Leviathan gas export options in light of gas price fluctuations in Europe

Offshore platform

Israel started exporting natural gas to Europe in December 2020, through a pipeline connecting its offshore Leviathan gas field to Egypt and then to the European market via the existing LNG infrastructure. The exported gas comes from the Leviathan field, which is located in the Eastern Mediterranean and is one of the largest natural gas fields discovered in the past decade. Compared to other gas exporters to Europe, Israel's exports are relatively small. However, the withdrawal from Russian recources as the largest supply source of natural gas to Europe (accounting for more than 40% of the region's gas imports in 2020) means that Europe is aggressively looking for alternative options. Other significant suppliers to Europe include Norway, Algeria, and Qatar and over the past year also US and others stepping in to replace Russian supply. Would Leviathan gas field gain a more promenent role for Europe as well?

Israel's gas exports to Europe are significant for Israel itself, as they provide a new source of revenue and help to diversify its economy. Israel had once been a net importer of energy, but the discovery of the Leviathan and Tamar gas fields in 2009 and 2010 has transformed the country into a regional exporter of natural gas. Israel is already a major provider of gas to neighbouring Kingdom of Jordan and a net exporter of gas to Egypt (which mostly goes to export via its LNG facilities). The other options on the table to enhance the Israeli gas supplies to Europe have long been considered to be the CNG pipeline branch of the Southern Connection and alternatively an offshore FLNG export terminal at the Leviathan gas site. While the first megaproject option is actively promoted by the US Deparment of State in collaboration with regional players Cyprus and Greece, the second is more of a private initiative which however solely depands on the LNG pricing environment and natural gas demand in Europe.

Israel's gas exports to Europe are relatively small compared to other suppliers, but they are significant for Israel's economy and from a geopolitical perspective, as they help to strengthen energy cooperation between Israel, Egypt, and Europe. The pipeline connecting the Leviathan field to Egypt was built with the support of the European Union and is seen as a key step in enhancing energy cooperation between Israel, Egypt, and Europe. European gas demand dropped from 412 BCM in 2021 to 357 BCM in 2022 and is not expected for sudden rebound in light of the prolonged conflict in Eastern Europe. Israeli supply share of European demand hence grew over the past several months from a mere ~1% to as much as 2-3% and may increase to nearly 3.5% in the near future upon scale up of operations in the Karish field. The numbers however can go higher - some estimate gas supply from Eastern Mediterranean to Europe can increase to more than 30 BCM/year, or some 10% of European demand. This would mainly come from the Israeli Leviathan field, but to some degree also adjacent Karish field and perhaps Cypriot gas findings which are yet to be monetized.

The first option for Israel and Egypt for increasing exports to Europe is increasing the pipeline capacity interconnecting the countries. Due to the almost two decades of age in the existing pipeline infrastructure, an optional idea would be construction of a larger parallel pipeline to export Israeli gas to Egyptian LNG facilities which are not yet fully utilized. It is very reasonable that the export of Leviathan and Karish could well reach 15 BCM/year, which is however close to the maximum combined capacity of the Damietta (6.75 BCM/year) and Idku (9.9 BCM/year) export facilities. This way Israel's supply to Europe may reach roughly 5% of demand.

Alternatively, constructing a new marine pipeline that would directly connect Israel and Cyprus to Europe is something which could bring 10-20 BCM/year to the European continent. This would require significant investment and infrastructure development, but could provide a more direct and secure route for gas exports to Europe. Roughly saying this could bring 3-4% of European natural gas demand and this is not something to be taken for granted. However, the scale of this project is immense - it would require an unprecedent investment of 6-8 billion USD into infrastrucures and hence demand warranties from major regional and international players. The advantage of the project is long-term price stability for the European customers and diversification of supply.

Finally, Leviathan partners also consider building a floating LNG terminal as phase 3 of the field development, which would allow for more flexible and cost-effective LNG exports. This option would require less infrastructure investment than building new pipelines or developing new offshore gas fields, but would still require significant capital investment on the scale of 2-3 billion USD. Advantages of such project would be flexibility from the point of view of Israel and Cyprus on one side and Europe on the other. However, the gas would be shipped as LNG and hence prone to sudden price fluctuations. The FLNG terminal technology has a mixed reputation over previous experience worldwide. The technology however matured over the past decade and is now fully commercialized unlike in the era of the previously promoted Levant FLNG project at the Israeli Tamar gas field site (which went abandoned for a number of reasons). This could bring additional 3-5 BCM/year to the European market or 1.0-1.5% of European demand.

Overall, there are several options for increasing gas supply from Israel to Europe, each with its own advantages and challenges. The most viable option will depend on a range of factors, including market demand, geopolitical considerations, and infrastructure capabilities. In any case however Israel and (to some degree) Cyprus are not expected to become game changers for the European gas market, even though could play a role in the European energy market of the 21st century. That said, unless another major gas field is discovered in the EastMed region doubling or even trippling the available gas reserves in the Eastern Mediterranean, which must be said - is still a solid option.

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