Israel is currently reviewing the policy on gas it intends to adopt in the future, shortly before natural gas production begins in the Tamar field in the spring of 2013. The ministerial committee set up by Prime Minister Benjamin Netanyahu, and tasked by the government to draft policies on natural gas consumption at home as well as gas exports, finished drafting its final report on August 29, kicking off discussions over its contents. The committee is known by its chairman's name, Shaul Zemach, Director General of the Ministry of Energy and Water Resources. It is one of several such bodies created to shape the country's policy regarding its natural gas resources. Here, another committee is also doing significant work: The Sheshinski Committee, which has since proposed a controversial hydrocarbon tax. The Zemach Committee report indicates that the priority for Israel is energy security. This means meeting domestic demand for decades to come, and limiting gas quantities meant for export to certain levels that cannot be exceeded, except with the consent of the Ministry of Energy. In light of this report, which is being currently reviewed, Israel is set to export around 500 billion cubic meters of liquefied natural gas, or 53 % of the total gas reserves which have been discovered – i.e. 950 billion cubic meters-, according to the committee. In other words, around 450 billion cubic meters of gas will be retained for domestic consumption, for the next quarter of a century. Gas discoveries in Israel began more than a decade ago. A consortium comprising the American firm Noble Energy and several Israeli energy companies, discovered the fields Noa and Mari-B in Israel's southern waters in 1999 and 2000; but the production of these two fields was very limited and not commercially lucrative. Nevertheless, these two fields provided Israel with gas for power generation, replacing imported coal and petroleum derivatives – and Egyptian gas imported through El Arish. The Egyptian pipeline was the target of several explosions, both during and after the uprising. Egypt then suspended the 20-year old gas agreement with the Hebrew state. In 2009, Noble Energy discovered the Tamar gas field in Israel's northern water, off the coast of Haifa. In December, 2010, Noble also discovered the Leviathan field. Tamar is estimated to hold about 8.4 trillion cubic feet of gas; production from it is set to begin in March or April, 2013. Noble also signed seven important long-term agreements with Israeli companies to use the gas from the Tamar field locally, at a price of $ 5-5.5 per million BTUs. But these agreements will need the approval of the Israeli authorities, because the gas industry in the country is monopolized by Noble Energy. As concerns Leviathan, this is the largest field in Israel. It is located in the waters adjacent to the Tamar field, and holds around 17 trillion cubic feet of gas, or about 418 billion cubic meters; production from this field is set to begin in 2016. Negotiations are underway to offer the stocks of the companies operating in the field for sale. Remarkably, the successive and significant gas discoveries made in northern Israeli waters faced their first major failure earlier this month. This happened when the consortium of Israel Land Development Corporation and Modiin Energy failed to find gas in the exploratory well Mira-1, located near Tamar and Leviathan. Zemach's report confirmed the importance of linking all Israeli gas fields, whether those located in territorial waters or the exclusive economic zone (EEZ), to the local gas distribution network that will be built. The report also confirmed that the government will be responsible for delivering the gas to local consumers, which means that the Israeli companies working in Tamar and Leviathan will have to deliver specific proportions of their quotas in these two fields to the government for internal consumption, and export the remainder volumes. The Israeli gas industry has managed to make quick strides, beating many other East Mediterranean countries in this field. But at the same time, the Israeli gas industry faces significant hurdles, both commercial and economic, that cannot be overlooked. Indeed, exploration and drilling in the East Mediterranean involve very large depths, sometimes reaching about 20,000 feet below sea level. This means that the cost of exploration, drilling, development and production is extremely high. To be sure, estimates indicate that Israel needs to drill about 20 additional exploratory wells over the next two years, at a cost of $ 100 million per well. The estimated costs for this expansion currently stand at about $ 2 billion. These costs may perhaps help explain the interest shown by companies operating in the Leviathan field, in selling some of their states to international companies – in order to reduce their financial burdens-, not to mention the interest shown by major companies in this huge field. The Israeli gas industry also faces challenges as a result of the current large decline in global gas prices, because of growing shale gas production, particularly in the United States. This has allowed the latter to begin exporting gas, instead of relying on imports, pushing prices down to about $ 3 per million BTU. This large decline, naturally, has negatively impacted the Israeli economy, particularly as concerns its gas export plans. Furthermore, the gas industry in Israel faces pressure towards reaching a diplomatic solution with Lebanon over their respective EEZs, which are very promising in terms of possible gas discoveries, not to mention diplomatic attempts to put an end to Israeli resistance to production from the Gaza Marine field in Palestinian territorial waters – which was discovered early last decade. Israel insists on receiving gas volumes from the Palestinian side that Israel itself determines, with high discounts, and provided that gas is delivered first to Israeli territories before reaching Gaza. * Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
