The other week, Prime Minister Benjamin Netanyahu met Australia's Minister for Employment and Workplace Relations Bill Shorten. The Prime Minister's Office did not publish a press release about the meeting, but according to the Australian press, Netanyahu asked Shorten for the assistance of Australian companies in developing gas liquefaction facilities in Israel. Earlier, Netanyahu met Noble Energy CEO Charles (Chuck) Davidson, and discussed with him, among other things, the question of gas exports. Noble Energy is already involved in a plan to construct export installations in Cyprus, and probably will not change its plans despite Israel's desire to build such installations on its territory.
The prime minister sees construction of an LNG (liquefied natural gas) installation as a strategic national project, and is personally promoting it. This outlook is reflected in the report of the Tzemach committee on the structure of the gas industry, which recommended that gas exports from Israel should only be via an installation on Israeli-controlled territory.
However, constructing vital infrastructure in Israel has become almost mission impossible in the past few years. A coalition of green organizations and residents fearful for the quality of their lives and the value of their properties have managed to hold up for two years the state's plan to construct an additional entry point for gas from the Tamar field in the north of Israel. An LNG installation is a far larger and riskier complex than a terminal, and the opposition to it will presumably be extremely fierce.
Public opposition is just one of the challenges awaiting an LNG venture. No less of a challenge will be raising the required finance, amounting to at least $5 billion. Since such a project is highly risky, financial institutions generally demand that the developer should put in up to 50% of the total cost as equity, a huge sum that no Israeli company today can find. In the course of the Tzemach committee's deliberations, a proposal was raised that the state should finance up to 15% of the cost of the installation, but, unsurprisingly, the Ministry of Finance shot down that idea.
Another precondition for financing is the signing of substantial gas supply agreements with strategic customers. For their part, the customers demand a significant stake in the venture in order to assure themselves of continuous supply of gas over the years.
In the light of the project's importance and complexity, the Tzemach committee recommended entrusting oversight of its execution to a committee to be headed by Prime Minister's Office director Harel Locker. The Locker committee has not yet convened, but meanwhile a first serious initiative has emerged. Earlier this year, "Globes" reported that Israel Natural Gas Lines Ltd. andEilat Ashkelon Pipeline Co. Ltd. (EAPC), two state-owned companies, had presented a plan to the Minister of Finance for the construction of an LNG plant in Eilat. According to the initial proposal, the plant will be built on the site of EAPC's currently unused oil unloading port. Former Ministry of Finance director Yarom Ariav prepared an economic appraisal that put the cost of the plant at $6 billion.
The companies propose that the government should retain control of the project until it is completed, and then continue to hold a golden share. The choice of Eilat confers a significant commercial advantage: closeness to the Far East, the main target market for LNG. LNG prices in Asia are currently at $17 per thermal unit, three times the price of the gas in Israel. From Eilat, the lead time for supplying LNG can be considerably shortened in comparison with supply from an LNG installation on the Mediterranean coast.
At this stage, the Israel Natural Gas Lines and EAPC proposal is arousing interest among potential investors. The Israeli plan speaks of constructing the plant by 2018, but that timetable is manifestly unrealistic. Construction alone takes about five years, and the time taken for planning and obtaining of permits could easily be more than ten years. The financing question will present many difficulties, and environmental organizations will lead a public campaign calling for protection of the coral reefs. Another threat to the idea of the Eilat plant comes from the direction of security: for the terrorism running riot in Sinai that has already hit the vacation town, there will undoubtedly be a double incentive to hit a strategic and sensitive installation.
Competition has begun
Meanwhile, rival initiatives to the Israeli one are making rapid progress. The main development that threatens to compete with the Israeli plant is due to be constructed in Cyprus. The Cypriot government has already designated a site for the installation in the south of the Island, and has obtained most of the permits required for constructing it. Negotiations are currently being conducted with a group of private investors that will undertake to construct and operate the plant, and are at an advanced stage. Among the group's partners are some familiar faces in Israel, such as Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) and Noble Energy.
The Cypriot venture too is not free of difficulties. Turkey is liable to deter potential buyers and to try to sabotage the venture in other ways. In addition, Cyprus does not have enough gas at present, and needs the Israeli gas to make the project economically worthwhile. However, the Cypriots are convinced that construction of the plant will go ahead with or without Israel. Cyprus will soon distribute new oil and gas and exploration licenses, and believes that additional gas reserves will be discovered that will justify constructing the onshore plant.
The third initiative is somewhere halfway between Cyprus and Eilat. This is the idea to construct a floating LNG installation (FLNG), anchored near the gas reservoirs. The FLNG is considered the coming thing in the natural gas industry. It is a compact and flexible solution that allows all of the elements of an onshore LNG plant to be assembled on a huge ship. The Tamar partnerships "bought" the idea when they signed a memorandum of understanding to for development of an FLNG with a consortium of companies led by Daewoo Shipbuilding of Korea. However, the FLNG initiative too is fraught with difficulty, most of them on the technical and engineering plane. There are only three FLNG projects in the world at the execution stage, and three more (including the Israeli project) at the planning stage. This is unproven technology, the cost of which is as yet unknown. Even the developers of the Prelude, the leading FLNG project, which due to be constructed in Australia, refuse to disclose the project's cost estimate.
Published by Globes [online], Israel business news - www.globes-online.com - on May 16, 2012
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