The latest achievements hit by Noble Energy offshore Israel have attracted world’s attention towards the probable gas potentials in Israel, which could turn it to a gas exporter instead of a current importer

Two years ago (January 2009), Ratio Oil Exploration LP, an energy firm, was worth about half a million dollars, while today, Ratio’s market capitalization approaches $1 billion. The rally at Ratio is mainly due to the company’s 15% stake in a giant offshore gas field called Leviathan, operated by Houston-based Noble Energy Inc., which made a natural gas discovery at the Tamar prospect in the Matan License, offshore Israel. The Atwood Hunter semisubmersible drilled the Tamar No. 1 well in 5,500 ft. of water to 16,076 ft., where it encountered more than 460 ft. of net pay in three high-quality reservoirs. Initial testing yielded a flow rate of 30 MMcfd of natural gas, but was limited by testing equipment available on the rig. Performance modeling indicated the well could achieve a production rate of over 150 MMcfd.

Noble confirmed its estimates that the field contains 16 trillion cubic feet of gas — making it the world’s biggest deep water gas find in a decade, with enough reserves to supply Israel’s gas needs for 100 years. After analysis of all the post-drill and production test data, the estimated gross means resource potential of Tamar was increased to 5 Tcf. The Atwood Hunter also drilled the Tamar-2 appraisal, which also encountered gas, and the Dalit-1 well, also offshore Israel in the Michal License, which encountered gas. Noble Energy operates the well with a 36% working interest with partners Isramco Negev 2 with 28.75%, Delek Drilling 15.625%, Avner Oil Exploration 15.625%, and Dor Gas Exploration 4%. Noble and its partners think the field could hold enough gas to transform Israel, a country precariously dependent on others for energy, into a net-energy exporter.

Such a transformation could potentially alter the geopolitical balance of the Middle East, giving Israel a new economic advantage over its neighbors. The energy index of the Tel Aviv Stock Exchange rose 1,700% in the past year. In recent months, energy stocks accounted for about a quarter of trading activity on the exchange, once mostly the domain of real-estate companies. It is also shaken regional relations. Lebanese politicians are trying to lure companies to explore their nearby waters, while the two countries– still technically at war — have threatened each other over offshore resources. A minor diplomatic furor has erupted between Israel and the U.S., which is lobbying hard against Israel’s plans to raise taxes on energy companies, including Noble. Leviathan sits some 84 miles off Israel’s northern coast and more than three miles beneath the Mediterranean’s seabed. Noble began drilling its first exploratory well in the field in October. Even before Leviathan, a series of finds had put the so-called Levant Basin, stretching offshore in the Mediterranean, on the international energy map. In March, the U.S. Geological Survey released its first assessment of the zone, estimating it contained 1.7 billion barrels of oil and 122 trillion cubic feet of gas. That is equal to half the proven gas reserves of the U.S. Except for the occasional small oil and gas find in its early years, Israel has searched in vain for energy. Big Oil shied away, worried about antagonizing Arab and Iranian partners. A hardy group of Israeli explorers kept at it anyway. Ratio was one of them. In the early 1990s, Ratio’s chief executive, formed the company to search for oil onshore.

By then, companies were also venturing offshore. In 1998, another Israeli energy firm, Delek Group Ltd., persuaded Noble, one of the first independents to operate offshore in the Gulf of Mexico, to start looking in Israel’s slice of the Mediterranean. Noble drilled its first Israeli well in 1999, and quickly scored two modest finds. Financial firms and local businessmen with little energy experience began snapping up offshore leases from the government. Armed with promising seismic data, the pair then convinced Noble and Delek to buy into their lease. They sold a 45% stake to Delek and a 40% stake to Noble.

In January 2009, Noble made a landmark discovery. The Tamar field contained premium quality gas — almost pure methane. Noble had expected to find three trillion cubic feet at the most. The reservoir ended up containing nearly three times. Two months later, the company found a second, smaller deposit of gas at the nearby Dalit field. Then, last summer, Noble dropped a bombshell. The Leviathan field appeared to be a supergiant, according to three-dimensional seismic studies, with almost twice the gas reserves of Tamar. Ratio’s shares soared, and so did those of other energy firms in Tel Aviv. The rally set off alarm bells among regulators. Officials at the Israeli Securities Authority declined to comment on specific cases, but said they were concerned about an ongoing pattern in which small energy companies publish vague or misleading reports that cause their share prices to skyrocket, and often to plummet later. In September, the ISA raided the offices of two energy-exploration firms related to probes into trading irregularities.

Amid the stock-market frenzy, the Israeli government started considering changing its 1950s-era energy royalties and tax regime, to boost the government’s take of any gas find. Earlier this year, Finance Minister Yuval Steinitz said he was considering changing terms retroactively — meaning the government could extract better terms on previously assigned leases. Noble and Israeli oil executives went on the offensive. The company enlisted high-level negotiators, including the U.S. State Department and former President Bill Clinton, to lobby against any change.

Despite these problems, Israel’s gas find is making waves abroad. Lebanon has staked out its own claim to offshore gas. In last August, lawmakers in Beirut rushed the country’s first oil-exploration law through its normally snarled parliament.

Lebanon’s Oil Minister, an ally of the Shiite militant group Hezbollah, said in late October that his ministry hopes to start auctioning off exploration rights by 2012. Iran, Israel’s arch-nemesis and Hezbollah’s chief backer, has also weighed in. Tehran’s Ambassador to Lebanon claimed that three-quarters of the Leviathan field actually belongs to Lebanon. The Israeli infrastructure minister denied the claim and warned Lebanon that Israel would not hesitate to use force to protect its mineral rights. Meanwhile, the poster child of the boom, Ratio, has seen its star fade after authorities launched a criminal probe of the company’s relationship with an Israeli wanted by the U.S. on racketeering and conspiracy charges. The Israeli investigation is ongoing and charges have not been filed.
Large gas reserves confirmed at Israel’s Leviathan deposit

Test drilling at Israel’s Leviathan gas deposit in the Mediterranean Sea has confirmed large gas reserves there, which allow Israel to begin exporting gas, said the project operator, U.S. Company Noble Energy. Leviathan, located to the west of the Mediterranean port of Haifa, contains 450 billion cubic meters of gas, said the company quoting the results of test drilling. Additional drilling will be carried out at the gas field to specify the figure. The discovery is believed to assure the country’s energy independence and is likely to put an end to Russia’s plans to export natural gas to Israel. Gas extraction at Leviathan, which is 6.5 times the size of Tel Aviv, is expected to provide Israel with some $300 billion over the life of the field – one-and-a-half times the national GDP. Noble Energy said there was a 50% chance that test drilling would confirm Leviathan’s estimated gas deposits. In 2009, a U.S.-Israeli consortium discovered another large gas deposit 60 miles off the coast of Haifa, called Tamar. The Leviathan field is estimated to be twice that size. Analysts say that altogether, the basin in the Eastern Mediterranean to which those fields belong could contain an amount of gas equivalent to one-fifth of U.S. natural gas reserves.

Leviathan worth $4.8B per year to Israel
Citi analyst David Lubin said that the Leviathan natural gas reserve, which may also include oil, is worth as much as $4.8 billion per year to Israel’s economy. Tests have shown that the Leviathan structure contains 16 Tcf (450 billion cubic meters) of natural gas. Lubin said that Leviathan appears to be worth the equivalent of 2.97 billion barrels of oil, or 74.25 million barrels per year for 40 years, or 203,000 barrels per day. Using an oil-equivalent price of $65 per barrel (which is a big discount on the price of oil to account for the difference between the price of gas and oil), his valuation would reach $4.8 billion, or 2.2% of 2010 GDP. Lubin’s earlier estimate was for an impact worth of 1% of GDP. Since then, he explained, two things happened to change the figure — the price of oil has jumped, and there is now much more clarity about the size of Israel’s reserves. The analyst took pains to point out that there are some uncertainties about Israel’s gas situation, such as whether the gas will be exported or used to reduce Israel’s energy imports, the final tax and royalties arrangement now that the Sheshinski recommendations are headed to the Knesset, the extent of infrastructure costs, and how any state revenues will be used (to reduce the debt, as the Treasury wants, or to set up a Sovereign Wealth Fund, as the Bank of Israel suggests). All in all, Lubin clarified that it is likely good news for Israel’s economy and balance of payments — which should support the shekel in the long term. 

Surplus of fuel for Israel
After making a huge natural gas discovery off the coast of Israel, Noble Energy now faces a different challenge: figuring out what to do with it. With Israel suddenly awash in gas, the Houston company believes the clear answer is to export surplus gas to Europe or other parts of Asia, where it can fetch better prices.  Yet, none of the options the company is studying is simple and all would require billions more in investment.  The most likely scenario is building liquefied natural gas capacity in Israel, Noble CEO Charles Davidson said in an interview. Production from the company’s newly announced Leviathan gas field could easily support two “mega-train” plants to convert natural gas to liquid and prepare it for shipment to global ports, he said.  But if it goes that route, Noble would likely seek partners to help shoulder the multibillion-dollar project.

Another export option would be a deep-water pipeline, but that comes with more political risk, since it would require the blessing of neighbor nations, not all friendly with Israel. Given the size of the discovery, it may require LNG plants and a pipeline, Davidson said. On December 29th, the company found an estimated 16 Tcf of natural gas at the Leviathan field in the Mediterranean off Israel’s coast. Together with Noble’s Tamar field, discovered in 2009 and estimated to hold 8.5 Tcf of gas, Israel now faces potentially huge natural gas surpluses.  The discoveries put Israel on the global energy map long dominated by oil-rich Arab nations in the Middle East. And the finds are a huge boost for Noble, an independent oil and gas company in business for nearly 80 years.

A U.S. Geological Survey study last year said the Eastern Mediterranean’s Levant Basin could hold 1.7 billion barrels of oil and 122 trillion cubic feet of gas. Discoveries there hold the potential to transform Israel’s economy and influence in the region and to open a new front in the global hunt for fossil fuels.  But, Israel’s recent plans to nearly double the tax rate on oil and natural gas production could make other companies cautious about rushing in.

Noble is still trying to come to terms with Israeli officials about how Leviathan should be treated under proposed rules that could boost the government’s take to 50% or more. Davidson said Israel has shown some willingness to ease tax requirements on fields discovered earlier, like Tamar. Higher taxes would not change Noble’s bullish outlook toward oil and gas production in Israel but could mean that marginal projects do not go forward, he said.

Prepared by Mostafa Mabrouk, Vice Chairman Assistant For Economic Affairs, Ganope

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