Israel's Options for Monetizing its Vast Reserves of Offshore Natural Gas in the Mediterranean Predicament

Israel's Options for Monetizing its Vast Reserves of Offshore Natural Gas in the Mediterranean Predicament

The recent announcement by Houston-based Noble Energy and partners of a major natural gas find, the Leviathan field, in deep-water off Israel’s north coast suddenly elevates that country, entirely unexpectedly just a few years ago, into the group of major energy players. Israel’s US-method-reserves at Leviathan and at the nearby Tamar field are about 25 Tcf (trillion cubic feet). According to the US Geological Survey, the eastern Mediterranean is likely to hold 200 Tcf of recoverable gas. A reasonable estimate, based on proxy basin experiences, is that Israel’s offshore reserves will surpass 50 Tcf, comparable to the proven natural gas reserves of Libya and Egypt, and will rank Israel among the top 25 nations in reserves. Yet to be determined is how, and if, Israel will be able to monetize these vast reserves.

Israel’s natural gas resources greatly exceed the amount it can use domestically. Even if Israel converted all of its future electricity generation (70 billion kWh per year) to natural gas-fired systems, it would use less than 0.5 Tcf/year. If the country were to convert all its vehicles to use compressed natural gas or even to be electrified, it would still allow Israel to comfortably export 1 Tcf/year, most of which would likely go to Europe.

Western Europe currently imports 10 Tcf/year of natural gas, 85% of which is delivered by pipeline and 15% by LNG. It is forecasted that Western Europe’s demand for imported natural gas will grow by 50% over the next two decades. Israel’s 1Tcf/year of exports will easily be absorbed by Europe, and it will generate at least $6 billion per year of net income (at current market prices) for Israel and its E&P partners. Israel’s natural gas sales can satisfy 7% of its annual national budget.

The Problem with Pipelines

One option is for Israel to export natural gas via a new overland pipeline traversing Syria, Lebanon, Jordan and/or Iraq before passing through Turkey to access the European pipeline in Bulgaria and Greece. It is unlikely however that Israel will accept the political risk of transporting its natural gas through those Middle Eastern neighbors.

Another possibility being considered is an undersea pipeline. In August the Benjamin Netanyahu, the Israeli Prime Minister, visited Athens and reportedly suggested building a pipeline between Israel’s offshore fields and the Greek mainland. Such a pipeline would be the most challenging project of its type ever attempted. It would be the world’s deepest undersea natural gas pipeline with long stretches at depths of 2,000 meters over rugged terrain and the Eastern Mediterranean Ridge. Covering 1,040 kms from Leviathan to the access point near Athens, the pipeline would match the length of the world’s longest undersea pipeline (or exceed it by 200 kms if the pipeline is routed to the access point in northern Greece).

Sea Depth
Sea depth in the eastern Mediterranean is twice that between Libya and Sicily

If an undersea pipeline from Leviathan to the Greek mainland with capacity of 1 Tcf/year were to be built, its costs can be inferred from the trans-Mediterranean pipeline recently commissioned between Libya and Sicily (“GreenStream”), which also was a challenging engineering project. GreenStream is 520 kms long, has a maximum depth of 1,100 meters, a pipeline diameter of 32″ and a capacity of 280 Bcf/year. It was built six years ago at a cost of $6.6 billion, or for $13 million/km.

A pair of 32″ pipelines from Leviathan to the Greek mainland would be twice as deep, twice as long, transporting 2 1/2 times the volume of gas as GreenStream. The construction costs are likely to be around $25 million/km (assuming that formidable engineering challenges can be overcome). Adding in the cost of tripling the capacity of the Greek pipeline system to handle 1 Tcf/year, the estimated capital cost for pipelines from Leviathan to the northern Greek border would exceed $30 billion. This capital cost leads to an ongoing cost of up to $5/MMBtu, absent large subsidies, to deliver 1 Tcf/year of Israeli gas from Leviathan to the European gas grid. At current market prices for Russian gas at the German border, a transport cost of $5/MMBtu plus at least $1.00/MMBtu in transit fees leaves a small amount of net income for the Israelis and their partners. A more cost-effective way for Israel to export natural gas to Europe is via ship.

Phase One: CNG

As a first phase of monetization for a volume of perhaps 200 Bcf/year of gas from Leviathan or Tamar, Israel should use CNG (compressed natural gas) ships. As soon as the fields are ready to produce natural gas for export, the first step is to situate above the fields a large deep-water FPSO to receive gas from the wellheads and to separate liquids. Large FPSOs can be configured to handle 500 MMscf/day. The gas then will be loaded on to one or more large CNG vessels per day that will shuttle between the FPSO and destinations in Cyprus and Greece.

FPSO

Cyprus at only 150 kms away is an obvious candidate for CNG from the FPSO. Cyprus seeks to use natural gas instead of fuel oil and diesel to generate electricity, and its current needs are for 35 Bcf/year. CNG from Leviathan or Tamar will provide Cyprus with natural gas at the lowest costs, enabling Cyprus to reduce electricity generation costs by 50%. It will also enable Cyprus to avoid building a costly but now unnecessary LNG regasification terminal.

Another 35 Bcf/year of CNG can be distributed to off-grid Greek islands currently using fuel oil or diesel to generate electricity. The remaining 130 Bcf/year can be transferred to the Greek national pipeline system, which has total spare capacity of 140 to 180 Bcf/year that can be used to supply gas to the Balkans and the EU through south-to-north backhaul flows and through gas swaps.

By starting with CNG as Phase 1, Israel can begin monetizing its offshore natural gas within 24 months. Total capital costs for the CNG system will be approximately $2.5 billion, including the FPSO and a fleet of CNG ships transporting 500 MMscf/day to Cyprus, the Greek islands and the Greek mainland. All-in costs of shipping including capital costs will be around $3/MMBtu. At current market prices to European endusers of $9/MMBtu, Israel and its E&P partners will be able to generate more than $1 billion of net income per year from CNG, which probably will be the most profitable sales of Israeli natural gas.

Phase Two: LNG Processing in Cyprus

To export an additional 700 Bcf/year, Israel’s most viable option is LNG (liquefied natural gas). GTL (gas-to-liquid fuel using Fischer-Tropsch technologies) is a possibility, but LNG is the less risky method for monetizing such large amounts of gas. An LNG plant consisting of two 7 million MT/year trains will produce 700 Bcf/year of gas, at a capital cost of approximately $12 to $15 billion. Included in the project would be the construction of an undersea pipeline from Leviathan to the liquefaction plant.

Israel can build its liquefaction plant in Israel. But the better option is to construct the marine port and liquefaction plant in Cyprus, which is almost as close as the Israeli coast to the Leviathan field. An advantage of Cyprus is that it is a full member of the European Union benefitting from preferential terms for importing into other EU countries, and the political situation in the country supports large-scale, long-term investments. There also are possibilities for EU and Cypriot government grants for the project.

It will require five or more years for Israel and Cyprus to start LNG production. At current market prices, Israel and its E&P partners can expect $4 billion per year in net profits from LNG sales.

Geopolitical Implications

By starting with CNG, Israel can begin monetizing its offshore reserves within 24 months, generating more than $1 billion per year in net profits from the sale of 200 Bcf/year. The second phase of shipping 700 Bcf/year of LNG will generate an additional $4 billion or more in annual net profits.

The monetization of Israel’s offshore gas fields will have significant implications for Cyprus and Greece. Cyprus will cease using expensive and polluting fuel oil and diesel to generate electricity. Cyprus will avoid the huge cost for an LNG importation regasification plant that – now with the Israeli gas find – is superfluous, and instead Cyprus will earn profits as an exporter of LNG.

Greece will benefit by replacing oil-fired with lower cost gas-fired power plants on the islands, and it will generate perhaps $100 million per year in gas transit fees by using its national gas grid to transport gas to the Balkans and the EU. Furthermore, the prospect of closer energy-related commercial ties between Greece and Israel will draw support from the US, a development that may help Greece overcome its debilitating fiscal and economic crisis.

© 2013 Energy Tribune

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