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PEER STRATEGY

East Med Gas Deal Puts IOCs on Alert

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  • A memorandum of understanding agreed at the East Mediterranean Gas Forum in Cairo last week could help answer Europe's gas supply prayers.
  • Israel's offshore is receiving unprecedented attention but there are concerns over policy stability after a number of recent U-turns.
  • A long-overdue concept selection by Chevron on East Med LNG exports would reassure future investors over the region’s potential to supply global gas markets.

The Issue

A deal for Israel and Egypt to supply Europe with LNG is reigniting international oil company (IOC) interest in East Mediterranean gas as EU states look to wean themselves off Russian pipeline volumes. This could see the East Med receive an investment boost just as new bid rounds are under way or being prepared in Lebanon and Israel. The risk of conflict and political delays cannot be ignored, however, while Egypt’s past diversions of gas feedstock from LNG plants to its domestic market still play on investors' minds.

Exploration Renaissance

The Egypt-Israel LNG supply deal is provisional with no volumes or prices mentioned but could lay the groundwork for more investment. Included is a clause in which the EU promises to encourage European companies to bid in competitive tenders and invest in exploration and production in Egypt and Israel.

Attracting European investment in Egypt's energy sector has not been a problem for Cairo since Eni’s 30 trillion cubic foot Zohr gas discovery in 2015 triggered an exploration renaissance. BP, Shell and TotalEnergies joined Italy's Eni in Egypt's Nile Delta and deepwater, as did — at a later date — US majors Exxon Mobil and Chevron.

But in Israel, majors were noticeable by their absence until Chevron entered the country through its acquisition of Noble Energy in 2020. Some speculated a lack of participation by IOCs in Israel’s first bid round in 2016-17 was down to fears they would be excluded from future opportunities in the Mideast Gulf. But the 2020 Abraham accords — which secured diplomatic recognition for Israel in Gulf states Bahrain and the United Arab Emirates — have changed the political landscape.

East Mediterranean Gas Finds

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Even Abu Dhabi's state-owned Mubadala now has acreage in Israel. An executive at Petronas — whose home country of Malaysia has yet to recognize Israel — believes the company and European IOCs may well consider Israel more seriously going forward, as well as perhaps Lebanon.

Political Risk Lingers

The IOCs may prove wary of political inconsistency in both those countries, however. Israel is preparing a fourth offshore licensing round, which — while in the IOCs' interests — does in fact represent a policy U-turn. Energy Minister Karine Elharrar, who signed off on the bid round, had previously insisted Israel would target renewables investments over gas to help meet net-zero emissions targets.

Furthermore, Israel’s gas export policy, which was due to be revised to allow companies to ship more volumes overseas, was shelved earlier this year. The country had planned to hike its export quota from 40% to 60% to reduce the risk of fields becoming stranded assets. And one former IOC executive recalls Noble's years-long struggles in Israel to reach a final investment decision on the 22 Tcf Leviathan field, which faced both political and regulatory delays. Under domestic pressure, the current Israeli government is likely to limp on until elections in October, which could affect the bid round.

Lebanon’s current dire economic situation and electricity crisis with frequent blackouts would make many IOCs think twice. Yet Total, Eni and Russia's Novatek still jointly hold offshore Blocks 4 and 9 there. They are yet to make a commercial discovery but still have well commitments to fulfill. The deadline for submissions in Lebanon's second offshore bid round was recently extended until December.

Bordering on a Solution

Amid this backdrop, the threat of an escalating conflict between Israel and Lebanese Shiite militant group Hezbollah should factor into IOC calculations. The US is currently mediating a solution to the disputed maritime border between Israel and Lebanon amid intensifying rhetoric.

Conflict has impacted regional gas projects previously. As a result of Israel’s brief war with Palestinian Hamas in May 2021, Chevron’s 11 Tcf Tamar field was forced to shut in production for 10 days. Any missile attack by Hezbollah could potentially strike key gas infrastructure offshore or impact IOC production and revenues.

Despite this, the CEO of East Med-focused E&P Energean, Mathios Rigas, told Energy Intelligence that “anyone who invests [in Israel] knows and understands that his investment will receive the protection of the government ... I will myself fly to the Karish rig and I will sleep there. I feel very safe,” he said.

Energean’s floating production, storage and offloading (FPSO) vessel arrived at the Karish gas field, 90 kilometers off Israel’s coast, this month. Gas production targeting 630 million cubic feet per day is expected to start by the third quarter, destined for the Israeli market. Hezbollah had explicitly said it would prevent Israel extracting gas from Karish.

All Eyes on Chevron

Chevron’s selection of an export option for a Phase 2 monetization of Leviathan, potentially combined with development of the 4 Tcf Aphrodite field offshore Cyprus, is long overdue and would provide a level of reassurance as new investors consider East Med gas projects.

Joint development looks likely with a provisional state-to-state agreement already in place between Cyprus and Egypt to pipe Aphrodite gas to Egypt’s Shell-operated Idku LNG terminal for liquefaction. Floating LNG at Leviathan is another option that some industry sources in Egypt have argued would give Chevron more direct control over its production. Furthermore, the US major this week signed a preliminary agreement with Egyptian Natural Gas Holding Co. (Egas) to explore sending gas from offshore Mediterranean fields to Egypt for processing and export. Italy's Eni, which operates Egypt's Damietta LNG terminal, signed a similar deal with Egas in April looking to "maximize gas production and LNG exports ... to promote Egyptian gas export to Europe, and specifically to Italy."

Under the Israel-Egypt deal with the EU, a plan will look at existing infrastructure and include the need to build and develop “new liquefaction plants.” A European Commission funded-study into a potential East Mediterranean Gas Pipeline is due to conclude this year but there are industry concerns over its commercial and technical viability. European financial institutions have previously favored the cost savings associated with using Egypt’s existing LNG plants.

For now, Israeli diplomats say Cyprus and Israel must resolve a boundary delineation dispute over the Aphrodite and smaller Ishai field that is holding up development. Chevron, Shell and Israeli partner Delek operate Aphrodite, while smaller Israeli firms manage Ishai.

Selected Major East Mediterranean Gas Fields and Blocks
CountryReserve/Resource EstimateOwnershipProduction
Israel
Leviathan field 22 TcfChevron (operator) 39.66%, Delek 25.48%, Ratio Oil 15%10.7 Bcm 2021, production capacity 12 Bcm/yr, Phase 1B: 21 Bcm/yr
Tamar field11 TcfChevron (operator) 25%, Mubadala 22%, Isramco 28.75%, Tamar Petroleum 16.75%, Dor Gas 4%, Everest 3.5%8.7 Bcm 2021
Karish field1.41 TcfEnergean (operator) 100%630 MMcm Q3'22
Cyprus
Block 12 Aphrodite gas field 4 Tcf confirmedChevron (operator) 35%, Shell 35%, Delek (New Med Energy) 30%NA
Block 10Glaucus-1 5 Tcf-8 Tcf under appraisalExxon Mobil (operator) 60%, QatarEnergy 40%NA
Block 9NAEni (operator) 80%, Kogas 20%NA
Block 8 NAEni (operator) 100%NA
Block 6Cronos-1 drilled in May, Calypso-1 2 Tcf-4 TcfEni (operator) 50%, TotalEnergies 50%NA
Block 5 NAExxon Mobil (operator) 60%, QatarEnergy 40%NA
Block 3NAEni (operator) 80%, Kogas 20%NA
Block 2NAEni (operator) 80%, Kogas 20%NA
Lebanon
Block 9NATotalEnergies (operator) 40%, Eni 40%, Novatek 20%NA
Block 4NATotalEnergies (operator) 40%, Eni 40%, Novatek 20%NA

Topics:
Gas Supply, LNG Projects, Offshore Oil and Gas, Upstream Projects, Military Conflict
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