Shaul Zemach
Director-General
Ministry of Energy and Water
216A Jaffa Road
PO Box 36148
Jerusalem
Israel
12 March 2012
Dear Shaul
Gas Development Policy
You have asked Petroleum Development Consultants (PDC) to provide some additional information on a
number of the suggestions that we have made regarding an overall gas development policy. The purpose of
this letter is to provide this additional information. Please note, however, that these proposals were made in
the context of an overall policy including covering the issue of exports and the proposals in this letter have to
be taken into consideration in this context.
The areas that are discussed in this letter are the following:
Open access in a Leviathan landing terminal and LNG liquefaction terminal
Our position regarding government participation in an LNG liquefaction terminal
Our position regarding future connection of fields other than Tamar and Leviathan
Our position regarding the proposed provision of sub-sea tees in a Leviathan domestic pipeline
system
Open Access: Leviathan Land Terminal and LNG Liquefaction Terminal
PDC has proposed that the Leviathan field owners should be required to land some of their gas in Israel in
return for a concession from the Government of Israel to allow a certain level of exports. As part of an overall
settlement PDC has proposed that the Leviathan owners shall be required to construct and pay for additional
capacity both in the main pipeline to Israel and the land terminal. It was suggested that a minimum of 25% of
the capacity of the pipeline and the terminal should be made available by the Leviathan owners.
On the basis that the minimum annual capacity of the pipeline and the terminal would be 2 bcm, the capacity
available for third party access would be 0.5 bcm. This would allow a smaller field with reserves of around 50
bcm to be connected to the system. We have done some rough scoping field economics which indicates that
such a development would be economic even based on the Sheshinsky assumed domestic gas price of
$4.5/MMBTU. We will be able to provide you further details of the economics of such a field over the next
few days as we further develop our field economics model.
The provision of third party access as described above will allow some limited supply competition in Israel to
emerge, a precursor to the development of gas competition. However the extent of this should not be
exaggerated particularly as the unit costs of Leviathan are likely to be less than the unit costs of a third party
field due to the large size of Leviathan even allowing for the fact that the unit capacity costs in the pipeline
and the terminal will be identical. However the third party field will not be required to build either its own main
pipeline or terminal and this will reduce the capital investment required.
A further point to be made is this third party access requirement needs to be considered in the context of the
proposed strategic reserve envisaged for Leviathan. This provides that not only is the physical capacity
provided for third party access but also a market is provided for. This is very similar to the small fields policy
in the Netherlands which requires that the giant Groningen field is reserved in order to allow smaller fields to
have access to the market.
You have asked whether the provision of additional capacity for third party access for pipelines and terminals
is a solution adopted elsewhere. We can confirm that this has been the case and quote from PDC’s specific
experience the development of BP’s Nam Con Son development in offshore Vietnam where PDC was
advising PetroVietnam the state oil and gas company. In this case the state wished the offshore producers to
provide additional capacity in the pipeline and onshore terminal. This additional capacity was provided by the
producers with PetroVietnam paying for and owning the additional capacity.
PDC would argue that the provision of extra capacity in Israel should be paid for by the Leviathan owners
rather than the government. Firstly unlike Vietnam the government of Israel is not a participant in the
offshore licences. Secondly a significant issue in Israel is the shortage of land for a terminal which can only
be resolved by the government actively supporting the provision of this limited asset. In return for this
support PDC believes that the Leviathan owners should be required to provide this additional capacity at
their cost.
We have had limited time to consider the additional costs that the provision of this third party access might
entail. Our initial view that is it would involve about 15% on top of the base costs for the terminal. Assuming
that cost of a terminal is $600 million suggests that the extra cost for the additional terminal capacity would
be $90 million. The cost of additional pipeline capacity could be around $60 million giving a cost of $150
million – basically the cost of an offshore Israeli exploration well.
PDC has proposed that the level of third party access is 25% and you might ask the question why this
number rather than any other number has been used. It is really set from a minimum which must be large
enough to allow a single field to use it. Generally it is usually possible to get this sort of increase in most
process plant by de-bottlenecking. Typically at this level of increase not all the equipment will need to be
increased in size.
We have not specifically proposed that third party access shall be provided in the LNG liquefaction terminal
although if the government wishes to take an interest in such a facility it could offer their capacity to a third
party field developer if it so desired. However the subject of a LNG liquefaction terminal is discussed further
below.
Government Participation in an LNG Liquefaction Terminal
Any LNG liquefaction terminal project is likely to involve a utility rate of return. This sort of terminal would
normally have a dedicated gas supply and dedicated LNG customers. It is not necessary that the owners of
the LNG liquefaction terminal are identical to the owners of the gas production licences. However there does
need to be significant alignment between these two owners.
The example of Trinidad and Tobago is instructive in evaluating the potential role for government investment
in LNG liquefaction. There are four separate trains of the plant with differing government interests. Train 1
had a government interest through the National Gas Company (NGC) of Trinidad and Tobago of 10%. The
government had no interest in Trains 2 and 3. NGC had an interest of 11.1% in Train 4.
The development of the Oman LNG liquefaction terminal is another example of an aligned interest between
the owners of the terminal and the gas producers. The Oman LNG terminal is owned by the Government of
Oman (51%) in cooperation with Royal Dutch Shell (30%), Total S.A. (5.54%), Korea LNG (5%), Partex Oil &
Gas (2%), Mitsubishi Corporation (2.77%), Mitsui & Co. (2.77%), and Itochu Corporation (0.92%). The main
producer Petroleum Development Oman (PDO) is owned 60% by the Government of Oman, Shell (34%),
Total (4%) and Partex (2%). However PDO is dominated by Shell rather than the Oman government and
PDO failed to find additional gas to support the LNG liquefaction terminal beyond the initial dedication of gas.
The result is that the LNG liquefaction plant has been operating below capacity for many years.
As noted earlier the government of Israel does not have an interest in oil and gas production as a direct
participant. It is PDC’s considered view that a limited involvement of the government of Israel in the
ownership of an LNG liquefaction terminal would be accepted by the offshore producers. However the
government of Israel would have to provide its proportionate share of investment. It would be up to the
government of Israel to whom it would rent its capacity to and it could if it wished facilitate third party access.
Position Regarding Future Connection of fields other than Tamar and Leviathan
The shear size of the Tamar and Leviathan fields provides a real obstacle to the development of other
offshore fields. This comes about because these two fields are likely to dominate the physical infrastructure
(pipeline and terminal) and the domestic market. This is very typical of the development of offshore fields
and is very comparable to the initial developments in the UK North Sea as has been described to the
Committee previously. However these Israeli fields are so large that the development of any other fields is
going to be difficult. For this reason PDC has proposed the establishment of a strategic reserve which would
allow smaller fields to be developed.
It is premature to establish policy for these smaller fields as the actual technical development of these
smaller fields remains uncertain. The example of the UK is not helpful in this instance as the early large
development involved fixed platforms. Smaller additional fields could be brought into production as satellites
of these larger fields. A more relevant example is the development of deep water gas fields in Egypt. In this
case smaller fields are developed as a group with each group having a dedicated pipeline to shore. Another
alternative is the pre-installation of sub-sea tees (described below) which would allow smaller fields to have
direct access to the offshore pipelines.
Provision of Sub-sea Tees in a Leviathan Domestic Pipeline System
Sub-sea tees are installed at the same time as the subsea pipeline. They allow a subsequent field or pipeline
to be connected directly to the main pipeline with out interruption to flow in the main pipeline as the tees
have an isolation valve that prevents sea water entering the main pipeline. The cost of a sub-sea tee is quite
modest in comparison to the cost of retrofitting a connection. An example of this type of system is the UK
CATS system which has six sub-sea tees (T1-T6) of which three are available for third party use (T1, T2 and
T5). Please see Appendix 1 for details of the system
Yours sincerely
David Aron
Managing Director
Appendix 1 CATS Sub-sea Tees