Israeli operators deliver positive results, amidst legal challenges

14 November 2018
25 September 2018, Week 38, Issue 467

Greece’s Energean laid out an optimistic development trajectory for the company’s Israeli offshore fields in the first results statement since going public earlier this year – buoyed by an increase in the assets’ reserves estimate.

The local Delek Group likewise revealed positive operational progress at the country’s two largest fields in the firm’s own interim report, published several weeks previously.

However, while development activity in Israeli waters has blossomed in the wake of settlement of a lengthy regulatory dispute three years ago, legal challenges remain. Delek faces environmental objections to the development plan for the 606 bcm Leviathan field and expansion of the Greek firm’s exploration activities cited in a fresh eruption of the maritime territorial dispute between Tel Aviv and Beirut.

Energean results

Energean published a comprehensive interim results statement on September 12 – befitting the raised profile engendered by a landmark initial public offering (IPO) on the London Stock Exchange (LSE) in March.

Existing production derives solely from the Greek market but the report focussed heavily on the company’s flagship investment in the Karish and Tanin fields in north of Israel’s maritime waters.

An FID on the estimated US$1.6 billion development project – which aims at production of 11.3 mcm per day from Karish by the first quarter of 2021 – was taken in March and the firm was able to report what was described as “the first delivery milestone” on the scheme. First steel is on track to be cut by the end of 2018 on the FPSO unit commissioned from China’s COSCO by engineering, procurement, construction, installation and commissioning (EPCIC) contractor London-listed TechnipFMC.

The UK’s Stena Drilling and the US’ Halliburton are providing drilling services while the UK’s Wood Group has been selected for operations and maintenance services after the start of production.

The new-build FPSO is being built with capacity of 8 bcm per year while contracted gas sales thus far total only 4.2 bcm – and the results statement reiterated optimism that sufficient reserves would be proved up over the next 18 months to fill the remaining capacity.

Such hopes were bolstered by an updated Competent Persons Report from Netherland Sewell & Associates in mid-August – the first to assess both the Karish and Tanin fields and the five additional licences nearby acquired during Tel Aviv’s first licensing round last year.

Total gross recoverable prospective resources were put at 212 bcm of gas and 101 million barrels of liquids while 71 bcm of contingent resources were converted into 2P reserves. The firm declared the finding to be “consistent with Energean’s view that its acreage contains an attractive number of near-field prospects where potential discoveries can be quickly and economically monetised”.

Development plans

In the near term, the focus for additional development is the Karish North Prospect. In June, Energean announced the intention to take up one of the seven optional wells included in the contract with Stena in order to spud the prospect – which contains estimated recoverable prospective resources of 37 bcm – by the end of the first quarter.

The latest update laid out three possible outcomes for the potential additional volumes – namely to underpin existing supply contracts, to justify further sales agreements, or to allow the deferral of the projected US$700 million investment in developing Tanin in favour of tie-backs to the FPSO from the Karish prospect at a predicted cost of only US$100 million.

A three-well development programme at “Karish Main” will follow the Karish North drilling.

Energean was similarly upbeat on the prospects for additional demand to meet the full 8 bcm being targeted. In particular, planned privatisation of Tel Aviv-owned Israel Electric Corp.’s (IEC) power stations was said to offer the country’s newest upstream player the chance to compete with sales from the giant Tamar and Leviathan fields, both operated by the country’s first-movers, the US’ Noble Energy with Delek.

Reference was also made to a proposed pipeline to deliver 0.5-0.8 bcm per year to Cyprus by the early 2020s – although the island’s domestic and regional gas plans remain in limbo at present.

Financially, Energean again had positive news for investors – swinging to a profit of US$82.1 million from a loss of US$4.4 million in the corresponding period last year, as a 50% increase in production coincided with rising oil prices.

Plans were revealed for a secondary listing on the Tel Aviv Stock Exchange in the coming months – with the stated aim of “expanding the accessibility of our East Mediterranean oil and gas story to a wider pool of investors. The LSE IPO raised US$460 million, valuing the firm at around US$968 million.

Delek’s development

Delek also published first-half results in late August – reporting record quarterly output from the estimated 317 bcm Tamar field, currently Israel’s only producing asset.

Output during the second quarter totalled 2.6 bcm – corroborating Noble’s assertion in results released earlier in the month that production facilities were now running at around full capacity of roughly 28 mcm per day.

The revenue effect for Delek was offset by the Israeli firm’s divestment in July last year of a 9.25% stake in the licence for the field to comply with the terms of the tortuously-negotiated Gas Framework Agreement reached with the authorities in 2015 – which also forced the firm to offload Karish and Tanin to Energean.

Quarterly net profit slipped by 5.6% year-on-year to 170 million shekels (US$47.4 million). Cash balances climbed by 600 million shekels (US$167 million) over the first six months to stand at 2 billion shekels (US$558 million) at the end of June.

The results statement also provided an update on the US$3.75 billion development project under way at Leviathan – which is aimed at production of 34 mcm per day in late 2019. Work was running on schedule and within budget, and was roughly 60% complete, the firm said – with the Leviathan-3 well having recently reached its final depth and the rig currently drilling the bottom part of Leviathan-7.

Hurdles

However, construction of the production platform – which Delek said was “in progress” – is provoking domestic legal opposition. A coalition of local authorities and citizens groups was revealed in the local press to have forced the State Comptroller to investigate the permission granted to the Leviathan partners to site the platform only around 10 km offshore rather than close to the field itself, which lies around 125 km out to sea.

Earlier in the development project’s protracted gestation, an FPSO unit had been considered.

Energean has likewise faced – and overcome – various domestic legal objections to the company’s field development plan, which was approved by the government in August last year.

However, in early September, the intention to extend exploration activity at Karish appeared to be the target of a rhetorical revival of an ongoing dispute between Israel and Lebanon about their respective rights along the maritime border.

Tel Aviv objected vehemently when Beirut awarded exploration rights in block 9 during the country’s maiden licensing round last year, since a small portion of the licence – awarded to a consortium led by France’s Total – lies in a triangle of disputed frontier territory.

The operator is not planning to drill the first well until 2020 and has pledged to avoid the contested area. However, Lebanon’s parliamentary speaker Nabih Berri on September 5 publically expressed fears about prospective activities at the Karish field, which also lies close to the border and where Lebanese officials have in the past raised concerns about potential horizontal drilling.

We have learnt that in the Eastern Med, obstacles to progress are rarely far away, but for now at least, the prize appears to be well worth that inconvenience.

Edited by

Ian Simm

Editor

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