- Karish first gas close
- Geopolitical risks remain
Alandmark US-brokered deal between Israel and Lebanon over a maritime border looks set to de-risk energy exploration in the eastern Mediterranean, boost oil and gas production, and could help with Europe’s transition away from Russian energy over the longer term.
The draft text of the deal confirms a border between the waters of the two nations, and settles the rights attached to gas fields regarding “a hydrocarbon prospect of currently unknown commercial viability”.
Israel would completely controlthe Karish field, which is where Energean (ENOG) has its flagship project, and which has previously been threatened by Iran-backed paramilitary group Hezbollah. As the company has approached production at Karish, the border dispute has become more heated.
Lebanon, which hopes that the deal will help it escape its economic troubles, would have the exploration rights to the Qana field, although given this straddles the sea border, Israel would receive certain revenues through an agreement with French hydrocarbon giant TotalEnergies (FR:TTE).
Sign-off on the deal appears to be close, although there is still a chance of last-minute hiccups given the fraught political backdrop. Israel’s cabinet gave it the green light last week and it has gone to the Knesset ahead of a final vote. Lebanon’s government is keen for new exploration and drilling to start at Qana, with bullish noises made by president Michel Aoun and prime minister Najib Mikati.
Panmure Gordon analyst Ashley Kelty told Investors’ Chronicle that the deal “is good for the region, and in theory it should help to unlock new exploration” but he wants to “seehow the unitisation of the [Qana] field is resolved and how the development spend and gas sales agreements will be agreed”. Unitisation is where a reserve is exploited jointly across borders.
The deal is good news for Energean, which is listed in both London and Tel Aviv. The gas-focused exploration and production company revealed earlier this month that it had made a new commercial gas discovery at its Hermes well, offshore Israel, and it expects to shortly produce first gas at Karish after recently starting the final part of the pre-production process by introducing gas from the grid to the floating production storage and offloading (FPSO) vessel via subsea pipes.
Peel Hunt analysts said the company was “on the cusp of transformation” while Stifel analyst David Round said that the deal “removes one of the final potential obstacles to Karish first gas”.
Other energy companies with interests in the area should also benefit. Chevron (US:CVX) is a US giant with offshore Israel operations, and the company is in discussions to develop a new natural gas platform there. TotalEnergies, which is due to release a third-quarter trading update next week, and Italian major Eni (IT:ENI) are part of a consortium licensed to explore for gas in Lebanon’s waters. Lebanon’s government will take over Novatek’s stake, after the Russian company pulled out.
Exploration and development in the region come with significant risks attached, which the new deal could remove or at least materially reduce.
Energean’s prospectus in 2018 noted that its operations “could be specifically targeted by physical or cyber attacks” due to the geopolitical situation in Israel. This was borne out by an incident in July – Hezbollah send drones towards the Karish FPSO, which were shot down by the Israel Defense Forces.
While the region’s future energy supplies will not replace the gas that Europe has lost from Russia, a stabilised environment around energy exploration will help increase production and provide a new source of energy for global markets in the years to come as the Israeli government seeks to boost exports. Israel’s gas production was up by 22 per cent to 11bn cubic metres in the first half of 2022.
Stifel’s Round said that “new discoveries continue to be made in the region, and there are wider implications here assuming solutions can be found to enable these volumes to reach international markets, and replace gas from Russia” while Panmure’s Keltysaid that “over the longer term it [the deal] will help deliver new gas to the Middle East and Europe and will help as part of the wider energy transition”.
Energean’s shares are up 48 per cent this year, but have dropped 6 per cent in the past month as gas prices have fallen back slightly.
