Standoff threatens new Egyptian LNG project
CAIRO: Israeli authorities have held up the development of an offshore natural gas field in Palestinian territory by not responding to a routine request for a survey from the field s operator, British Gas (BG).
The delay is the latest development in a five-year saga of the field known as Gaza Marine, which was discovered off the coast of Gaza in 2000 and is estimated to contain approximately 1 trillion cubic feet of gas.
A consortium led by BG was granted a 25-year concession to develop the field by the Palestinian Authority in 2000 and the validity of the concession has been unsuccessfully challenged in court by the Israeli government, according to the field s project manager Nigel Shaw.
The PA s right to grant that concession has been tested legally, says Shaw. It s agreed that [the Palestinian Authority] have the right to grant the concession. BG subsequently drilled two exploration wells to verify the existence of gas in the field and has worked on marketing the development. It has also negotiated the sale of natural gas with various Israeli customers for five years without success.
Shaw believes the negotiations failed to yield any results for a combination of political and economic reasons.
Israel was never really able to offer us a competitive price, but I don t think that until recently they ever really wanted to because I think it suited them to have the Gaza Marine gas as a strategic reserve and I suspect that they thought that there isn t any alternative for the gas, says Shaw.
The Israeli government may also have been concerned about how funds from the project would be used, as BG estimates that the field will generate $1 billion in taxes and royalties to the Palestinian Authority over a 10 year period.
In addition, an underwater pipeline from Egypt to Israel is currently under construction by the East Mediterranean Gas Company (EMG), an Israeli-Egyptian joint venture. The pipeline is expected to begin supplying Israel with Egyptian gas at the end of 2007.
Israel now has more than enough gas to meet its requirements for the next 10 to 15 years, says Shaw. That s fundamentally reduced the need for [Marine Gaza] gas.
After years of stalemate between BG and Israeli companies, the Israeli government eventually stepped in last year to try to broker a deal with buyers, but the parties still could not reach common ground.
In October 2005, BG announced its intent to seek alternative buyers through its liquefaction facilities in Egypt, in response to which the Israeli government asked for an opportunity to make a counterproposal.
On the back of sustained high international commodity prices and the fact that BG had developed two trains of LNG (liquefied natural gas) in Egypt using gas from our own fields, we had the confidence that we could take this gas [from Marine Gaza], bring it to Egypt and use this gas to supply half of a third train of LNG, says Shaw.
The counterproposal was made three months later, followed by more intense negotiations between BG and the Israeli government. Unconvinced that an acceptable price could be reached, BG officially announced its decision to terminate negotiations for the sale of Gaza Marine gas to Israel on May 16 and to redirect its efforts toward transporting the gas by pipeline to its liquefaction facility in Idku, Egypt.
The price [offered by Israel] had only changed by a small amount from what it had been for the whole of five years, and it was in no way matching the price we can get from international markets, says Shaw.
British Gas owns two trains for the liquefaction and export of natural gas in Idku that started production last year. The Idku facility can support up to six trains and the company is now in the process of commercial negotiations for the construction of a third train.
Gaza Marine is enough for half the third train and we would use a mix of other Egyptian gas to fill the other half of the third train, says Shaw. We ve got some of our own concessions and we re talking to a number of other gas producers in Egypt that would like to have access to the export market.
However, in order to proceed with the commercial development of the Gaza Marine, the company must survey the field and the vessel that will conduct the survey needs to pass through the m-zone between the border of Gaza and Egypt. This zone is one nautical mile in width and navigating through it requires the approval of the Israeli Ministry of Defense in accordance with previous Israeli-Palestinian peace agreements.
Although BG was granted permission to sail through the m-zone when it drilled the exploration wells in 2000 and, more recently, a similar survey passing through the zone was permitted for the EMG pipeline, Israeli authorities have not responded to the request from BG that was made over a month ago.
Shaw says that the request is a fairly routine matter, and that the absence of any response from the Israeli Ministry of Defense is very unusual.
Ironically, the survey for the EMG pipeline, which was completed last month, used the same vessel that BG plans to use for its own survey.
A survey has just been done for the EMG pipeline using a very similar route, going through exactly the same waters [and] in fact using the same vessel that we want to use, says Shaw.
Israel has also tried to obstruct the field s development in other ways, claiming that the gas from the Marine Gaza field may physically intermingle with Egyptian gas in the EMG pipeline. This would contravene the agreement between Egypt and Israel governing the pipeline, which requires that it only carry gas of Egyptian origin.
If that is a genuine issue, and that s a government-to-government issue rather than a BG issue, physically our gas can tie into the pipeline that goes to Jordan, so there would not be any mixing of our gas with the Egyptian system [and] commercially an equivalent quantity would be placed in the [Idku] LNG facilities, says Shaw.
Ultimately, the interconnection of the Gaza Marine facility with the Egyptian gas pipeline grid is a technical issue that is likely to be resolved, but the approval of the survey permit is critical to the continuation of the development of the field as well as the third train in Idku.
Meanwhile, the Egyptian government, which intends to own part of the third train, has stepped in to try to resolve the deadlock and discussions are underway on several official levels. I think we re aligned commercially and politically [with the Egyptian government] in terms of trying to do this, and we are getting support from the Egyptian government, but we are now hitting a key practical issue in terms of the delivery and execution of the project, says Shaw.
BG owns 90 percent of the Gaza Marine field with the balance owned by Consolidated Contractors Company. The Palestinian Investment Fund has an option to purchase 10 percent of the venture.
The fund is owned by the Palestinian Authority but lies, crucially, under the office of the president, a fact which prevents a direct affiliation with Hamas and enables the venture to deal with many Western governments that have shunned all dealings with the Palestinian cabinet led by Hamas while maintaining links with Palestinian President Mahmoud Abbas.