The development of East Mediterranean natural gas so far has two storylines. The first tells of big discoveries offering access to a relatively clean and affordable resource, and extra state revenue. The second is a story of continuous political tinkering and infighting, jeopardising the development of some of these newly found riches. The second story seems likely to continue in 2016.
Start with the good news. Over the past 15 years, substantial natural gas deposits have been found and more may follow. Eni’s discovery of a supergiant, 30 trillion-cubic-feet field offshore Egypt, announced in August 2015, may not be the last find in the region. Until August, the big recent gas discoveries had come off the coast of Israel, where development has crept along. The Tamar field, with proven reserves of 10 trillion cf, has been operating since 2013. It should meet demand in the Israeli market for a number of decades.
Despite Tamar’s progress, resource extraction in the East Mediterranean has become troubled. Take the case of Cyprus. In 2011, Noble Energy found 5 trillion cf offshore the island and local politicians beset with austerity dreamt of building a lucrative liquefied natural gas-export business. It was a pipedream. To commercially develop the resource more gas must be found – but this is not expected soon. Eni and Total have already dropped their exploration activities in Cyprus after disappointing initial results. Just across the Mediterranean, Lebanese authorities still quarrel about the terms under which companies can start exploring off its shores. It’s still unclear when exploration will commence – 2016 certainly looks too soon. Further south, the Palestinian Authorities are in no position to unilaterally facilitate development of the Gaza Marine field that sits just off the Gaza Strip. Despite its huge find in Egypt, Eni will still have to agree a gas price and development strategy with the government, and will probably want to share the financial burden with partners. For all of these nations, 2016 will be a fallow year in terms of gas development.
The real rollercoaster has been over Israel’s Leviathan field, offshore Haifa. Its 22 trillion cf, found in 2010, made it one of the largest discoveries of the century. But because the nearby Tamar field can meet Israeli gas needs for the foreseeable future, Leviathan’s development has hinged on finding other buyers. Strong LNG prices originally prompted Noble and its fellow developers to look for a partner with experience in this market. Two years of talks with Woodside Petroleum ended without a deal in 2014. The Australian firm argued over tax with Israel’s government and the Leviathan partners were forced to make regional markets their priority; LNG would come later. Production from Leviathan, said Noble, would start in late 2017.
This will not happen. Throughout 2014, Noble and its partners came under scrutiny in Israel for their dominant position in the country’s gas market. In December 2014, Israel’s Antitrust Authority declared Noble’s consortium, which also involves Delek Group and Avner Energy, to be a “monopoly” that may have to be broken up. The announcement, coming close to parliamentary elections in 2015, made the issue a political flashpoint that played into popular disenchantment. Things got heated.
After the Netanyahu government won 2015’s spring elections it made the development of Leviathan a national priority. More politicking followed as a deal with the gas consortium was broached. The head of the Antitrust Authority resigned. A “final” agreement was brokered in mid-August. But controversies remain, including over the agreed price of gas, and about a stability clause guaranteeing no significant regulatory changes until 2025. Noble is optimistic it can finalise a deal by end-2015.
But the political tinkering may well continue in 2016. Further delays to the development of Leviathan should not be ruled out. The coming year ought to have pushed Israeli and other gas projects in the region forward, but progress will remain slow. In a world that is long in gas, it remains to be seen whether there is even a market for Leviathan’s output in the near future.
An extract from “Outlook 2016: Energy markets and politics in the year ahead” published by Petroleum Economist, November 2015. More information can be found here: www.petroleum-economist.com/outlook