Interview: Opportunity knocks in the East Med

12/4/2018

PETROLEUM ECONOMIST: Rony Halman, chairman of Israel Opportunity Energy Resources, explains why the region could be on the verge of something big—but some points of contention remain

These are busy days in the East Med. Egypt has just received its last cargo of imported liquefied natural gas, and now Israel is poised to move forward on a plant to send pipeline gas to its neighbour, after Egyptian and Israeli companies agreed in early October to buy a stake in the Egypt-Israel gas pipeline.

Cyprus in mid-September took a bold step towards gas exporter status with the striking of a pipeline deal with Egypt. This will initially send gas from the offshore Aphrodite field, discovered in 2011, to be liquefied at the Damietta and Idku plants. Meanwhile, production is due to start in 2019-20 from Israel's giant Leviathan gasfield.

All in all, it makes for an active hydrocarbons area, although one that has been marked from the outset by geopolitical tension and slow progress.

That must now change, Rony Halman, chairman of Israel Opportunity, told Petroleum Economist during a visit to London. Israel Opportunity, an energy resources company established in Israel in 2010, holds interests in two offshore East Med licenses: Ishai, a continuation of the Aphrodite field, but in Israeli waters; and Royee, close to the Leviathan structure that's operated by Noble Energy and Delek Group. The company also has an onshore prospect in Israel and a US oil license.

"Now is the right time to develop these resources because of the confluence of high gas prices and an improving geopolitical situation," says Halman, who is a former senior officer in the Israeli Defence Forces. "Relations between Israel, Cyprus and Egypt are the best they have been for years, maybe even ever. So we should leverage the positive geopolitical situation because, as we know, we can't take this for granted in the Middle East. "

Starting from zero

Halman, a mathematician by background who established Israel's pension fund association, says the East Med players need to cooperate if they want to provide gas-hungry Europe with supplies in the future. "We're still in the childhood phase. We are having to establish the infrastructure from virtually ground zero, so after this childhood phase we will see a big leap forwards for the region."

Even Lebanon's offshore, so far un-drilled, is seen as a significant future prospect-though relations with Israel are non-existent. The two countries are locked in a dispute over offshore blocks licensed by the Lebanese authorities that Israel regards as infringing on its maritime territory.

The childhood phase has also led to some challenges for Israel Opportunity and its partners in the Ishai license.

Aphrodite differences

The Ishai license holders commissioned $20m of seismic with Norway's PGS in in 2010, and then undertook a drilling campaign that led to a gas discovery. Israel's energy ministry declared it a commercial discovery, with potential reserves of about 10bn cubic metres.

However, in March of this year the Ishai license owners wrote to Energy Minister Yuval Steinitz, complaining that activities on the Cypriot Aphrodite field were depleting reserves in the Israeli block that's a continuation of Aphrodite. The owners of the rights in the Ishai license alleged the extraction of gas on the Cypriot side would lead to the extraction of gas from Ishai as well. Aphrodite's developers, which comprise Noble Energy, Delek Group and Shell, have rejected the claims that any part of their field extends into Israeli waters.

Back in 2010, two years before the drilling campaign, Israel and Cyprus signed agreements delineating their maritime economic border and agreeing to cooperate on developing any resulting production.

The September deal between Cyprus and Egypt over the planned 645km pipeline from Aphrodite to Egypt came as a surprise to Halman. "We see it as a violation of our agreement from 2010," he says, pointing out that Israel could lose between $1-2bn in tax and royalties if the Aphrodite partners take gas from the Israeli side of the boundary.

Cyprus' government has begun the process of renegotiating the revenue-sharing agreement with the Aphrodite consortium. The partners are pushing for a new deal, arguing that the current price levels need to be increased in order to render the project viable.

Knesset involvement

"This is a real agreement, this is not just PR," says Halman. "And it's easy to see why they are pushing for it, given the way that natural gas prices have increased this year. Last year prices were around $4.5 per million British thermal units, but now that has doubled, and the profit potential is therefore 10 times higher as most of the work is fixed cost. So they have a motivation to do it."

Halman is set to lobby the Israeli government to intervene in the dispute. "I'm going to put our case to the Israeli parliament (the Knesset) in the first week of November, and will ask them to put into effect the agreement from 2010 that would prevent Cyprus from undertaking a one-sided development programme," says Halman.

But doesn't this dispute jar with the picture of burgeoning geopolitical harmony painted by Halman? Not really, he says, adding: "I'm still optimistic we can convince the Cypriot side to cooperate according the legal agreement between the two countries."

Were the Ishai partners to succeed in referring the case to international arbitration, it could stymie progress on developing the Cypriot field - potentially for years. So the stakes are high.

Paths to an agreement

In this context, a unitisation deal between Israel and Cyprus would clearly be a step forward, as it would allow joint development and revenue distribution from the shared reservoirs.

"There are two ways forward," says Halman. "One is for a unitisation agreement, meaning there is cooperation not just at the commercial level, but at the geopolitical level too. Another alternative is a purely commercial agreement at the business level."

In theory, he says, either of these options could be agreed as both parties are already committed through the 2010 agreements.

One complicating issue is that Cyprus itself is divided. Negotiators in Nicosia had in recent years been anticipating an historic peace agreement to reunite the island, easing the path to a unitisation deal. But optimism that reunification might be near has now faded.

In the meantime, Israel Opportunity will be focusing on its Israeli assets, as well as its US oil license in North Dakota. In June 2017, the company signed a farm-in agreement for the acquisition of rights in oilfields there, before completing the fracking phase in September of that year. Initial production began in October 2017.

All in all, the Dakota field may prove to have been a nifty bit of business for Israel Opportunity, predicts Halman. "We bought it when oil was trading at about $45 a barrel, and now it's more than $70 a barrel."

President Donald Trump's robust support for the US to be transformed into a major oil and gas exporter gives the Israeli company more confidence that North America is a good place to be. "North America is looking active across the board," says Halman. "You have Canadian gas exports from the west coast, and my expectation is that, in future, the gas price differential between North America, Europe and Africa is going to narrow. North Dakota will give us an opportunity in oil, and now we are looking at North America's natural gas potential too."

Join us for the Eastern Mediterranean’s Must-Attend Event for the Latest, Most Accurate Information on Regional Natural Gas Development.

The 6^th Eastern Mediterranean Gas Conference (EMGC) takes place in Nicosia, Cyprus on 6-7 March 2019. The conference provides attendees with the latest information on the region’s developing natural gas industry, and the ability to gain entry to regional markets and seek potential new business partners.