Israeli Gas to Reach Global Markets via Pipelines to Egypt

Big 5

In the midst of some of the worst Middle East tensions in a decade, one-time enemies Egypt and Israel are negotiating deals that may mean the sale of $60 billion in Israeli natural gas to liquefaction plants in Egypt.

The talks come as Israel resumes air strikes on Gaza after Hamas, which the U.S. and the European Union classify as a terrorist group, fired rockets following a breakdown in Egypt’s efforts to broker a ceasefire. The move is all the more improbable because Egypt — little more than a year ago — was under the sway of the Muslim Brotherhood, which had begun to steer the country away from viewing Israel as a trading partner.

Noble Energy Inc. (NBL:US) and units of Israel’s Delek Group Ltd. (DLEKG) plan to deliver as much as 6.25 trillion cubic feet of gas from the Tamar and Leviathan offshore fields to LNG facilities in Egypt’s Damietta port and the coastal town of Idku. Executives said this week they expect to finalize the agreements by yearend.

With Cairo peace talks to end the war in the Gaza Strip faltering, the trade agreements offer the potential to strengthen relations between the region’s largest economy and its most populous. The two offshore fields have more than enough gas to supply Israel for decades. The country is seeking a way export the excess and shipping it to Egypt will be faster than building LNG plants.

“From these LNG plants in Egypt, Israeli gas can reach European and Asian markets,” said David Shrem, a Tel Aviv-based portfolio manager at Sphera Funds Management Ltd. The deals “are the first significant ones for regional exports.”

Mediterranean Pipelines

Noble, based in Houston, and the Delek units Delek Drilling-LP and Avner Oil Exploration LP, expect to send gas through pipelines under the Mediterranean Sea. They signed a non-binding agreement in June to deliver the fuel to BG Group Plc (BG/)’s LNG plant in Idku, and reached a similar deal in May to sell gas to Spain-based Union Fenosa Gas SA’s Damietta plant.

Delek’s units expect those deals to be finalized by year-end, as per company filings, according to an e-mailed statement Aug. 17. That echoes comments made by Noble’s president and chief operating officer David Stover in July. Tamar started production last year and Leviathan is scheduled to begin output in 2018.

The two accords provide for sales of as much as 6.25 trillion cubic feet of gas over 15 years, Noble and its Israeli partners said. That would be worth more than $60 billion at current prices in the U.K.

Export Revenue

The agreements would bring billions of dollars a year of export revenue to Israel. Exporting by pipeline would be faster than developing its own liquifying infrastructure, said Guil Bashan, an analyst at Tel Aviv-based IBI-Israel Brokerage & Investments Ltd., as building LNG plants would take years, cost billions of dollars and entail a long regulatory process.

Under Egyptian President Abdel-Fattah El-Sisi, the former army chief who led the military’s removal of the Muslim Brotherhood last year, Egypt’s relations with Israel have improved. That’s opened a window for gas-export agreements as Israel’s prolonged conflict with Hamas fighters continues in the Gaza Strip.

The Union Fenosa and BG plants in Egypt have been unable to fulfill long-term contractual commitments to European and Asian buyers as the country diverts gas to supply domestic consumers. That means Israeli gas would help achieve two important goals: meeting the country’s growing energy demands and maintaining public support, said Michael Leigh, a senior adviser to the German Marshall Fund of the United States.

Gas Reversal

The agreements would be a reversal from the past. Egypt used to export gas to Israel until a series of bombings against the Sinai supply pipeline led to its closing in 2012. Relations between Israel and Egypt deteriorated after former President Hosni Mubarak was overthrown in 2011, and his eventual replacement by Muslim Brotherhood leader Mohamed Morsi.

The ouster of Morsi in July 2013 has led to better ties with Israel. Egypt helped broker cease-fire agreements between Israel and Hamas.

Egypt’s Minister of Petroleum & Mineral Resources Sherif Ismail said Aug. 13 that no agreement has been reached regarding Israeli gas imports. Maya Etzioni, a spokeswoman for Israel’s Ministry of National Infrastructures, Energy and Water Resources, declined to comment.

Turkey, another potential export destination, no longer appears to be an option. Turkish Energy Minister Taner Yildiz said this month there won’t be any gas deals with Israel unless a long-term cease-fire is achieved in Gaza.

‘Turkey Option’

“A pipeline to Turkey will not be built under current political conditions,” Leigh said. “The Turkey option faces serious political and economic constraints.”

Israels has other export options. Noble and its Leviathan partners, Delek, Avner and Ratio Oil Exploration 1992 LP (RATIL), are considering a pipeline to Cyprus, according to an April investor presentation from Delek Drilling. And the Tamar partners signed an accord in February to supply Jordan-based Arab Potash Co. with fuel, starting in 2016.

Guenther Oettinger, who leads European energy policy as a commissioner at the European Commission, said last month that the EU wants to encourage the development of Mediterranean oil and gas resources to secure sustainable and affordable energy. Israel’s island neighbor Cyprus has also made major gas discoveries under its seabed.

“Recent developments concerning Russia and Ukraine have made energy security a top priority for Europe and the EU is scrutinizing all potential sources,” said Leigh, a former director general in the European Commission. “Greater attention will probably be focused on the Eastern Mediterranean and Israeli gas as a result.”

Source: Businessweek