Gas Is King, and Now Even Israel's Got It

With the embattled state now tapping offshore reserves, Israel owns a bargaining chip that could guarantee future growth, provided regional politics begin to normalize.

Once again, its dogged tendency toward self-reliance seems to be paying off for the beleaguered State of Israel.

This time, it involves domestically produced supplies of petroleum, an asset base to which practically nobody would have given serious consideration even as few as five years ago.

Nevertheless, the Israelis are now anointing themselves with oil--though more correctly, with natural gas--in the presence of their many enemies, and they plan to use it to at least partially free themselves from dependence on foreign imports, the cost of which puts a lot of strain on the country's already burdened economy and, as with almost everything else, their survival.

As with most of the world's developing countries, Israel wants to increase the share that natural gas occupies in its fuel mix. And the country plans to help it along with recently discovered domestic offshore gas reserves.

On Christmas Eve, Houston-based Noble Energy Inc. announced that gas production had begun to flow via pipeline to an onshore power plant from the Mari-B field, a significant discovery in the Mediterranean Sea off Israel. A Noble affiliate, Samedan Petroleum, as operator for the Yam Thetis Group, a consortium that's rounded out by several small Israeli independent companies, discovered the field in March 2000.

The field is located about 15 miles offshore in about 800 feet of water. A conventional fixed steel platform jacket and production facility deck were installed in the field in early 2003 to receive, process, and transport gas to shore from both subsea wells and wells drilled from the platform itself. The production facilities are sized to produce up to 600 million cubic feet per day (mmcf/d).

According to Noble, the group has an 11-year contract to supply up to 636 billion cubic feet (bcf) of gas to power plants owned by Israel Electric Corp. (IEC), the state-owned power company. First on the list to receive gas from the field is IEC's generation plant at Ashdod, where one new gas turbine is being installed and four boilers are being converted to burn natural gas. As the boilers are fired up, IEC will increase its gas supply at Ashdod gradually to some 100 mmcf/d by March 2004. Additional increases are expected during the year as IEC expands its gas-fired generation capacity at Ashdod and elsewhere. Ultimate gross production is scheduled to reach 170 mmcf/d, and the group anticipates it will market even more during the next few years as Israel develops its infrastructure.

Noble, with Samedan holding a 47.1 percent working interest in the group, estimates total recoverable reserves in the Mari-B field exceeds 1 tcf. The group also has an undeveloped discovery nearby, Noa, with an estimated reserve base of up to 330 bcf of recoverable gas. Noa will be brought on line "at a later date" as a subsea tieback to the Mari-B platform, the company said.

But the Mari-B and Noa discoveries aren't the only source of Israel's potential domestic gas supply. Yam Thetis itself has extensive offshore exploration acreage, and the group continues to drill exploratory wells in and around the two discoveries, and has plans to drill in other, more distant parts of their acreage holdings.

But the British company BG, as operator for another group of independents, has discoveries in the Mediterranean, as well. One is off Israel; two others are not. But more about them later.

In August 2000 BG International, as operator (40 percent working interest) for the Israeli company Isramco and several other domestic companies, announced discovery of a large gas field about 12 miles offshore with its Nir-1 well, drilled in about 400 feet of water. Reportedly, the field contains recoverable reserves of some 274 bcf of gas. However, no development plans have been revealed. One reason it remains undeveloped may be that BG also has two discoveries off the Gaza Strip in territorial waters claimed by the Palestinian Authority. In fact, BG obtained the Gaza exploration licenses from the acting Palestinian government.

In August 1999 BG, as operator (90 percent working interest) for Consolidated Contractors Co. (CCC), an Athens-based, Arab-owned firm with 10 percent working interest, made a gas discovery with its Gaza Marine-1 well about 10 miles off Gaza. The well flow-tested at rates up to 37 mmcf/d. Later, in December 2000, they confirmed the strike with their Gaza Marine-2 well nearby, indicating possible reserves of around 1.4 tcf. If developed, the Palestinian Investment Fund has the contract option to assume up to 20 percent equity in the field.

That's where it gets dicey. The BG-CCC group apparently would like to combine the Nir-1 and Gaza Marine discoveries and sell the gas to Israel. However, the Israeli-Palestinian conflict and the increased terrorism it produced, starting in 2000 and continuing through the present time, added a negative aura to such a pact. In fact, even though the deal is viewed favorably by Israel's energy community, including IEC, Israeli Prime Minister Ariel Sharon has opposed it on the grounds that without a peace agreement, any Israeli funds going to the group might potentially be used to fund Palestinian terrorism.

So, while negotiations continue between the BG-CCC group and IEC for a sales contract, BG itself is considering pulling out of Israel altogether unless Sharon alters his position. Even UK Prime Minister Tony Blair has been involved in trying to get Sharon to do so. However, if BG actually were to pull out of Israel, industry sources believe they probably would build an LNG facility and ship the Gaza Marine gas to Europe.

Meanwhile, Israel's protracted series of on-again, off-again negotiations over obtaining additional supplies from gas-rich Egypt currently are off again. In the days before the 2000 rift in peace negotiations with the Palestine Authority, Israel and Egypt were in serious discussions about supplying gas from Egypt's Nile Delta region to both Israel and Palestinian territory. It could be brought either by land pipeline across the Sinai Peninsula or via a submarine pipeline from the prolific Delta fields to the Israeli coast. In any case, Egyptian gas will be exported by major gas producers in Egypt such as Italy's ENI, who plan to move it by pipeline to neighboring countries, including Jordan. The line would terminate less than 30 miles from the Israeli border.

As is the case almost everywhere else in the world, future economic growth in the Middle East, at least for the next quarter-century or so, will hinge on the accessibility to supplies of natural gas. The oil component of the Petroleum Age is taking a back seat to it.

As for Israel's domestic crude oil supply, the jury's still out. Ever since it became an independent state in the late 1940s, Israel has imported nearly all of its oil needs--about 237,000 b/d in 2002, according to industry sources. Most of the imports come from Egypt, Western Europe, Africa, Mexico, and in recent years, the Caspian region (Kazakhstan, Turkmenistan, and other like countries).

But while domestic oil exploration so far has been unspectacular, with current production of less than 1,000 b/d, Israel's leadership is pushing for increased drilling. The country's oil ministers point to Israel's geographical and geological position on line with the same Paleozoic petroleum trend that stretches from Saudi Arabia through Iraq to Syria, and are doing everything possible to interest established exploration companies to apply for exploration licenses.

Many of the domestic companies taking part in the offshore search are intensifying their search onshore, particularly along the coast and in the Negev Desert. What's more, several smaller U.S. companies like Ness Energy International of Dallas and others have made Israeli onshore exploration their focus in recent months.

However, probably inflated estimates by the country's Petroleum Commission claim that the country could contain up to 5 billion barrels of oil reserves, most of it likely to be located beneath the offshore gas reserves found so far. Both the Yam Thetis and BG groups are thought to be planning to drill gas development wells deeper in hopes of cutting oil sands below the gas reservoirs.

And finally--though this one is a "corker" politically--there is talk of Israel reviving a pipeline built in 1941 from Iraq to the now-Israeli port of Haifa that supplied British forces with oil during World War II. That line, which fell into disuse after Iraq stopped the flow when Israel declared statehood, would require hundreds of millions of dollars in repair costs. However, its route begins in the Kirkuk area, where some 40 percent of Iraq's oil is produced, and passes on to Haifa through Jordan, which has been at peace with Israel since 1994.

The political implications of reviving the line, of course, are immense. First of all, if the line were to be reactivated, it would play not only to those in the Arab world but also in the West--including those in the U.S. who are opposed to the current Republican administration--who would claim the most recent U.S. invasion of Iraq was, after all, strictly "about oil."

According to some observers, however, the idea of reviving the line is merely an attempt to pressure Turkey into more agreeable terms over moving increased volumes of Iraqi oil through the pipeline that passes through that country to the Mediterranean.

In any case, the international petroleum industry probably will keep a practiced eye on Israel's development of its own domestic oil and gas resources, since even modest increases would put it in a much better bargaining position with its more abundant oil and gas producing neighbors, particularly if political stability begins to spread, however slowly, across the region.