Turkey “Takes Israeli Gas over Egyptian”

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Turkey “Takes Israeli Gas over Egyptian”
By: Hedy Cohen, Globes
27 August 2015
 
Turkish energy expert Nusret Comert says Turkey will pay more for Israeli gas, and be a more reliable source of demand.

As of now, exporting Israeli natural gas to Turkey is probably the main possibility for the development of the Leviathan reservoir. In the past, there were negotiations between the Israeli gas companies and private gas companies in Turkey, but these resulted in no deals. Now, the two countries need to seriously consider how to move ahead with such a deal, says senior Turkish energy expert Nusret Comert, who has visited Israel several times to consider possible cooperative ventures between the two countries. A deal is very economically worthwhile for both sides, and is the right thing to do strategically.

Comert, who has over 30 years of experience in the global gas industry especially in Turkey, is considered the number one expert in the Turkish energy sector. He worked for global company Royal Dutch Shell for many years, and advised on its entry into markets in the Middle East, Africa, and Eastern Europe. Today, he is chairman of the first private gas company to import gas into Turkey, chairman of Damnus Energy & Investment, and a director of Energo Windpower. He is also the initiator of the Turkey-Greece Gas Pipeline Project, currently supplying gas to Greece via Turkey.

Globes: The gas plan approved by the Israeli government in August gave the Leviathan partners four years to develop the Leviathan gas reservoir, but many in Israel assert that given today`s oil and gas prices, they will not be able to obtain $8 billion in financing for developing it. What is your view on this?

Comert: There`s no doubt that this will be very challenging economically. The plunging price of oil has caught everyone unprepared, and gas companies are backing off from projects requiring huge investments like those required by the Leviathan reservoir. It would have been far better had the gas companies in Israel signed long-term export contracts a year ago, when oil prices were high and an atmosphere of stability and confidence prevailed in the markets. At the same time, from a geopolitical perspective, now is the time to export gas from Leviathan, because there is a market for it in Europe, and when I say now, I mean now, not in two or three years, and not even in another year.

Why Europe, and why now?

Because Europe is desperately looking for ways to diversify its sources of supply. On the average, more than 30% of the gas currently consumed by Europe comes from Russia, and a large percentage of that comes through Ukraine. In recent months, however, Russia has been pursuing an aggressive policy against Ukraine and halting the flow of gas to it, which obviously affects Europe as a whole. In addition, Russia recently decided to cancel the south stream pipeline project, which was to have reached Europe by way of Bulgaria. Far more than it did a year ago, Europe now realizes that it is in a critical state, and must take action. It is now making every effort to find alternative sources of gas that will reduce, even slightly, its dependence on Russia. Gas from the Middle East in general, and from Israel in particular, could be a solution for it.

Egypt is Not the address

Meanwhile, in Israel, all eyes are trained on Egypt. The Tamar partnership signed a letter of intent with Spanish company Union Fenosa, which has a gas liquefaction facility at Damietta, and the Leviathan partnership signed a letter of intent with British company BG, which has a liquefaction facility at Idku. While the first deal was designed to facilitate the expansion of the Tamar reservoir and raising the supply of natural gas to Israel, the second is designed to help raise the capital needed to develop Leviathan. So far, no final agreement has been signed with either of the companies, and there is a lack of clarity concerning the possibility that any such deals will be signed. According to Comert, however, Egypt is not at all the right target.

I don`t think that Egypt is the address for the development of Leviathan, and I don`t see at the moment how exports of Israeli gas to Egypt can actually go ahead, he says. The first reason is obviously plummeting oil and gas prices. Both the Spanish and British companies planned to import the gas to Egypt in order to export it to their customers in Europe and Asia, but while the average price of gas in Europe was $13 per mmbtu last year, today it is at $7. The cost of importing gas from Israel to Egypt, plus the cost of liquefaction, transportation to Europe, and turning it back into gas, make the deal only marginally viable. Furthermore, several months ago, Royal Shell announced that it had acquired BG. When Shell examines its portfolio, I`m not sure whether it will want to do business with Israel, among other things because it wants to operate in Iran, and it has announced that it will sell $30 billion worth of assets in order to cover the cost of its BG acquisition.

What do you think can make developing Leviathan possible?

Signing a gas export contract with Turkey. Exporting gas from Israel to Turkey is currently the best, if not the only, possibility for developing Leviathan. Turkish gas consumption has doubled over the past decade, and now stands at 48.6 BCM. The rate of increase in gas consumption in the country is the fastest in the world, with consumption projected to double in the next 20 years. Like Europe, Turkey wants to diversify its sources of gas, and in my opinion, can import 7-8 BCM annually from Israel.

Turkey indeed needs gas today more than ever. It was expected that it would be able to import gas from northern Iraq until 2016, but the Islamic State`s activity in the area is making this impossible. In addition, the gas coming from Russia through Ukraine is not flowing continuously, and the Trans-Anatolian gas pipeline (TANAP) from Azerbaijan, which was slated for construction by 2018, has been delayed at least to 2020. Another pipeline that Russia was supposed to have built, Turkish Stream, is also being delayed.

Comert: Turkey can be the anchor customer that Leviathan needs, and as I said before, this is also the most economically worthwhile deal for both parties.

Why is that?

For two main reasons. The first is that Turkey will be willing to pay more than the Israeli, Egyptian, or European market will be willing to pay for the Israeli gas. Turkey has no gas resources of its own, and currently must import gas at relatively high prices (it is estimated that Turkey pays $15 per mmbtu to Iran, $12 to Russia, and $10 to Azerbaijan, H.C.). The price in Egypt, on the other hand, ranges from $3.10 to $5.80 per mmbtu. Another reason lies in the fact that exporting to Turkey requires only a marine pipeline, not liquefaction facilities, as in the export deal to Egypt. In other words, in the end, Israel will be left with a higher net present value than the value it would receive in other places. It is also impossible to ignore that exporting to Turkey provides greater flexibility in case things `do not progress as planned,` in contrast to an export deal with Egypt. This is something very important, which countries have to consider before signing a huge contract.

By not progressing as planned, Comert means, among other things, upheavals in Egypt, a countries whose own gas reserves amount to 77 TCF, according to an up-to-date report by the International Energy Agency, double the gas reserves of the Israeli economy. In the past, it exported large quantities of gas, including to Israel, but government actions, such as subsidizing gas prices for Egyptians and recognition of too low a gas price for international companies, caused local consumption to rise, while production fell and the companies stopped exporting gas. Furthermore, the repeated bombings of the gas pipeline used to transport gas to Israel led to a final halt in the flow of gas from Egypt. According to Comert, however, this is not the only problem.

A gas contract is usually signed for 20 years, and a lot of things change in 20 years, not necessarily terrorist attacks against infrastructure, he says, For example, it is possible that the demand forecast for natural gas is too high, or that Egypt will develop renewable energy sources, and will no longer need all the gas it has imported. In that event, a problem arises. Therefore, before a country signs a decades-long gas contract, it looks at the energy markets adjacent to the target country, and asks itself whether those markets can be used as customers if things change. In the case of exporting gas to Turkey, this is precisely the situation.

As I said before, Europe is starving for sources of gas other than Russia, and a pipeline to connect it to Turkey, TAP, is currently under construction. In the case of Egypt, on the other hand, the gas can be exported directly to no neighboring country. A deal with Turkey therefore gives Israel great flexibility.

Politics Has No Effect on the Energy Sector

You don`t have a government yet. How can a deal like this be made?

Politics in Turkey have never had any effect on the energy sector. A gas deal can be signed with Turkey`s government gas company, BOTAS, or through one of the private gas companies operating in the region. These private companies currently have a 25% market share (BOTAS has 75%), and Turkey hopes their share will grow to 80% in the future. The private companies can sign a deal with the Israeli gas companies, and sell the gas in the local Turkish economy to power plants, factories, and homes. The fact is that, in the past, Turkish companies Zorlu and Turcas negotiated with the gas companies in Israel for imports of Israeli gas.

When the sanctions against Iran are removed, Turkey surely plans on importing gas from Iran. Is this not expected to affect any deal between Turkey and Israel?

Turkey already imports 10 BCM of gas a year from Iran, so the way I see it, there will be no problem in buying gas from Israel even after the sanctions are removed. The most important thing for Turkey is to diversify its sources of supply, and Israel is a good source: reliable and relatively cheap.

Apropos the Iranian market, how in your opinion will Iran`s entry in to the energy sector affect the gas sector in Israel?

The process of Iran`s entry into the global energy market will take a long time, because it must do quite a few things before it manages to export large quantities of gas. It could take a decade. It will also take more time for the recently discovered gas in Iraq and Africa to start flowing. Nevertheless, Iran has the second largest gas resources in the world, amounting to over 18% of the world`s gas reserves (the reserves in Israel are 0.5%, H.C.). Therefore, as soon as Iran enters the picture, the global gas sector will change, and this will obviously also affect the Israeli gas sector. That is exactly the reason for my argument that if you want Leviathan to stay relevant, the partnership must act quickly, and sign export contracts as fast as possible, while there is still a market for it.

There are quite a few people in Israel who will oppose what you say. They say that Israel is exporting too much and too early, and this is harming Israel`s energy security. Former Shell president John Hofmeister also recently asserted in a Globes interview that Israel should not export gas; it should keep it for an emergency.

Israel`s problem isn`t energy security. It has a lot of it. All it has to do is make sure that its reservoirs are developed; then it will have a supply of gas for decades. If it`s really important for Israel to feel a little more `secure,` it can also import gas from the Gazan marine reservoir discovered off the coast of the Palestinian Authority. In the past, Israel was in negotiations to import gas from there, but decided for its own reasons not to do so. Obviously, Israel could have decided that keeping enough gas for 30 years is not enough, and it should keep enough gas for 50 or 70 years, but the energy sector changes at an unexpected pace, and in unanticipated directions. Had I told you a year ago that the price of oil would reach a third of its then value, you would have laughed and thought I was crazy. So I don`t think you can plan what will happen 30 years from now, and certainly not 50 years from now. It may very well be that more giant gas reserves will be discovered in the Middle East, in which case Israeli gas will become less relevant than it is today. In addition, renewable energies are expected to supply a more and more significant proportion of electricity production in the world, in which case Israeli gas will again become less relevant (according to the International Energy Agency, solar energy is likely to become the main source of energy in the world by 2050, H.C.). My message is that now is the time to export the gas, because it`s by no means certain that there will be more opportunities in the future. Israel can invest the money that it earns from exports in exploration for new gas resources, or in alternative energy resources

Original article

Photo on front page: Extracting gas from the Eastern Mediterranean Basin. Source: offshoretechnology.com. Map on this page: Charted gas and hydrocarbon deposits in Eastern Mediterranean. Source: Gulf Times.

Themes
• Access to natural resources
• Energy
• Infrastructure
• Regional

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