Mediterranean gridlock

Audrey Leon

November 1, 2015

The Mediterranean and North African region is largely considered to be a promising frontier oil and gas area, and yet, border tensions, and internal disputes have seriously held back exploration efforts. Audrey Leon surveys the prospects.

The Tamar field offshore Israel. Photo from Delek Group.

The Mediterranean is renowned for its beauty, but several factors – unrelated to oil prices are hurting the area’s chances for oil and gas success.

When asked what country seemed most promising in the Mediterranean/North African sector, Sarah Haggas, Director – Middle East, for IHS Energy said, “A few years ago I would have said Lebanon,” but in terms of the Mediterranean, she says, everything is on hiatus.

Lebanon

According to the US Energy Information Administration (EIA), the ongoing dispute between Lebanon and Israel over their shared maritime boundary could affect Lebanon’s ability to proceed with its offshore development plans. The area in dispute covers over 300sq mi, and the EIA says this portion may contain potentially significant hydrocarbon resources given its location near the center of the Levant Basin. The US Geological Survey estimates from 2010 placed the potential mean recoverable resources in the Levant Basin at 1.7 billion bo and 122 Tcf of natural gas.

Noble and Delek’s discoveries off Israel. Map from Delek Group.

Since 2013, Lebanon has been hoping to offer 10 offshore blocks, but the round has faced many delays. And the last time it was even mentioned by the country’s petroleum ministry was August 2014. Both Haggas and the EIA contend that delays have been faced due to politics. The EIA attributing the delay to issues surrounding the demarcation of the southern boundary of Lebanese territorial waters.

Haggas said that the biggest factor could be due to Lebanon’s government. Since 2014, Lebanon has lacked a president. Currently, its Prime Minister Tammam Salam, who has served in that role since February 2014, has also served as acting president since May 2014. Because of this, Haggas says, the country hasn’t been able to formally legislate their own petroleum law. “There’s lots of potential due to various seismic surveys, but no legislation that allows it,” she says. “They are working on it, but there is no fixed deadline at the moment.”

Other factors affecting Lebanon’s proposed bid round from 2013, include a border dispute with its neighbors Syria and Israel, the latter which is home to many large discoveries in the Levant basin. Complicating matters, Haggas says, while Lebanon does not have diplomatic relations with Israel, it does have them with Syria. However, Lebanon has not ratified international offshore boundaries with either country. And until that happens, nothing in that area can truly be defined, especially not in the short-term, she says.

“The countries have not focused on exploration in those border zones,” she says. “You’ll have problems that will be contended by that neighbor.”

Israel

Flare test at the Tamar field offshore Israel. Photo from Delek Group.

Disputes are fairly common in the region, whether they be among neighbors or with foreign oil and gas operators inside a country. Most recently, Israel took on US Independent Noble Energy and its local Israeli partners when it thought the companies had a monopoly over the country’s resources.

And indeed, Noble and its partners Delek and Avner Oil had discovered some sizeable natural gas finds offshore Israel. First came Noa in 1999, then the 1 Tcf Mari-B in 2000, and the 10 Tcf Tamar field in 2009, which was touted as the largest deepwater natural gas discovery in the world at the time. But, the largest was yet to come, the 19 Tcf Leviathan discovery, in December 2010. Since its discovery, Leviathan is now estimated to contain up to 22 Tcf of gross reserves.

All seemed to be going well, until Noble and its partners submitted a US$6.8 billion development plan in September 2014 for Leviathan, which sits 130km from Israel’s coast in around 1600m of water. Noble intended to have the field up and producing by 2017, and then 2018, but faced more delays from the Israeli government and the Israel Antitrust Authority, which decreed that it would not approve the development plan, even though a key component, the divestiture of the smaller Tanin and Karish gas fields had been previously reached. Israel now wanted Noble and its partners Delek Group, to sell interest in the producing Tamar field in order to maintain interest in Leviathan, due to monopoly concerns. What would transpire would be a long fight between the US operator and Israel’s government, which is only now coming to some sort of resolution.

In August, Noble Energy told OE: “On August 13, Prime Minister Benjamin Netanyahu and Minister of Energy Dr. Yuval Steinitz announced that the government of Israel finalized the regulatory framework, which provides a path forward for the development of Leviathan, Karish, Tanin and the further development of Tamar, and for the citizens of Israel to realize the benefits of the country’s vast offshore resources.

“The framework presented on August 13 acknowledges the importance of moving forward with Israel’s discovered oil and natural gas resources without delay, establishes a foundation for competition, and ensures that Israel’s citizens pay a fair price for natural gas. The framework also promises a stable investment climate that will enable the continued exploration and production of Israel’s offshore resources. Noble Energy welcomes the clarity this framework will bring.”

Of course, the issues around Noble and Israel have been closely watched by the oil and gas industry, and have left many wondering if working in the Eastern Mediterranean country is worth it.

“Many international oil companies are reluctant to come work [in Israel],” Haggas says. “Because, it may preclude them from working elsewhere (in the region).” Additionally, Israel has not generally held formal licensing rounds in the past, Haggas says, but it is planning to launch a new offshore licensing round in its EEZ in the future. There has been no proposed date as yet.

Map of Eni’s prospects in Egypt. 

Egypt

From not so friendly to somewhat friendly climates, Egypt has presented itself as a country to watch in the region.

Late last year, the country began repayments to oil and gas companies that were owed billions of dollars, including supermajor BP and UK-based BG Group. The debt was due to the Arab Spring uprising that disrupted production in the region. In October 2014, Egypt had paid some $1.4 billion out to foreign companies. And now, according to Mohamed Zine, regional director, Africa, IHS, the country owes just $3 billion.

Despite the debt, Zine says, Egypt still remains one of the most attractive countries in North Africa for several reasons: Low cost operating environment with established infrastructure; competitive production sharing contract terms (35% cost oil and 80/20 profit share); gas price flexibility and import pragmatism, which is keeping companies on board, despite the payment delays; plus, bid-rounds organized on a regular basis (three bid-round per year organized by the three national companies: EGPC, EGAS and Ganope). However, the number of bid-rounds was less than usual during the last four years due to the unrest in the country, Zine adds.

Egyptian LNG (ELNG) terminal at Idku 

At the end of August, Italian operator Eni hit a jackpot offshore Egypt with its Zohr deepwater natural gas discovery, which it has called the largest gas field in the Mediterranean, and possible the world. Eni says the field could hold up to 30 Tcf of lean gas in place over some 100sq km.

When the find was announced, Simmons & Co. analyst David Kistler said Eni’s new discovery could be potentially negative news for Noble Energy because it provides more competition for Israeli gas in the region. “In addition, the Egyptian authorities are likely motivated to develop the field as quickly as possible in light of natural gas shortages in the country,” he said in Simmons morning note. “This could remove a key customer for Leviathan gas while placing more gas competition into the international market.”

However, Zine disagrees that this new discovery could disrupt Israel’s burgeoning natural gas business.

“I don’t think that this discovery will have a big impact on Israel’s gas market,” Zine says. “Egypt needs more big discoveries to have a significant impact on regional gas market.

“Israel needs to secure its gas supply in the future for strategical and political reasons and Egypt has a fast growing domestic demand.”

Zine says the search for new resources is a major concern for Egypt, as it consumed more than 1.7 Tcf of gas last year (the amount destined to the domestic market). Before the Arab Spring occurred in 2011, Egypt was once an exporter of gas, but now it is an importer, Zine says, having to run its LNG liquefaction plants under capacity.

The analyst believes gas produced from Zohr will eventually end up on the local market, and possibly as LNG exports to Europe, with some exported to Jordan and possibly Syria and Lebanon in the future through the Arab Gas pipeline.

“The country has been facing energy deficits for a number of years now, as a result of growing demand and decreasing production, and most of the gas originally slated for exports has been diverted to supply the local market,” Zine says. “The Zohr discovery was a relief for the country as it has started long-term LNG import plans.” Zine says Egypt has signed contracts with Algeria, Qatar and Russia to meet its needs.

But indeed, the future looks bright for Egypt, which by far has the most activity. In October, the country awarded four offshore blocks to BP, Eni, Edison and Total, with a total investment of $306 million and a signing bonus of $10.5 million to drill eight wells, and conduct 3D seismic survey, according to Egypt Oil & Gas.

EGAS’ chairman said at the time that the offers made during the 2015 international exploration Mediterranean bid round represented a good turnout in light of the challenges posed by declining crude oil prices worldwide in the current period.