Israel Races to Increase Gas Exports

Israel looks poised to hike its gas exports by end-September in a dash to maximize the value of its offshore reserves before the Israeli government introduces a carbon tax. The move could result in a reversal of Israel's current export policy, which demands that producers earmark 60% of gas output for the domestic market. It could also boost the investment profile of Israel's upstream sector, lift the prospects for East Mediterranean LNG exports, and help allay supply concerns in nearby Egypt. The new Israeli government under Prime Minister Naftali Bennett is preoccupied with introducing a new carbon tax on fossil fuels, which will be introduced gradually from 2023-28 and will include gas. An Israeli upstream source believes the government is likely to adopt the proposed gas export hike soon to seize the window of opportunity the country has to develop its gas reserves. “I believe the final government resolution will be similar to the current [export] proposal or perhaps better,” said the source. A 66-page government report recently favored no export restrictions on gas from new fields and a reduction in the minimum supply obligation to the local market. Israel's rationale comes primarily from a fear that fast-changing global gas market dynamics could leave it with stranded assets, based on estimates from the International Energy Agency showing that Israel has about 20-25 years before demand for Israeli gas starts to weaken. The second driver comes from a new energy policy, under which the carbon tax falls. Israel has raised its renewables target for power generation from around 17% to 30% by 2030, which potentially frees up domestic gas for export. A carbon tax on gas currently set at 17 shekels ($5.27) per ton would rise to 170 shekels ($52.74) per ton by 2028. The development could be good news for US Chevron, which sits at the nexus of East Mediterranean gas reserves that have yet to materialize into LNG exports to global markets. Chevron operates the 22 trillion cubic foot Leviathan and 11 Tcf Tamar fields offshore Israel, as well as the undeveloped 4.1 Tcf Cypriot Aphrodite offshore field, and could find itself in a commanding position with more Israeli export volumes at its disposal. Chevron’s dive into East Mediterranean gas back in July 2020 looked geopolitically risky, but so far it appears to have paid off despite the recent Israeli conflict with Hamas in Gaza (PIW May28'21). Chevron has inherited piped gas export contracts from Leviathan to Egypt and Jordan, with proof of concept reached in January 2020. Last month, the US supermajor, with Israeli partner Delek, extended a contract with Belgium’s Exmar to promote a second phase development of Leviathan involving a floating LNG facility. Egypt’s questionable gas production outlook is raising concerns among its producers. Cairo could become reliant on East Mediterranean gas reserves in Israel and Cyprus soon either to achieve its LNG export hub ambitions or to supply its gas-hungry domestic market. Egypt wants to use its twin LNG export plants at Idku and Damietta as potential hubs for the re-export of East Mediterranean gas as LNG and has the backing of international institutions, European and regional governments (PIW Oct.2'20). But the domestic gas production outlook is unclear, raising fears of another gas crunch in a few years akin to its 2012-14 crisis, when rampant local gas demand outstripped its marketed gas exports and saw Egypt stripped of its LNG exporter status to become a major gas importer. Idku partners could not agree on a Phase 10 development of the West Delta Deep Marine field, which feeds gas to the plant, with likely expiry now set for 2024-25. BP’s West Nile Delta project is experiencing difficulties with water encroachment, and sources say that production loss at three of the five fields -- Libra, Giza and Fayoum -- is significant. Even Egypt’s flagship 30 Tcf Zohr field appears to be experiencing problems from water encroachment. Another source claims that while Zohr's stated capacity is 3.2 billion cubic feet per day, actual capacity is closer to 2.8 Bcf/d or even 2.4 Bcf/d. Operator Eni insists that Zohr's capacity remains at 3.2 Bcf/d.