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A Leviathan sized greed strikes

Jan. 05, 2011 4:32 PM ET
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When a nation becomes greedy, while not a unique event, it is rarely good for the national long-term best interests of its citizens.  There is a case already brewing that will be interesting to watch unfold.  The largest energy find since the Brazilian deep-sea Tupi (new Lulu) field has been announced lately.

It is already changing the dynamics of the politics in its area.  A nation that has always been energy dependent on imports is now going to find itself an energy exporter.  What they do with this new source of wealth will shape their national destiny for the next century.

For the first time since Norway, a developed western nation with a high technology based economy has discovered enough hydrocarbons that they can realistically change their future, today.  There is already pressure on them to export their hydrocarbons via underused LNG facilities in neighboring Egypt.

The implications are clear.  What happens next will decide the real long term future of Israel.  How they adjust to this new found wealth, both in developing the usage of the raw hydrocarbons into value added exports and in the tax revenue generated will shape the future.

They can change over their society to one based on Natural Gas, instead of crude oil.  While this sounds radicle, it really isn’t.  Natural Gas is the perfect energy source for providing a single source of BTUs.  It is the cleanest of the hydrocarbons and needs very little processing to be put to use.

However, before the first production well is drilled, before the first FEED contract is signed to develop either of the properties, the nation of Israel is already tearing up the signed contracts it has with the companies that took all the risks necessary to find this new world-class giant resource.

This event, if it starts to be a recurring theme, will slow if not stop the development of these fields before they can be tapped.  The reality of the geology makes it clear that there is a significant chance of additional giant or super giant fields to be found in the region. They will most likely be in neighboring national waters.  You don’t find two world-class fields next to each other and nothing else in a region.

“I am really disappointed with the recommendations,” said Gideon Tadmor, the head of Delek Energy, the oil and gas arm of Israel’s Delek Group, a conglomerate controlled by billionaire Yitzhak Tshuva. “It will be very hard to encourage investors to continue to invest in this sector.”

“Tens of billions of shekels will need to be invested [to develop exports]. In order to do that, the government needs to be friendly to investors and give them a feeling that there is stability.”

Charles Davidson, Noble’s chief executive, said in a statement that the company opposed tax changes applied retroactively for existing fields.

Mr Davidson added: “Noble fails to understand why Israel’s government take should exceed that of the United States and the United Kingdom, where gas markets are dramatically more robust and developed than that of Israel.”

What have been found so far are two world-class natural gas fields.  What is unknown is how many more are in the region.  Europe may have found its next long-term source of energy, to replace the erratic production curve of their eastern neighbors like Russia.

The Tamar field discovered in 2009 with 8 TCF of estimated reserves changed the long-term future of the area.  The nation of Israel will now have a long life NG field providing its total energy needs for decades.  The find of the Leviathan field nearby with 16 TCF in estimated reserves has completed the domestic energy issues for Israel.

What it has also done is unleashed a national wish to rewrite the contracts that are in place.  In doing so, Israel is now talking about taking around 50% of the value of the energy produced.  While this number is less than what Norway and other major exporters nations take, it is more than what was contractually agreed too when the corporations paid to lease the property.

“According to the recommendations issued Monday, reserves that begin production before January, 2014, would only have to pay an increased tax rate after a 200% return on investment. Tamar is the main reserve that would fall into this category. This exemption would not apply to Leviathan, which is estimated to hold up to 16 trillion cubic feet of natural gas, but will not begin production until after 2014.

The committee reiterated on Monday the same recommendation it made in November, that the state leave royalties on energy discoveries at the current 12.5%, but levy a tax of up to 62% on energy company profits. Israel hasn't increased taxes on the development and production of petroleum reserves since 1952.”


Israel could find its fields undeveloped, as the corporate risk of further contract hostage negotiations scares away capital.  They do not have the technology to develop the fields, and greed has killed more than one major field development before.  The hydrocarbons will always be there.

What Israel should do, is to embrace a natural gas society.  It burns cleaner; it can be used in public and private transportation, & electricity production.  In fact, if Israel were to invest in a fleet of brand new Combined Combustion NG powered electricity plants; they could become the electricity exporter to the region.  They have the infrastructure already in place to quickly become a major Gas to Electricity exporter.

Since the invention of electricity, nations in the Gulf have needed more electricity during the heat of the summer months, Israel could fill this growing need.  A series of modern C.C. natural gas-powered electrical plants could change the dynamics of the electrical grid in the region.  A stable electrical grid would help to stabilize the unrest in some locations like Iraq during the heat of the summer.

If Israel embraces NG, both domestically and as a source of value added exports, the nation has a chance to change its future, today.  It also has a very real chance of killing the golden goose before it’s laid an egg.  Greed kills, the future will be the judge.

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Disclosure: Jack H Barnes does not have interest in any company named in this article, nor does he expect to have any interest in any company named in this blog for the next 72 hours.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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