Due to the delay in the start of gas production in Karish field, several Israeli gas buyers are asking to terminate the purchase agreements they signed with Energean in 2017. Many other factors are also motivating this decision, not least the new competitive prices that other gas producers in Israel are keen to offer, especially from the already operating fields in Tamar and Leviathan. Israel’s total hydrocarbondiscoveries from its present fields exceed by far its gas demand for the next fifty years. Additionally, it faces difficulties inexporting its gas to Europe through the unviable East Med gas pipeline. The consequence will be more pressure on the gas price level in the local market.
To date, Energean has contracted 7.1 billion Cubic Meter (MCM)/per annum from the total 8 BCM/per annum that it is planning to produce from its fields in the North offshore area of Israel, on the border with Lebanon. Parts of these fields are considered by Lebanon as disputed areas and subject to final delineation agreement.
The Floating production storage and offloading (“FPSO”) vessel, named Energean Power, which will be installed 90 kilometers offshore of Israel, will have a total gas treatment capacity of 8 BCM/per annum and will be fed from three offshore hydrocarbon fields: Karish Main, Karish north and Tanin. The FPSO was scheduled to be on its production site in late 2020 to start production in the first quarter of 2021. However, due to Covid-related delays during the construction work in both Singapore and China, the arrival of the vessel is postponed to the first quarter of 2022 and the gas production to mid-2022. Energean considers this delay as a valid “force majeure” event and is trying to win the approval of its clients for a late start. The company invested to date more than one billion US Dollars in Israel building the field infrastructure and the FPSO, and expects to reach a net total debt of two billions US Dollars by end of 2021. The Greek company raised $1.275 billion via a Senior Credit Facility, and a further $460 million from an IPO on the London Stock Exchange in March 2018, in order to take a final investment decision on Karish field, which is supposed to be Energean’s winning horse.
Unfortunately, Energean’s clients do not have the same opinion. Thus, more than half of the already contracted 7.1bcm/y gas sale is under threat of termination due to this delay. Major Israeli power producers like “Dalia”, “Or Power” and others, totaling more than half the contracted quantity, want to seek sources from other Israeli gas fields like Tamar or Leviathan, where the price level is becoming more realistic. After the acquisition of Noble Energy by the oil giant Chevron, and the termination of Noble Energy’s monopoly in the Israeli hydrocarbons market, as well as the entrance of new companies as partners in the two main gas fields Tamar and Leviathan, the new ownership structure has started to be reflected in the domestic gas price. From a level of approximately $5.30/MMBTU in 2020, the average gas price in Israel fell to around $4.60 by the end of 2021.
As Energean’s supremacy was originally built on price, with the company in 2017 securing sales deals with pricing of around $4-5/MMBTU, undercutting at the time that offered from the Leviathan and Tamar fields, the recent fall of domestic prices and the capacity of the Tamar field to supply immediately big volumes of gas, is increasing the pressure on Energean. Energean’s clients would prefer to purchase from other gas suppliers which are sitting on big gas reserves and waiting for such opportunities to arise.
Such a situation could jeopardize Energean’s very existence due to its high level of indebtedness. With interest rates foreseen to increase in the near future, Energean’s financial situation could only worsen, speeding up its potential insolvency.
The alarming financial complication is accompanied by a political stalemate in the maritime border negotiations between Lebanon and Israel. If commencement of production is further delayed by negotiations not reaching a swift and positive outcome, the bleeding would only increase, and the risk of insolvency would increase correspondingly. Once this point is reached, the only solution would be its acquisition by a bigger player in the oil and gas field. This player would probably be a company currently working in the East Med rather than Israel, due to competition-related reasons.
Author: Abboud Zahr – Oil & Gas Specialist