Energean Group Chairman & CEO, Mr. Mathios Rigas, in an interview with the magazine Natural Gas World, focused on the corporation’s plans for Israel and the development of the country’s Karish and Tanin gas fields, gas sale prospects in the Israeli market, as well as possible partnerships developing in the wider region which could be utilized by the Greek firm.
The full interview follows:
Energean is in the limelight because of Tanin and Karish project, but there is quite a success story involved here. Can you please tell us about it?
Energean was founded in 2006 and obtained the shares of Kavala Oil, the company which had the Prinos licenses, one year later. At that time, oil production was pretty low, the acquired company was facing significant financial headwinds and on top of it all, Prinos had less than 2 million oil barrels of 2P reserves.
Ten years later, and after having invested more than 300 million dollars, we have managed to revive Greece’s sole hydrocarbon production by mobilizing four jack ups to Prinos and, since May 2015, our own drilling rig, “Energean Force”. We have successfully completed the drilling of eleven wells, increased 2P reserves to 40 million barrels, shot a new 3D campaign in 2015 that is proving additional potential in the Prinos basin. We secured our cash flow through a long term offtake agreement with BP, which purchases the entire production from Prinos but most importantly we managed to reduce costs and have an operating break-even of less than $25/bbl which allowed us to survive the oil price crisis over recent years. Moreover, Third Point, a US based fund which has more than 11 billion dollars under management, acquired a strategic stake in Energean in 2013.
The fact that we had a low cost base and strong balance sheet at the time of the oil price crisis allowed us to invest and take advantage of the opportunities when others were trying to cut investment. During the past two years we have built our portfolio through the acquisition of four new licenses, now totaling seven in the SE. Med, and we are now ready to sign final contracts for three new blocks. Beyond Greece, we are present in Egypt, Montenegro and most recently Israel, where we completed the acquisition of Karish and Tanin from Delek in December 2016, becoming the Operator and 100% owner of the 2.4 TCF discovered gas fields
Is this a strategic turning point for you, and what are your goals and ambitions?
Entering the Israeli market is definitely a strategic decision for a company that has been operating in the wider SE Mediterranean region. Due to the huge natural gas discoveries in the area and the prospective ones, Israel is considered to be the next key market to provide for the increasing gas demand in Europe and neighbouring areas. Our primary goal is to open the Israeli market, create competition and offer better prices to the consumers, since gas from the Karish and Tanin fields cannot be sold abroad. It is very important that, just a couple of months after being granted the final approval by the Israeli Government, Kerogen Capital, an oil and gas focused private equity fund manager, with 2 billion dollars under management, has agreed to initially invest 50 million dollars by acquiring 50% in Energean Israel, the company which owns 100% of the Karish and Tanin leases. Energean has teamed up once again with a powerful partner and this collaboration is another important milestone towards the fields being successfully developed.
But it is not only Karish and Tanin. We have also been examining the option of participating in the ongoing licensing round, having attended the road shows held by the Israeli Ministry of Energy and having acquired the data package. If we bid and are awarded one of the blocks, if we explore and discover a field, it is obvious that we will have the opportunity to sell in other markets too.
In addition to Greece and Israel, Energean is expanding into other regions such as Egypt and Montenegro. How are these faring and given the size of the company, how much can you handle? Will you show interest in Lebanon’s new round?
We are examining every opportunity in the region very carefully, taking into consideration primarily the geological but also the geopolitical risks. As regards how big an expansion we could handle, I mentioned previously that we have already invested more than 300 million dollars in the upstream sector in Greece. We are executing a 200-million-dollar investment in Prinos, backed by our shareholders and the EBRD, which financed us with 95 million dollars in 2016. We have a very strong and committed shareholder base, we have proved our ability in fund raising and cooperated with the biggest banks globally, even in adverse market conditions. We are of course very careful as we have now assumed the responsibility to invest $1.3-$1.5 billion in the development of Karish and Tanin so we will not “over-stretch”. I note that our appetite for exploration exposure is always managed as part of a very balanced portfolio of assets that are based on solid cash flow from producing assets, development projects and growth from exploration that we can “afford to lose”.
Israel is a tough market, given that most of its gas needs are provided by Tamar. What is your plan in order to break into it?
Israel has a rapidly growing economy, and all estimates regarding electricity needs refer to a 2%-3% annual growth during the next decade. That means the country has to create an additional power capacity of 300 MW annually in order to meet the predicted increasing demand. Thus, there is room for the development of the fields. Furthermore the Government has set a goal to increase the gas in the energy mix of the country and has already ordered the replacement of 4 coal fired power plants in Hadera with gas fired power plants.
We have decided to develop Karish and Tanin with an FPSO and have already appointed Technip, one of the global engineering leaders, as our Front End Engineering Contractor. The Feasibility Study is already completed and we are working on the delivery of the Field Development Plan by May, only 5 months after completion of the deal. We are taking quick decisions and we are able to avoid delays that would have been caused if we had non operated partners in the venture. We are working very closely with the Israeli Government to obtain all the necessary approvals and permits to bring gas to the market by 2020.
All this will result in offering competitive gas prices to IEC the IPPs and the industry in Israel compared to what they have been paying for Tamar produced gas but, most importantly, security of supply for Israel. We have already started negotiations with all potential customers, estimating that we need to contract 3 BCM annually in order to make the Final Investment Decision.
Others before you who have tried to enter this market came up against regulatory problems. Are these over now and are you getting strong government support?
Israel has a new framework that allows competition in the market. The first step was taken with the Gas Framework Agreement, which obligedthe monopoly to sellcertain assets. But there are more steps to be taken. Steps that, in the end, will work for the benefit of consumers; the government has to finalize decisions to reduce further the use of coal in electricity production and increase the role of natural gas, encourage the public state company and the IPPs to buy gas from the new suppliers, accelerate the connection of factories to the distribution system, and present certain arrangements that will promote the expansion of gas use in the transportation and retail sector. Finally we are expecting shortly the Government to publish a bill for the support of small gas fields in the country.
We have operated in the SE Med for many years and we are able to understand and work closely with local Governments to overcome any issues. I note the excellent relationship between the Israeli and Greek Government particularly in energy cooperation.
Israel and the development of Karish and Tanin are top priorities for Energean and regulators and government, in my experience, are always supportive when they see genuine and serious interest to invest and create value.
Leviathan is trying to sell gas to the same Israeli domestic market and is finding it a challenge. Why do you think you will succeed?
As already stated, the Israeli market allows room for new fields to be developed. Leviathan is a strategic export-oriented project, and the quantities needed for the development of the field could not be found in the local market, provided that the partners are not allowed to corner the latter.
Energean has developed an interesting concept for Tanin and Karish revolving round an FPSO. What advantage do you expect this to provide you with? Will it give you a price advantage? Such a concept provides opportunities for future expansions. Is that at the back of your mind?
The FPSO over Karish and Tanin will be the first offshore installation in the deep waters of the East Mediterannean, so undoubtedly this could provide a hub for the development of future discoveries in Israel and the region.
Using an FPSO is not the cheapest development option, however is the one that brings most value to the stakeholders of the project as it allows a fast execution, maximization of reserves and potentially tariffing of other fields in the area. I note also the environmental advantages as we will minimize the impact near the beautiful beaches of Israel or onshore allowing us to avoid conflicts with local communities.
This gas is destined for the Israeli domestic market. But do you see a chance to export? Cyprus is looking for gas, given that Aphrodite is facing delays…
Gas from Karish and Tanin is limited to the local market by law so at the moment there is no export option from the fields. As I mentioned above, our FPSO could be used to allow fast monetization of other fields in the region that would have export rights.
In a low global gas price environment, cutting costs is essential to the success of East Med projects. There are three potential projects in the region. Yours, Leviathan and Aphrodite. Do you see any synergies?
The most important issue for the success of any project is effectiveness. Energean operates assets that have been producing oil & gas from offshore fields for 35 years, next to traditional tourist destinations and environmentally sensitive areas, with an excellent HSE track record, despite the fact that we have been dealing with fields which have some of the highest H2S density in the globe. Energean has a highly experienced key management team, who have worked in almost every one of the main producing fields worldwide, and employs more than 450 dedicated and highly skilled professionals. This expertise, together with the collaboration with global industry leaders, as already said, underpins the successful implementation of the Karish and Tanin project.
There is no doubt that cost efficiency is a very important factor, as stated by the majority of the upstream companies in any relevant research. We are talking about fields which have been discovered in the same region, thus the distances between them do not forbid potential synergies. What is needed in the region is committed operators that are focused on the East Med and are able to work closely with the local governments to develop the vast resources of the region.
Energean’s commitment is unquestionable.