Israel s Natural Gas Sector Opportunities, Challenges and Strategic Outlook

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1 The Champion Brand Global is Local Know What s Next Integrated Insights Return on Reputation 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 According 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

2 EXECUTIVE SUMMARY Israel is poised to capitalize on massive natural gas finds in the Eastern Mediterranean that will make the country energy self-sufficient for several decades, and a likely energy exporter. A current energy shortage, due to a halt of natural gas imports from Egypt and diminishing production from existing reserves, has created a pressing need for Israel to rapidly expand its energy infrastructure and domestic energy production. Natural gas from recently discovered fields is scheduled to be connected to the grid in mid-2013 and exported by Israel is in the process of constructing a comprehensive regulatory framework for the development of its natural gas reserves, which aims to provide investors with clear policies concerning the country s natural gas industry. The recent discoveries present significant opportunities for companies operating across all streams of the natural gas economy, including in the development, construction and operation of resource extraction operations, pipelines, LNG plants and storage facilities. Government analysts forecast that the majority of domestic gas consumption will be slated for power-generation purposes, although projections also indicate increased usage in the petrochemical industry and the transportation sector. With stable prices, ample supply and limited competition, these sectors could present lucrative opportunities for firms operating in these spaces. Israel s Natural Gas Landscape A decade ago, the Israeli natural gas market was virtually non-existent. That changed once the Yam Tethys reserves went online in 2003 and a natural gas import agreement with Egypt was signed in By 2011, the Israel market was consuming 6.7 bcm of natural gas a year a number which is projected to grow to 25.4 bcm a year by This anticipated increase is largely due to Israel s newfound natural gas reserves in the Eastern Mediterranean. In 2009, Noble Energy, Delek Group, and a consortium of other Israeli companies discovered the Tamar gas field, which is estimated to contain 246 bcm. According to current consumption rates, Tamar alone will have enough natural gas to meet Israel s domestic demand for the next two to three decades. However, Israel s most significant find has been the Leviathan field. Discovered in December 2010, and housing an estimated 480 bcm, the Leviathan reserve is valued at as much as $90 billion. While it is not expected to go online until , these reserves will change Israel s status to that of an energy exporter. Reserve Size Estimate 1 Partners 2 Leviathan 480 bcm 2c Tamar 246 bcm 2p Tanin Israel s Largest Natural Gas Reserves 31 bcm 17 bcm (2c) 14 bcm (best estimate) Mari B 30 bcm 1p Shimshon 15.6 bcm 2c Dalit 14 bcm 2c Dolphin 2.3 bcm 2c Noa 1.3 bcm 1p Pinnacles 1.3 bcm 1p Delek Group (45%) Noble Energy (40%) Ratio Oil (15%) Noble Energy (36%) Delek Group (32%) Isramco (29%) Dor Gas (4%) Isramco (60%) ATP Oil & Gas (40%) Noble Energy (36%) Delek Group (32%) Isramco (29%) Dor Gas (4%) Delek Group (45%) Noble Energy (40%) Ratio Oil (15%) 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%. 2

3 NatIONAL ENERGY POLICY Cheaper than oil and cleaner than coal, Israel is openly embracing the economic and environmental benefits of natural gas. Since 2006, consumption in Israel has grown by more than 300 percent. Recent events have further deepened Israel s commitment to natural gas. Regional unrest and a domestic energy crisis have underscored the country s need for energy security a theme underlying much of the decision-making concerning national energy policy. The 2005 import agreement with Egypt was a major stepping stone in the growth of Israel s natural gas industry. According to the agreement, Egypt would provide Israel with 1.7 bcm of natural gas per annum, which would be imported via a pipeline operated by the jointly owned East Mediterranean Gas Company (EMG). By 2010, Egypt was supplying Israel with 43 percent of its natural gas needs. However, in the wake of the Arab Spring, the EMG pipeline was sabotaged more than a dozen times, making the flow of gas erratic. In March 2012, the Egyptian government cancelled the agreement, bringing imports to a grinding halt. The result of this shortage has been an energy crisis, as 40 percent of Israel s power generation capacity relied upon natural gas. In summer 2012, Israel had a peak demand of 12,370 megawatts (MW) but a power production capacity of just 12,800 MW. The country was operating with just a 2 percent to 3 percent reserve margin, which resulted in sporadic brownouts across the country. While the state has tried to provide relief by rapidly bringing smaller reserves online, arranging for the import of liquid natural gas, constructing new power plants and subsidizing renewable energy, a permanent fix will not materialize until there is additional natural gas production. As the below chart from the Ministry of Energy shows, the government has pegged natural gas to play an increasingly significant role within Israel s power generation mix. The cancelled gas accord and the susceptibility of the EMG pipeline to attack has reinforced the perception within Israel that the country is an island within an unstable region, and, as such, must look to control its energy production capacity and critical energy infrastructure. Therefore, the primary driver behind the expansion of Israel s natural gas market is, and will continue to be, energy security both the security of infrastructure and security of supply. Israel NG Demand Forecast, no Coal Conversion, 10% RN by 2030 Source: Ministry of Energy website: 3

4 REGULATORY ENVIRONMENT Natural Gas Exports Nowhere are the considerations of energy security more apparent than when discussing the development of Israel s natural gas export policy. Indeed, much of the debate surrounding this issue is about how to implement policies that balance the country s long-term energy security with the need to establish concrete export quotas demanded by investors. Existing and Proposed Expansion of Israeli Natural Gas Pipelines Source: The Rand Corporation s Report Natural Gas and Israel s Energy Future Page 30 monographs/2009/rand_mg927.english.pdf To develop this policy, the Israeli government mandated the creation of an inter-ministerial committee, which is being headed by the director general of the Ministry of Water and Energy, Shaul Tzemach. In August 2012, the Tzemach Committee released a final report, which issued the following recommendations: Allow up to 50 percent of reserves greater than 200 bcm to be exported. Allow up to 60 percent of reserves between bcm to be exported. Allow up to 75 percent of reserves between bcm to be exported. No limitation on exports for reserves smaller than 25 bcm. The committee also recommended that the country expand its natural gas infrastructure, including: Constructing additional sea-to-shore inlets, natural gas intake and handling facilities. Constructing strategic reservoirs and storage units. Connecting all offshore reserves to the national distribution system. Increasing the number and capacity of distribution lines connecting IPPs and other industrial plants to the national distribution system. Not only will these steps ensure security of supply, but the proposed expansions will also bolster industry by enabling access to greater volumes of natural gas. This would be 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. 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 are required to build the plant, with costs typically above $5 billion. Strategic partners. Israel s dearth of experience in this field means that it will need to partner with international firms with expertise in the construction and operation of an LNG plant. These challenges, however, are not insurmountable. Indeed, two state-owned enterprises already submitted a joint proposal in March for the construction of an LNG export facility in the southern port city of Eilat. The cost of the plant was estimated at $6 billion. The facility would require 7 bcm of natural gas feedstock a year, would produce 5 million tons per annum (mtpa) of LNG, and fixed costs were estimated at $3.20 per mbtu numbers that largely fall in line with industry standards. The company projected a 10 percent return on investment, using a conservative pricing structure of $8 $12 per mbtu in Asia. Cost of facility: ~$1000 per ton of LNG exported Cost of liquefaction, transport and regasification: $4 to $7 per mbtu THE ECONOMICS OF LNG Cost of LNG transport tanker: $200 million 1 ton per annum (mtpa) of LNG production requires 1.38 bcm of natural gas per year 4

5 LOOKING FORWARD Israel s discovery of these massive reserves, coupled with a growing domestic demand for natural gas and the rapid development of a policy framework, has signaled a number of approaching business opportunities: Upstream: Firms with expertise in the extraction, transportation and sale of natural gas to both foreign and domestic markets. Midstream: Firms capable of aiding in the development, construction and operation of an LNG plant, processing units and the expansion of the country s gas-supporting and export infrastructure, including pipelines and storage facilities; companies with the expertise to convert existing power stations to natural-gas compatible or build new power stations; companies with expertise in pollution controls; companies capable of developing Israel s gas-to-liquid (GTL) industry. Downstream: Petrochemical companies interested in entering the local industry to take advantage of lowend natural gas rates and ample supply; companies capable of introducing natural gas vehicles and the supporting infrastructure to the Israel market. Lastly, it will be important to remember that Israel s national energy policy will be heavily informed by its volatile history with energy imports and geopolitical outlook. These considerations can come to bear on the development of Israel natural gas economy in a few ways: Domestic reserves. Israel will move to ensure that sufficient reserves are maintained for the domestic market. While final quotas have not yet been decided, it is likely that Israel will maintain a minimum of 25 years of natural gas reserves, or between bcm. Israeli control. Israel will be reluctant to allow key energy infrastructure, such as a liquid natural gas (LNG) plant, to be constructed outside of its territory. While there have been discussions about constructing a joint LNG plant in Cyprus, it is unlikely that Jerusalem would allow the control of such critical infrastructure to be ceded to an outside party. This also makes the option of a floating LNG plant (FLNG), which is more susceptible to attack, far less likely. 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. 5

6 about APCO APCO is a global communications, stakeholder engagement, and business strategy firm with more than 600 consultants located in more than 30 locations worldwide. We provide a full range of integrated services across multiple industries, with clients that include large multinational companies, trade associations, governments, NGOs, and educational institutions. Our staff includes former elected politicians, government officials, political advisers and seasoned business advisers. APCO s Tel Aviv office has a comprehensive and incisive understanding of the most pressing energy issues currently dominating policy discussions in Israeli decision-making and opinion circles. With several energy sector clients, APCO Tel Aviv is well placed to provide extensive stakeholder engagement and media outreach support. The office s efforts have successfully garnered nationwide media attention on behalf of its clients, helped raise public awareness around key sector issues, and positively influenced the development of national energy policy. It has also led to many durable relationships with key stakeholders in the Israel energy market. Through direct advocacy, relationship building, coalition building, landscape analysis and strategic counsel, APCO helps its energy sector clients convey their messages to elected leaders and government officials. Some of the main services we can offer companies looking to enter the Israel market are: Identifying business opportunities. Long-standing relationships with key officials and an intimate understanding of the local business environment enable APCO to identify new opportunities ahead of the curve. Tracking market developments. APCO is able to closely monitor developments in the natural gas economy, alerting companies to any changes and trends that could impact their business interests. Stakeholder engagement. APCO builds relationships for its clients in key circles of influence. Our energy clients have met and partnered with the prime minister s office, heads of NGOs, leaders in academia, and C-Suite executive in industry. We have a broad and constantly growing network within the local market that can be put to work for you. Issue and regulatory management. APCO assists its clients to understand the regulatory environment and engage regulators as needed. Our inside ability to accurately track, analyze and engage at the earliest stages of regulatory development allows clients to be well prepared and address opportunities and challenges as they arise. Media relations. APCO has long-standing relationships with all of Israel s leading energy and environment journalists. Experience with both local and international media has given our team a strong background in branding, positioning, as well as crisis management. Communications strategy development. Accounting for local issues and trends is critical to the construction of a successful communication strategy. APCO has the deep market knowledge and experience to help craft a strong and unique message that will promote our clients goals. Thought leadership. Creating a durable local presence is important, especially when looking to achieve or maintain market influence. APCO can help build this foundation by developing tailored content, featured on multiple media platforms, that engages a range of 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 Israel Phone: rfeder@apcoworldwide.com Driving Global Dialogue For more information on this and other events please visit APCO Worldwide Inc. All rights reserved. Design: StudioAPCO 6