50%, but it's impossible to predict, because there are a lot of parties which pull the matter in both directions. There is no doubt that the failure of a well is a risk in terms of export quotas from the total reserve that the committee will approve."
Shapiro says, "If the scenario materializes, and the gas export quota is reduced, this will adversely affect the pricing of the Leviathan reservoir. The milestone with Woodside should be remembered. Its initial investment is $700 million for 30% of the reservoir, giving it a value of $2.3 billion - far less than what the market currently assumes.
"Approval of the committee's recommendations in full, under the previous structure, could boost share prices, because this will lift uncertainty from the project."
April: start of gas flow from Tamar
In early April, commercial gas flow from the Tamar well is scheduled to begin. Shapiro believes that the market assumes that gas will begin flowing by this date, and it happens on time, it will boost the share prices of its Israeli partners, Avner, Delek Drilling, and Isramco, by only a few percent.
Shapiro says that Tamar is Isramco's only discovery, and that the moment the gas begins flowing, it will effectively turn into a bond. "There is similarity in terms of cash flow, and it should increase over the years like a cheap bond, at a theoretical level of 8% a year. It will rise over time, but there is no longer a significant upside in it."
Meir thinks otherwise. "Not everyone has realized that the dream has been realized, and that there is gas flow. The underpricing is due to the lack of faith in reality. They take companies with a proven discovery a risk premium that does not limit the shares," he says. He compares Isramco with Israel Chemicals Ltd. (TASE: ICL), which also extracts and sells natural resources. "Isramco's premium isn't the same premium for Israel Chemicals, and it will fall as soon as the gas begins to flow."
So will 2013 be the year of gas and oil? "I think so," says Meir. "Not everyone has realized it, but it will become a key industry in the economy, and we will see new professions in the sector. The Israeli public will suddenly discover another industry, with huge cash flows, and will see flows and profits associated with the banks and Israel Chemicals."
Shapiro is more cautious. "I think that the TASE Oil and Gas Index will outperform the Tel Aviv 100 Index in 2013, but not by much."
Published by Globes, Israel business news on January 9th 2013
The company announced that it has enough money to drill the Ofek 2 well near Lod.
The share price of Globe Exploration LP (TASE: GLEX.L) rose 8% to NIS 0.23, giving a market cap of NIS 25 million, by midday today, after announcing that it had the money to begin drilling the Ofek 2 well.
In a terse notice to the TASE, Globe Exploration said, "In response to numerous queries from investors to the partnership, the partnership wishes to clarify that, as of today, it has the financial means to carry out the drilling of the Ofek 2 well through the production tests stage, in accordance with the budget approved by the general partner's board of directors. The general partner has no plans to raise additional capital through an offer of new securities before the start of drilling. Bringing partners into the licenses held by the partnership is also under consideration."
The Ofek 2 well is targeting natural gas bearing strata at a depth of 6,000 meters. The company's resources report estimates the well's potential at 0.6 trillion cubic meters of hydrocarbons with a 30% probability of success.
Globe Exploration, founded in 2009, owns the onshore Ofek license near Lod in central Israel, and the Bar-Or and Yahel licenses in the north.
Published by Globes, Israel business news on January 8th 2013
Approval of a sale is subject to approval of the courts, the Oil Supervisor, and the Antitrust Authority.
Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) has petitioned the court to acquire the rights of ATP Oil & Gas Corporation (Bulletin Board: ATPAQ), which is under bankruptcy protection, in the Shimshon and Daniel East and Daniel West licenses for NIS 150 million.
Since ATP is under bankruptcy protection, a sale requires approval of the courts, the Oil Supervisor at the Ministry of Energy and Water Resources, and the Antitrust Authority. ATP's trustees believe that there will be no problem in obtaining the permits, since Isramco already owns rights in these gas exploration licenses.
Proceeds from a court-approved sale should allow the trustees to pay part of ATP's debts to unsecured creditors.
Published by Globes, Israel business news on January 7th 2013
Woodside agreed a month ago to acquire a 30% stake in the Leviathan natural gas field.
Australian oil and gas producer Woodside, which agreed a month ago to acquire a 30% stake in the Leviathan natural gas field, is considering selling its share of Leviathan's gas on the Israeli market independent from its partners.
This would inject new competition into Israel's natural gas market and perhaps dispel antitrust concerns by having Woodside compete against its partners at the Leviathan offshore field: Delek, Noble Energy and Ratio Oil Exploration.
The Israeli antitrust authorities say Noble and Delek hold a natural gas monopoly. The local market has been starved for gas since Egypt cut off supplies after the sabotage of pipelines in the Sinai Peninsula. The partnership is required to sell 25% of Leviathan's gas on the Israeli market.
In recent weeks, Woodside has been talks with the Israeli regulatory authorities about selling natural gas separately. The talks are an apparent effort to answer the antitrust commissioner's declaration that the current arrangement at Leviathan constitutes restraint of trade.
The proposed split in how the partners would sell the gas apparently only affects the portion destined for sale in Israel, not the gas to be sold abroad. The antitrust issue arises from the fact that Noble Energy and Delek own 78% of proven natural gas reserves in Israel through stakes that extend beyond the Leviathan project.
The Tzemach committee, which drew up recommendations on how much gas should be retained for use in the local market, projected that even by 2020, Noble and Delek would have at least an 80% share of the Israeli gas market. The panel says that in other countries, even when partners market gas separately, they usually end up selling the product on similar terms.
Sources in the gas exploration industry say that in addition to the technical and financial issues involved in Woodside marketing gas separately, it's unclear if competition would be increased. In addition, at least according to the agreement with Woodside, Noble Energy is the only partner responsible for supplying the Israeli market.
Published by Globes, Israel business news on January 6th 2013
Sources inform ''Globes'' that Teddy Sagi and Beny Steinmetz's companies have not yet submitted work plans for drilling their licenses.
In the wake of the disappointing results at the Ishai license, the Petroleum Supervisor is considering that the licensees, Israel Opportunity Energy Resources LP (TASE: ISOP.L) and companies owned by Beny Steinmetz and Teddy Sagi return most of their licenses.
Israel Opportunity owns 10% of the five Pelagic licenses, including Ishai, Benny Steinmetz's Nammax Oil and Gas Ltd. owns 42.5%, two companies owned by Teddy Sagi, Frendum Investments Ltd. and Daden Investment Ltd. own 33.5%, and 9%, respectively, and well operator AGR Petroleum Services Holdings AS of Norway owns 5%.
Sources inform ''Globes'' that the licensees have not yet submitted work plans to the Petroleum Supervisor for drilling at three of the five licenses. Nor have they submitted a contract with a drilling rig for the next well at the Yoad license, which borders Leviathan.
The preliminary findings confirm the "Globes" exposé that the amount of natural gas in the reservoir is much smaller than expected, and that it is doubtful whether it is worthwhile developing the reservoir. Sagi and Steinmetz invested an estimated $100 million in the Aphrodite 2 well at Ishai. Energy exploration industry sources say that the disappointing results may cause them to reevaluate making further investments in oil and gas exploration. This opinion is reinforced by the firing of most employees at Sagi's Genesis Energy (Israel) Ltd., which handles his Israeli energy exploration operations.
Genesis Energy said in response, "Genesis Energy owns rights to seven oil and gas exploration licenses. Following the completion of the well at the Ishai license and the sharp drop in activity until the next well in the licenses is carried out, the company reduced its workforce as planned. The professional team is continuing its work at the company, and will promote the work plan for the various licenses, including with regard to assessments and development of the Aphrodite structure, in which the company has a stake (along with its other partners in the Pelagic licenses), development of the other Pelagic licenses, which include part of the Leviathan structure, development of the Oz prospect, and more."
The Ministry of Energy and Water Resources said, "Under the Oil Law, all the rights holders must meet their work plans and the other conditions stipulated in the licenses awarded them."
Published by Globes, Israel business news on January 6th 2013
The Ishai licensees will nevertheless not carry out production tests.
Israel Opportunity Energy Resources LP (TASE: ISOP.L) yesterday notified the TASE that substantial signs of gas were discovered at the Aphrodite 2 well in the Ishai license, located 160 kilometers west of Haifa. The company added, however, that the licensees would not carry out production tests.
Israel Opportunity said that the well reached a depth of 5,652 meters below sea level (including a water depth of 1,707 meters), and that the well operator carried out electrical logs and measurements while drilling, including tests of the composition of the natural gas, rocks, and liquids in the well.
"We are pleased that signs of natural gas were found in the well, but it is necessary to wait for the external assessor's report, which will be ready in two months, to confirm the size of the discovery," said Israel Opportunity CEO Eyal Shuker in response.
Shuker added, "A gas discovery at the Ishai license, which borders the Cypriot Aphrodite structure, is important for us, and when we receive the external assessor's report about the well, we intend to review the remaining stages. The ultimate goal is to bring Israeli gas to Israel and the Israeli people for domestic use and exports."
Israel Opportunity owns 10% of the five Pelagic licenses, Benny Steinmetz's Nammax Oil and Gas Ltd. owns 42.5%, two companies owned by Teddy Sagi, Frendum Investments Ltd. and Daden Investment Ltd. own 33.5%, and 9%, respectively, and well operator AGR Petroleum Services Holdings AS of Norway owns 5%.
In June, Ryder Scott Company LP estimated the potential gas reserves at Ishai at 3.7 trillion cubic feet (TCF), which would make it Israel's third largest gas discovery after Leviathan and Tamar. The Aphrodite reservoir in Cyprus's Block 12 has an estimated 7 TCF of gas.
However, preliminary estimates by industry sources are that the final tests will show that the quantity of gas at Ishai is less than previously estimated. Other industry sources said that if the gas estimates were reduced, it would probably not be worthwhile to develop the reservoir, which is at a depth of 6,000 meters.
Published by Globes, Israel business news on January 3rd 2013
It is doubtful whether it is worthwhile developing the reservoir.
The capital market and energy industry are disappointed at the preliminary findings at the Ishai license well. The findings confirm the "Globes" exposé that the amount of natural gas in the reservoir is much smaller than expected, and that it is doubtful whether it is worthwhile developing the reservoir.
Last night's report by Israel Opportunity Energy Resources LP (TASE: ISOP.L) did not mention the amount of gas discovered, and said that the drilling would be terminated without carrying out production tests. It also said that the thickness of the gas-bearing strata did not exceed 15 meters.
A preliminary estimate of the size of the reservoir will only be received in the resources report, which will be published in a few weeks. However, many investors compared the figure for the thickness of the gas-bearing strata with corresponding thickness from the Shimshon reservoir, where 0.6 trillion cubic feet (TCF) of gas was discovered - 75% less than forecast. At Shimshon, the gas-bearing strata were 19 meters thick.
The price of the company's participation units fell by over 20% by mid-afternoon on the TASE today. Israel Opportunity owns 10% of the five Pelagic licenses, Benny Steinmetz's Nammax Oil and Gas Ltd. owns 42.5% and two companies owned by Teddy Sagi, Frendum Investments Ltd. and Daden Investment Ltd. own 33.5%, and 9%, respectively, and well operator AGR Petroleum Services Holdings AS of Norway owns 5%. Steinmetz and Sagi, who financed the well from their own resources, may be the biggest losers.
The future of other wells in the companies' five licenses is also unclear. The results of the well will also be seen as bad news for other offshore gas developers, beginning with Noble Energy Inc. (NYSE: NBL) and Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG), because they will increase the pressure to reopen the Tzemach Committee recommendations on gas exports. The committee recommendation to allow gas exports of up to 50% of any reservoir assumed that there would more major discoveries - an assumption that is turning out to be over-optimistic. The government did not approve the recommendations because of Prime Minister Benjamin Netanyahu's fear of the reaction by his political rivals.
The Ishai well was considered low risk. In June, Ryder Scott Company LP estimated the potential gas reserves at Ishai at 3.7 trillion cubic feet (TCF), with a probability of 68-77%. The low risk was because of Ishai's proximity to the Aphrodite discovery by Noble Energy in Cyprus's exclusive economic zone a year ago. Some commentators and analysts said today that the developers could still reach a deal to develop the reservoir as part of Noble Energy's development of the Aphrodite field, in which case Ishai will have economic value.
Published by Globes, Israel business news on January 3rd 2013
Energy Minister Uzi Landau gave the $1 billion project to the Yam Tethys partners without a tender.
Minister of Energy and Water Resources Uzi Landau has awarded the gas storage license to the joint subsidiary Yam Tethys of Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, and Noble Energy Inc. (NYSE: NBL) without a tender. The license will allow the companies to continue holding the empty Mari B gas reservoir offshore from Ashdod and use it as a strategic reserve, for pay.
Some Ministry of Energy officials, including its legal adviser, opposed the granting of the licenses without a tender. However, other officials, including Natural Gas Authority director Shuki Stern, and Petroleum Commissioner Alexander Varshavsky, support granting the gas storage license to Yam Tethys, irrespective of profits by its owners. The ministry estimates that the gas storage could save the economy NIS 1.3-7.5 billion, and that Yam Tethys's profits could reach $100-150 million at the most.
Ministry of Energy sources say that publishing a tender would delay the project by years, and render the storage irrelevant.
Yam Tethys's Mari B reservoir is Israel's only operating natural gas field. The field, discovered in 2000, originally had 31 billion cubic meters (BCM) of gas, and since 2004, it supplied two-thirds of Israel Electric Corporation's (IEC) (TASE: ELEC.B22) gas consumption. The Natural Gas Authority estimates that the reservoir still has 7 BCM of gas, but the drop in pressure is already making production more difficult, and will render the field not worthwhile economically within months. In April, gas deliveries from the Tamar field (also owned by Delek and Noble Energy, together with Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) and Alon Natural Gas Exploration Ltd. (TASE: ALGS)), which will render the Mari B field unnecessary.
That said, there is still great economic value in the depleted reservoir, as it is common practice to use them to store natural gas as a reserve in case of serious disruptions. In the case of Mari B, these advantages could be even greater, because of Israel's total dependence on Tamar. This first advantage is in case of an emergency.
A breakdown in the gas production system at the Tamar wells, or along the 200 kilometers of undersea pipelines to the Mari B production platform and then to the Ashdod terminal, could be devastating. Repairs at sea can easily take months, and the cost to the economy of no gas deliveries is estimated at NIS 1.8 billion a month. The Natural Gas Authority estimates the savings from the option of using the Mari B reservoir as alternative supply in such an event at up to NIS 5 billion.
The second advantage of storing gas at the Mari B reservoir is even more important than the first. In 2014, just one year after the Tamar field will be linked to Israel, the country will face a gas shortage, as peak consumption will reach 2 million cubic feet per hour, compared with the 1.1 million cubic feet per hour that Tamar can supply. The shortfall is because gas flow projections from Tamar to Israel were made when gas supplies from Egypt were considered secure.
Consequently, the gas pipeline from Tamar lacks the capacity to meet all of Israel's gas needs, and all solutions for boosting the gas flow require using Mari B as an operational storage reservoir. According to Noble Energy's proposed alternative, the compressors pumping gas from the Mari B field will also boost gas flow from Tamar, boosting its delivery rate by 25%.
The Natural Gas Authority prefers a different solution: laying a second pipeline from Mari B to Ashkelon, which it believes will boost gas deliveries by over 60% from the current supply rate. It is unclear which solution is better, but it is clear that increased gas deliveries will save the economy billions of shekels by reducing the need to use diesel (which costs five times as much as natural gas) or import liquefied natural gas (LNG) (which costs three times as much as gas). Noble Energy's solution would save NIS 2.5 billion compared with diesel and NIS 1.3 billion compared with LNG imports. The savings from a second pipeline will be much greater.
There is no choice
Given all the major advantages of gas storage, there still remains the question of why it was worthwhile for the state to give Yam Tethys's owners the license without a tender. Delek and Noble Energy already have a monopoly on gas supply and gas delivery infrastructures. Why should the state also give them a monopoly on gas storage for free? In other countries, gas suppliers are usually not given storage licenses, which are usually given to anchor customers or gas transportation companies.
The Ministry of Energy says that there was no choice in exempting the license from a tender. Taking the gas storage license away from Delek and Noble Energy and handing it to a third party would incur considerable legal, technical, and bureaucratic problems. Preparing a gas storage tender, which is unknown in Israel, would take over a year - and this would probably be the easiest and fastest part of the tender process.
Converting the Mari B reservoir for gas storage involves substantial investment. First, its eight currently operating production wells have to be sealed, at a cost of tens of millions of dollars, otherwise the stored gas will escape. Afterwards, the reservoir has to be filled with a very large quantity of gas to boost its pressure back to a level to enable routine operation of the reservoir. The Natural Gas Authority estimates that this will take two years and at least 4 BCM of gas to create sufficient cushion for the reservoir to function as an operational storage facility. The storage licensee would have to buy the gas from the Tamar partners at an estimated cost of $800 million.
It will also be necessary to pay Yam Tethys for use of its production platform, without which it would be impossible to produce gas from the reservoir, and for the pipeline to shore.
The tender's chances of success are not bright when the need to invest $1 billion to convert the reservoir for storage, the regulatory risks, and legal and bureaucratic problems are taken into account. The Ministry of Energy estimates that it would take ten years (!) to establish an operational storage reservoir if the license went through the tender process.
"Granting Yam Tethys the license means that we will get the strategically important storage reservoir almost immediately and at no cost," says Natural Gas Authority deputy director Constantine Bluz in an internal document.
The immediate and biggest beneficiaries of the storage license are the Tamar partners, which will earn an extra $800 million at almost no expense for the gas that they will sell to fill the storage reservoir's safety cushion at Yam Tethys, which is owned by two of the partners. For their part, Yam Tethys's owners will have to wait a long time to make a return on their investment to convert the reservoir for storage. The Ministry of Energy estimates that Yam Tethys's profit will be $100-150 million.
The gas producers said in response that they would be pleased by such a profit. "In view of all the risks of this project, we'd be happy to make any profit at all," says Yam Tethys. Sound familiar?
PPP tenders must not be budget bypassing tools
"Public private partnership (PPP) tenders must not be used as tools to bypass the budget," says BDO Ziv Haft president Shlomo Ziv, who helped introduce the method in Israel. The method, best known in Israel through BOT (build, operate, transfer) tenders, enables the government to hand over the implementation, financing, planning, and operation of large infrastructure projects to the private sector.
Road 6 (the Cross-Israel or Yitzak Rabin Highway) toll road is the best example of such a project, which has generated more than a NIS 1 billion in profits for the contractors and the government. There has been a retreat from PPP tenders in recent years, best seen in the nationalization of multibillion shekel projects such as the Tel Aviv light rail's Red Line, and Road 531, following disputes with the participating companies.
The latest wave of budget cuts has renewed interest in PPP tenders, because they are off the budget. Current PPP project proposals include the construction of Road 16 (the new road to Jerusalem) and the widening of Road 90 in the Arava by the Ministry of Transport. "There are two ironclad rules that dictate which projects are suitable for PPPs and which are not," says Ziv. "One rule is to take only projects with surplus economic benefits over the budget method, and the second is not to use PPP as a way to bypass budget cuts."
"Globes": Why is that so bad?
Ziv: "The project does not save the public expense, but spreads it out over more years. The people making the decision today lock in their successors by creating budget rigidities or public commitments for fixed expenditures over several years. A rule of thumb says that each NIS 1 billion in a PPP project budget creates a lock amounting to 10% a year. We estimate that out of NIS 20-25 billion in public investment in infrastructures a year, NIS 3 billion can be issued as PPP projects on a regular basis."
What can be done in the face of budget cuts?
"In times when it is necessary to increase investment despite budget restrictions, it is possible to make a temporary increase, with an emphasis on temporary, in the rate of PPP projects. In principle, it is possible to have 3-4 PPP projects for each budget project."
Published by Globes, Israel business news on December 26th 2013
Court okays fast-track drilling permits
Oil and gas exploration companies won a big one in court, which on Monday rejected a petition to ban fast-tracking for drilling permits. The High Court of Justice rejected the petition by the Israel Union for Environmental Defense, which argued that expediting drilling permits could weaken supervision and enable the companies to create facts on the ground without appropriate checks. While the court was unsympathetic, it did rule that the district planning committees discussing whether to grant permits must consider the attorney-general's directive, which distinguishes between test drills and production drills. Sinking an actual production well will require the normal planning procedure.
Published by Haaretz, Israel business news on December 25th 2013
Israeli government to probe IEC gas deal
The Electricity Authority wants to know why the Israel Electric Corporation backed down from demanding full reimbursement from the Tethys Sea natural gas partnership, after Tethys cut its fuel supply in half.
The Electricity Authority wants to know why the Israel Electric Corporation backed down from demanding full reimbursement from the Tethys Sea natural gas partnership, after Tethys cut its fuel supply in half.
The decision to investigate follows a controversial agreement in which the state-owned owned, financially troubled utility settled for just $30 million in compensation - a tiny sum compared to the estimated NIS 12 billion in damages it incurred after it was forced to buy expensive replacement fuel, while also hitting consumers with price hikes.
Neither does it compare with the $2 billion Israel Electric is demanding from Egypt to compensate for halting its natural gas exports and breaking its contract last April. The lack of gas for its plants forced IEC to hike consumer prices this year.
The Tethys Sea field, which is 53% owned by Noble Energy and 47% by Delek group companies, reduced its flow of gas by 1.9 billion cubic meters due to problems at the rapidly depleting Mari B well, located off the coast of Ashkelon. The cutback is similar in scope to the undelivered gas from Egypt.
IEC also forfeited half the gas not received from Tethys Sea, but this quantity might later be provided by the Tamar field, which is 67% owned by Noble and Delek. Suspicions have arisen that the compromise agreement may have been swayed by the IEC's negotiations with the Tamar partners.
The Electricity Authority is set to examine the basis of the IEC's decision. If the agreement is found to be based on irrelevant considerations, the regulator could insist that the IEC head back to the negotiating table.
Published by Haaretz, Israel business news on December 24th 2013
U.S. drafts compromise for Lebanon-Israel dispute over natural gas resources
Proposed map, based on versions submitted by both Lebanon and Israel, delineates maritime economic border and defines where each country can search for natural gas.
The United States gave Israel and Lebanon a map detailing a proposed compromise for dividing natural gas resources in the eastern Mediterranean, a senior official in the Obama administration has revealed.
The Americans proposed the division as part of their mediation efforts aimed at neutralizing the tensions that have arisen between Israel and Lebanon regarding the maritime economic boundary between the two states.
The maritime border between Israel and Lebanon is divided into two: a stretch of 12 nautical miles off the coast, with each country claiming full sovereignty of one side, and an additional stretch of more than 100 miles called the "exclusive economic zone" or economic waters – a territory which has gained strategic importance in recent years, after gas worth billions of dollars was discovered in the area.
The United States' latest mediation effort was unveiled by Deputy Assistant Secretary (DAS) for Energy Diplomacy Amos Hochsteinat at a roundtable discussion at the Aspen Institute on November 29.
"Building that favorable investment environment in Lebanon is no small task," said Hochstein during the roundtable discussion. "First, it requires determining which waters are, in fact, Lebanese, by delineating consensus boundaries with Israel and Cyprus."
"While this is made more challenging by the fact that Israel and Lebanon do not agree on their terrestrial border, the U.S. has already acted as an intermediary and suggested a maritime boundary based on established international law and agreements," he added.
Conversations with senior officials in the U.S. State Department and Israel's Foreign Ministry indicate that the Americans handed over the proposal for delineating "economic waters" about four months ago.
An official in the Foreign Ministry said the issue was handled on the part of the Americans by Hochstein and Frederic Hof, who until recently was in charge of Lebanese affairs for the State Department.
Hochstein and Hoff visited Israel and Lebanon on a number of occasions, and held talks with senior officials on both sides. An official in Israel's Foreign Ministry said the proposal was passed from the Americans to a government team headed by Oded Eran, a retired diplomat, who in the past served as Israel's ambassador to Jordan and to the European Union.
The U.S. intervened with a mapped proposal to both Lebanon and Israel, as the two countries have no diplomatic ties and thus cannot reach understandings on the matter in a direct manner, said a senior member of the State Department.
The map is based on cartographic research undertaken by American experts, said the U.S. official. The map does not purport to represent the territorial border between Israel and Lebanon, but to provide a compromise formula for a fair division of the "economic waters" and the gas resources in the area.
The American representatives stressed in their conversations with Israel and Lebanon that they believe their proposal could offer a satisfactory and respectable solution for both sides. The Americans added in the same conversations that their proposal would enable the two states to put the disagreement behind them and thus enlarge the area in the Mediterranean where both would be able to search freely for natural gas.
Neither Israel nor Lebanon has yet given a final answer to the Americans, but have rather asked for clarification on a few issues.
The Americans have told Israel and Lebanon that the offer is on the table, and can be implemented either now or in the future. Regardless, the sides will not be required to turn the proposal into a diplomatic agreement between them – they can pass their agreement on to the United States, who will sponsor the understandings.
The U.S. offer stipulates that if the two sides agree to the draft, each will be able to announce separately the amendments to the economic water delineation in accordance with the American map.
Lebanon submitted to the United Nations in August 2010 its version of where the maritime border should be - the exclusive economic zone. In November, it submitted its version of its western border, with Cyprus.
The Lebanese proposal does not include the large Tamar and Leviathan gas prospects, operated by Delek Energy and U.S. company Noble Energy. But the National Infrastructure Ministry found that the proposal contains reserves with a potential value in the billions of dollars.
The Lebanese also sent their version to the United States, which conducted an expert review and endorsed the document.
In July 2011, Israel submitted its own version, to which Lebanon responded angrily and called an act of "aggression."
The map drafted in recent months is a compromise based on both the Lebanese and Israeli versions, and delineates where each country may conduct its search for gas.
Published by Haaretz, Israel business news on December 16th 2013