by Aharon Lapidot
One morning in January 2009, the State of
Israel awoke to the news that its eternal gripe against Moses for
bringing us to the only corner of the Middle East that is bereft of oil
suddenly — and surprisingly — was put to the test. While there still
isn't any black gold to be found on Israeli soil, there are quite large
deposits of natural gas just off of our coast, with the potential for
substantial profit quite real.
The numbers are mind-boggling. According to
conservative estimates, the natural gas fields that have been discovered
underneath the Mediterranean Sea and within the maritime borders of the
State of Israel — in particular the Tamar and Leviathan projects, which
are considered to be two of the largest deep-sea discoveries in the
world in the last decade — could net somewhere around $200 billion in
revenue.
As a result of the discovery, the production
of electricity by way of natural gas will reach 60 percent within just
two years, 90% in the years afterward. Potentially, there is 470 billion
cubic meters in the larger field, Leviathan, and 250 billion cubic
meters in Tamar. A lot of gas means a lot of money.
On the other hand, the expenses incurred in
producing the gas are considerable. The cost of drilling alone is $100
million, and there is no guarantee that any drilling will yield results.
A day's work costs $1 million. Tamar's rig alone cost billions to
build. The sums of money that the investors, chief among them U.S.-based
Noble Energy, poured into the Tamar drilling project before they could
hope to see a single dollar as a return on their investment reached
$3.25 billion.
"This is a business strictly for
professionals," said Yaron Zar, a senior analyst at Clal Finance who
monitors the natural gas sector. The timing of the discoveries could not
have come at a better time, since the demand for natural gas in Israel
is likely to triple. In a year from now, the consumption of natural gas
is estimated to reach 5 billion cubic meters. By 2017, natural gas
consumption is due to hit 15 billion cubic meters.
Alongside the enticement inherent in this
underground treasure, there arise the inevitable complications that are
physical, legal, financial, and diplomatic in nature. There are
international border conflicts, problems related to taxation and
finances, environmental issues that need to be dealt with, and
logistical challenges posed by the need to transport offshore gas
through pipes that exceed 100 kilometers. There are other matters to
consider, like weighing local consumption with export and storing the
gas in land- and sea-based containers.
The most inescapable problem is that all of
that gas — hundreds of billions of dollars worth — lies at sea, there
for all to see, but still at sea.
Disputed borders
The Hebrew term "mayim kalkalim" ("economic
waters") is the Israeli interpretation of the international concept
known as "exclusive economic zone." According to this concept, an
imaginary line stretches 23 kilometers out to sea from every point along
the coast. This line demarcates what are known as "territorial waters,"
which are subject to the same legal and political recognition as the
terrestrial entity to which they belong. In other words, these areas are
an inseparable part of the State of Israel. Israel's territorial waters
cover an area of 4,000 square kilometers.
In the region that extends beyond the
territorial waters and reaches a distance of 200 kilometers offshore (or
half the distance that separates two countries) lies the exclusive
economic zone. As stipulated by the terms of international law, a state
is permitted to exploit the natural resources that lie within this realm
on condition that it doesn't seal off the area or limit the movement of
airplanes and sea vessels. The state is also obligated to put in place
proper security arrangements, ensure that no harm is inflicted on the
environment, make efforts to issue drilling licenses in a transparent
manner, and prepare contingency plans in case of disaster. Israel's
exclusive economic zone stretches across 28,000 square kilometers, which
exceeds the total size of the country's land mass (22,000 square
kilometers).
The delineation of the country's exclusive
economic zone is determined by international agreements. "In 2010 we
signed an agreement with Cyprus that solved the issue of where the
borders lay," said Brig. Gen. Yaron Levy, chief of the Israel Navy’s
staff. "We have a small dispute with Lebanon over a few degrees in the
northeast corner. To avoid a situation like Sheba Farms (a swath of land
along the northern border whose sovereignty has been a bone of
contention between Israel and Lebanon) at sea, I would recommend
refraining from establishing drilling points along the maritime
frontier."
A row may well erupt with Egypt over the
status of the Samson and Gal drilling projects, which are near the
maritime boundary that Israel shares with its neighbor to the southwest.
To pre-empt possible friction, Israel recruited the Italian energy firm
Edison, which is also heavily invested in Egypt, into the Gal project.
Tamar and us
Standing on the deck of the INS Dovra, which
is taking us to the Tamar drilling site, Col. Ilan Lavi, who heads the
navy's planning and organization branch, rolls out a map marked with
areas indicating the sources of the latest maritime threats with which
Israel must deal, particularly in light of its increasingly active role
in the exclusive economic zone.
"First of all, our area of operations has
doubled and tripled in size," he said. "Within that area, there are now
some very attractive targets for hostile entities. We could face, among
other things, bomb-rigged boats and ships as well as missiles of various
types, some of which, like the (Russian-made) Yakhont, are very
advanced and sophisticated. It is possible to inflict damage on a rig
from beneath the surface of the water by using deep-sea bombs and
explosive devices or divers. It could also be targeted from the air."
Prime Minister Benjamin Netanyahu eloquently
enunciated the need for bolstered defenses at sea. "There's no doubt
that this commodity is a strategic target which Israel's enemies will
look to harm," he said. "As such, I have decided that the State of
Israel will take part in safeguarding these assets."
In its report, the Sheshinski Committee
concluded that the state would be responsible for providing half of the
funding toward security of the maritime installations. The task is
therefore left to the Israel Navy.
"The maritime front has become quite complex,"
said Brig. Gen. Levy. "In the north, as we saw during the Second
Lebanon War [when the INS Hanit was hit], Hezbollah has acquired the
most potent naval capability that Iran could provide. In Syria, we are
seeing a significant investment in naval and maritime armaments,
including land-to-sea missiles, particularly the Yakhont. Egypt is
arming itself with Western vessels and German submarines that are built
in the very same shipyards that produce our Dolphins. Even in Gaza,
they're not letting up. In March 2011, we intercepted a boat, the
Victoria, which we found to be carrying land-to-sea 704-C missiles as
well as radars. These were intended to be delivered to Gaza."
The strategy that the navy chose to adopt is
theatre-wide defense, which entails the combining of intelligence,
reconnaissance, control, a physical presence, and, of course, a response
to create a pocket of defense that would cover the entire area.
"The impact of a successful terrorist attack
is dramatic," Lavi said. "It not only entails the physical harm done to
an installation, the economic ramifications of which reaches
astronomical sums and which results in loss of work days. Such an attack
would catapult insurance rates to heights which would call into
question the very feasibility of undertaking the drilling project. It
would also seriously dampen foreign companies' motivation and
willingness to do business here."
The navy seeks to acquire four vessels that
would serve as the backbone of its maritime defense strategy as it
relates to the exclusive economic zone. "The navy is stretched thin and
is doing all it can today," according to Levy.
"The four new ships are known as 'offshore
patrol vessels,' and the cost of purchasing them is $3 billion. Putting
them into operation will take time. The building of such a ship takes
over four years, but we would end up with an outstanding vessel that
will be armed with our very own Iron Dome as well as Barak missiles, the
Vulcan Phalanx CIWS, a helicopter, and other features. We can provide a
real boost toward carrying out our mission."
After 45 minutes at sea, the rigs, which look
like spider-shaped structures from a distance, peer out from the
horizon. The Yam Tethys field is smaller, while the Tamar complex is
newer and bigger. Observers at the site could easily discern the
Ashkelon and Gaza beachfronts, which appear to be at an equal distance
from the site. This view encapsulates the problematic, complex nature of
safeguarding installations that lie vulnerable in the exclusive
economic zone.
These two rigs, which are separated by just
1.5 kilometers of sea, will be connected to a joint operating grid. "The
Yam Tethys reservoir is empty," Lavi said. "Tamar is a platform which
we have connected to the longest gas pipeline in the world. It starts at
the Tamar drilling site, which is an underwater site on the northern
tip of the zone. The Tamar rig will receive the gas, filter it, decrease
the pressure, and funnel it to land through Yam Tethys. The excess gas
will be deposited in the empty Yam Tethys reservoir, creating another
natural gas deposit."
"The Tamar project is ready to go from all
aspects," Zar said earlier this month. "The business model is clear and
precise, the risk is very low. This is the only project currently
underway in the country that is assured of generating revenue in the
long term."
Natural gas superpower
Unlike the joke about "signs of oil" that
would inevitably yield no deposits, natural gas is an entirely different
story. This success story has an undisputed sponsor, Texas-based Noble
Energy, one of the largest and most experienced companies in the field.
The firm's holdings, which include land- and sea-based drilling projects
around the globe, are valued at $17 billion. It began operations in
Israel in 1998.
The Yam Tethys reservoir (which encompasses
the "Mari" and "Noah" drilling projects) was discovered in the early
2000s by a joint team of explorers from Noble and Delek, the Israeli
energy conglomerate owned by billionaire businessman Yitzhak Tshuva. It
is a relatively small reservoir (32 billion cubic meters), though since
2004 it has combined with the natural gas provided by Egypt to supply
all of Israel's modest gas needs (5 billion cubic meters of gas per
year).
The partners in the Yam Tethys project smelled
more riches beneath the sea. In 2006, they obtained permits to drill in
the northern section of the exclusive economic zone. "At the time,
whoever asked for a permit got one," Zar said. "Noble and Delek received
nearly the entire portion of the northern section. Today, the state is
far stingier in handing out permits. To Noble's credit, they did
excellent work. They efficiently mapped out the entire area and as a
result discovered Tamar, and then Leviathan."
Noble introduced to Israel its first deep-sea
drilling rig. Exploratory drilling began in 2008, months before Tamar
was discovered in January 2009. This changed the entire picture. Not
only did the enormous size of the reservoir change the energy calculus
in the country, but the timing could not have been better. Israel's
traditional natural gas suppliers were winding down their operations.
Egypt was in the throes of the Islamist revolution, while Yam Tethys had
exhausted all of its potential.
"Two years ago, I predicted that we would no
longer get gas from Egypt," said Zar. "During the revolution, I
monitored Egyptian media reports. I could detect within days when there
would be another explosion at a natural gas supply pipeline to Israel.
Beyond the political problems, however, there's also a practical
dilemma, and that is that Egypt just doesn't have enough gas to export."
In 2010, the Leviathan deposit was discovered.
Even for an experienced, wealthy company like Noble, this was a seminal
occurrence. On its Web site, it trumpeted the discovery as the largest
reservoir in its history. Overnight, Israel became a natural gas
superpower. The breakthrough compelled the finance minister, Yuval
Steinitz, to take action. He formed a committee that was headed by
Professor Eitan Sheshinski. Its task was to determine the royalties and
commissions the state would exact as a result of the discovery of the
natural resource.
Its primary recommendation was to institute
oil and natural gas levies at a progressive rate that would only be
collected after the entrepreneurs attained a full return on their
investment plus an additional 50 percent gain and before they would have
to pay corporate tax. The initial levy stood at 20%, and it would
gradually rise to 50% in accordance with the resultant revenues.
"This is a real achievement for the State of
Israel," said Lavi. "From now until 2040, the state will benefit from
royalties and taxes that will total $140 billion. That's a 5% addition
to GDP at no investment."
Beware of disappointment
There are mixed opinions regarding the strategic significance that the natural gas deposits hold for Israel's economy.
Uzi Landau, the minister of energy and water,
told the February 2013 edition of Haaretz's "Energy+" supplement: "The
discoveries of Tamar and Leviathan and the potential for more
discoveries augur an era of energy independence." The transition to
natural gas will impact the competition between private electricity
producers in the market that are due to begin offering services by the
end of 2015.
The discovery will also make its impact felt
on the transport of gas, the lowering of energy prices on the market
(although it is still uncertain as to whether these lowered rates will
be felt by the consumer), industry's transition to gas, and efforts to
institute "cleaner" and "green" measures, despite the controversy over
the proposed building of gas receptacles along the coast, something
which environmentalists have adamantly opposed. Experts in the field say
that Israel's geopolitical standing will be enhanced by these
discoveries. "Countries that export energy are more influential," said
one source.
Zar, however, preaches caution. "Natural gas
significantly improves the state of the economy, but it doesn't alter
global agendas," he said.
Even the most optimistic analysts rule out the
possibility that the new natural gas findings will translate into a
lifestyle led by Saudi oil sheikhs. They also warn that future drillings
could yield disappointment. The Sara and Mira drilling projects, which
were estimated to produce 180 billion cubic meters of natural gas, came
up completely empty.
"The partnership with Petromed, which was
established by the Land Development Company, invested $200 million in
drilling which turned out to be worth nothing," Zar said. "The
geological structure of the ocean floor simply isn't conducive to the
production of gas reservoirs."
Domestic consumption or export?
The most contentious issue surrounding the
anticipated revenue from the natural gas findings is how much of the gas
will be permitted for export. "If it weren't for the Sheshinski
committee, there wouldn't be any export at all," said Zar. "It was only
because of the future profits that were guaranteed by the committee that
people are even talking about this."
A panel chaired by Shaul Zemach, the
director-general of the Ministry of Energy and Water, has been assigned
the task of determining how much of the gas that has been produced will
be allocated for domestic consumption over the next 25 years and how
much will be permitted for export. Why 25 years? That is because holding
the gas in the domestic market for longer is liable to dampen the
motivation of other entrepreneurs to find and develop more energy
reservoirs, which would inevitably result in a significant loss of
revenue for the state.
According to estimates, in the year 2016, the
state economy will require investments that range between $10 and $20
billion. Allowing for natural gas exports is considered critical to
luring another serious player in the energy market. The Leviathan
partnership has also let it be known that if it is denied permission to
export gas, it will not provide gas for domestic consumption since it
would be cost-prohibitive given the scope of the investment.
"When the Antitrust Authority claims that it
wants to break up the monopoly [in this case the one belonging to Noble
Energy] in the natural gas market, it is, pardon me, talking nonsense,"
Zar said angrily. "In Israel, like in the rest of the world, we need to
get used to the fact that in the energy sector there are monopolies. In
foreign countries, there are only a very small number of key players,
and what the regulatory agencies need to do is just to make sure that
prices don't spin out of control. From a historical standpoint, we need
to say 'Thank you' to Noble Energy for what it did for the country in
this area. I don't see any other alternatives banging on the door to get
in."
The Zemach committee has come up with three
quite conservative estimates. First, there will be no more future
discovering of significant gas findings. Secondly, despite assessments
that the total volume of natural gas found in the fields could
potentially reach 1.4 trillion cubic meters of natural gas, the
committee based its conclusions on estimates that predicted a total
output of just 950 billion cubic meters. Thirdly, in the next 25 years,
the domestic market will consume 450 billion cubic meters that need to
be preserved. In other words, there are at least 500 billion remaining
for export.
The committee's recommendations, which it
handed down this past August, must be approved by the Israeli
government. The delay in forming the next government has also put on
hold final authorization. Charles Davidson, Noble's CEO, was quoted as
saying that until the Zemach committee report is approved, his company
"cannot take any decisions regarding future large-scale projects in
which it is involved in Israel." In less diplomatic language, the most
important player in Israel's natural gas market has just issued a yellow
card to our government.
Landau is prepared to accept the Zemach
committee recommendations, but he, too, is waiting for the formation of
the next coalition. "We will wait for the new government and we will
outline an export policy," the minister said. "After we set aside a
sufficient amount of natural gas for domestic consumption, including the
use of gas as part of a plan to create alternatives to petroleum, we
will be able to export gas to our neighbors, the Jordanians and the
Palestinians. There are talks being held between the Israel Electric
Company and Cyprus that deal with planning for laying down a pipe along
the ocean floor."
People are also wondering what will be done
with the money generated by the exports. On this issue, all of the
experts are in agreement. If the money goes toward covering everyday
expenses, paying back debts, or fulfilling coalition needs, then it's a
waste of time. This would be a disaster. If, on the other hand, a
special fund is established that will be devoted to tending to the needs
of future generations and other development projects, the State of
Israel will emerge as the big winner.
We still haven't even broached the issue of oil
reservoirs that are believed to lie underneath the natural gas deposits
that were discovered.
Aharon Lapidot
Source: http://www.israelhayom.com/site/newsletter_opinion.php?id=3873
Copyright - Original materials copyright (c) by the authors.
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