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Sunday, December 16, 2012
Will Israel Sell its Natural Gas to China?

Will Israel Sell its Natural Gas to China?
INSS Insight No. 393, December 16, 2012
Eran, Oded
http://www.inss.org.il/publications.php?cat=21&incat=&read=10705

Several issues related to the production of natural gas in Israel's
exclusive economic zone (EEZ) have not yet been properly analyzed and no
decision concerning them has been adopted. Some of these issues have
economic as well as political strategic implications, and particularly as
they are within an industry that is guided by long term policies and a
contractual framework, it is important that they be considered thoroughly.

An inter-ministerial committee that looked into government policy regarding
natural gas, headed by Director General of the Ministry of Energy and Water
Resources Shaul Zemach, submitted its recommendations to the government,
some of which deal with the ratio between exports and domestic Israeli
consumption. They do not, however, prioritize the external markets (and in
any event, the government has not adopted the recommendations).

Moreover, even if the price paid by all external buyers is equal, it is
still important to consider the geo-strategic aspects in the debate about
prioritizing markets. That can be done mostly by the government itself,
informed in part by contributions from the private sector. It is not clear
whether such a process within the Israeli government has taken place. Nor is
it clear to what extent the government wishes and is capable of guiding the
private sector to direct export to specific markets. Again, this is said
with the assumption that the net income to the producer and the Israeli
government from different potential markets is equal.

On December 3, 2012, the Australian Woodside Company on the one hand, and
the partnership comprising the American Noble Energy Ltd. and the Israeli
Avner Ltd., Delek Drilling Ltd., and Ratio Ltd. on the other, announced that
they had reached an agreement in principle. According to this agreement,
Woodside Petroleum Ltd. will acquire a participating 30 percent interest in
the Leviathan field, which is estimated as containing 17 trillion cubic feet
of recoverable natural gas. They added that their intention is to sign a
full agreement by the end of February 2013.[1]

Woodside will, according to its statement, deal with the natural gas other
than that supplied to Israel and its liquification. Noble Energy Ltd. will
continue to be the operator for the gas channeled to Israel. Woodside also
announced that the payments schedule for the 30 percent it will purchase
will depend on the Israeli legislation permitting exports of natural gas. If
the full agreement is signed by Woodside and its partners, two foreign
companies, Woodside and Noble, will retain 60 percent of the rights in the
Leviathan gas field.

Reading through Woodside’s website reveals the company's intensive activity
in the Far East, with a focus on Japan and China. Woodside Energy Ltd. has
partnered with Chinese companies since 2002, particularly in the area of gas
liquificiation. In 2006, Woodside was one of the partners that signed the
agreement to build the de-liquification terminal in the Guandong Province.
Present at the inauguration ceremony were China’s then-Premier Wen Jiabao
and Australia’s then-Prime Minister John Howard. Since 2007, Natural Gas has
been supplied from Australia’s North West Shelf Venture (NWSV), in which
Woodside is a partner. The agreement between Woodside Energy Ltd. and
PetroChina Company Ltd. on the sale of LNG was signed in September 2007,
with John Howard and China’s President Hu Jintao in attendance.

The Chinese National Offshore Oil Corporation Ltd. (CNOOC) is also a partner
in the North West Shelf Venture; as such, it is entitled to 5.3 percent of
North West Shelf Venture reserves and titles. As said, Woodside Energy Ltd.
is an equal partner and operator in this field. CNOOC is a peer company
among the shareholders of Woodside.

It is inconceivable that all of this was unknown to Woodside’s new partners
in the Leviathan gas field. On the contrary, in their announcement to TASE,
they mention Woodside’s activity in the Far East.[2] Thus, unintentionally
and without the Israeli government deliberating this issue, a possibility
has been created that Israel will sell to China part of, or the whole
quantity that will ultimately be available for export (between 25-50
percent, and potentially more of the extracted quantity).

Woodside was not the only company to be interested in obtaining rights in
Leviathan. According to press reports,[3] Russia and Gazprom, the French
Total, and CNOOC itself were interested. If so, China, through the CNOOC
ownership share in Woodside and ts partnership in other ventures, can expect
that Woodside will give China priority for its share of the gas in the
Leviathan when determining the markets.

Thus without a government decision, Israel may export its gas to China,
which would have important strategic implications. The sale in itself is not
necessarily problematic; disturbing here is the absence of a proper process
that weighs the pros and cons of selling natural gas to specific potential
customers. Thus it is possible that if materialized, this option may prevent
the establishment of a partnership, even if through a third party, with
other regional producers, should Egypt, the Palestinians, Lebanon, Cyprus,
and possibly Syria, individually or collectively, decide that Europe is
their preferred market. Israeli gas exports to Europe could be leveraged to
prevent an economic boycott of Israel and help in the long run to upgrade
Israel’s formal relations with the EU. Cooperating in major economic
regional ventures cannot substitute for a political process between Israel
and its neighbors, but it can certainly facilitate it.

At the same time, linking Israel to the Chinese economic giant has its own
advantages that may surpass those that could be expected from a long term
contract with the EU. All of these aspects should be weighed and considered
in an orderly process, conducted by the proper and relevant departments and
agencies of the government of Israel.

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I wish to thank Rachel Beerman for her research assistance for this article.

[1] ASX Announcement: "Woodside Enters Major Gas Discovery Offshore Israel,"
December 3, 2012.

[2] Avner Ltd. at the Tel Aviv Stock Exchange (TASE) website. Both
announcements are from December 3, 2012.

[3] The Marker, December 5, 2012, pp. 28-29.

The Institute for National Security Studies • 40 Haim Levanon St. • Tel
Aviv 61398 • Israel • 03-640-0400 • e-mail: info@inss.org.il

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