Israel’s potential to capitalize on trillions of cubic feet of natural gas offshore while meeting its and others’ energy needs suffered another regulatory setback that could delay development of the country’s biggest discovery to date.

The High Court of Justice in Israel issued a ruling March 27 that rejects a crucial part of an agreement reached in December between the Israeli government and developers Noble Energy (NYSE: NBL) and Delek Group regarding the colossal Leviathan gas field. Objections concern the stability clause, specifically the prohibition of changes to regulations impacting the project for 10 years.

“The stability clause in this chapter of the plan, in which the government undertakes for a decade to not only not legislate but to also fight any legislation against the plan’s provisions, was determined without authority—and as such is rejected,” Deputy Supreme Court president Elyakim Rubinstein wrote in the ruling, according to news reports.

The government now has a year to come up with another solution. Discovered in 2010, the Eastern Mediterranean field is believed to hold about 22 Tcf of gas.

Hopes were for the $6 billion project to start up in 2019.

The agreement reached in December—amid objections by some who believe Noble and Delek were essentially forming a monopoly on Israel’s gas supplies—established the framework the companies need to proceed with developing not only the Leviathan but also expansion of the nearby Tamar Field, a smaller field discovered a year earlier. The deal also enabled the companies to start marketing Leviathan gas.

But it also mandated the two companies sell off some of their other assets, opening the field to other potential natural gas players in Israel.

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Risks To Timeline

Since then, developers have been evaluating development concepts—including an FPSO and fixed platform—lining up potential customers and financing with hopes of making a financial investment decision by year-end 2016.

However, the ruling puts Leviathan at risk for further delays.

“The court’s ruling, while recognizing that timely natural gas development is a matter of strategic national interest for Israel, is disappointing and represents another risk to Leviathan timing,” Noble Energy CEO David Stover said in a statement. “Development of a project of this magnitude, where large investments are to be made over multiple years, requires Israel to provide a stable investment climate.”

Stover added that “stability is a minimum condition for project development” and that the company will defend its rights concerning its assets.

“It is now up to the government of Israel to deliver a solution which at least meets the terms of the framework, and to do so quickly,” he said.

It is important to note that the court did not disapprove of the entire framework agreement, Herzliya, Israel-based Eco Energy CEO Amit Mor told Hart Energy.

But the ruling “might cause some delays in the development of the Leviathan and the other smaller fields of Karish and Tanin,” Mor said, adding the government and companies will discuss how to overcome this issue.

Possible Alternatives

A solution could include providing some financial guarantees to the Leviathan Field developers, if the stability clause is removed, Mor said. He pointed out that no significant gas contracts—such as for exports to LNG plants in Egypt or Jordan—have been signed yet. Several letters of intent for gas have been signed.

During a conference call, Delek Group said the partners are working to develop the Leviathan Field on time. But Barclays analyst Tavy Rosner said this might be “overly optimistic” because it is unlikely that the partners will secure exports without a stability clause. Moreover, it could take several months to work around the clause, he said.

“The stability clause will be required prior to signing export contracts in our opinion,” Rosner said in a note to investors. Yet, “Overall, we view the long-term story as being intact and believe that the Leviathan Field is too important for Israel not to be developed.”

Another alternative to the stability clause would be broader legislation that covers all gas projects, Rosner said.

‘Golden Opportunity’

Chances are likely that the FID for Leviathan will get pushed back to 2017, he added.

It is unknown when Leviathan will reach first gas, given the regulatory delays.

“It depends on the magnitude of the contracts the parties will have, which will determine the scope of investment,” Mor said.

If Noble and Delek secure an export deal to an LNG plant in Egypt, to Jordan or possibly to Turkey, the scope of development could be large or the field may have to be developed in stages, Mor said. He believes the project could be commissioned in 2020 or 2021 instead of 2019.

Speaking to Hart Energy in October, Israeli Energy Minister Yuval Steinitz spoke about the importance of the Leviathan and Tamar developments to Israel’s economy. At the time, more than 50% of Israel’s electricity was being produced by natural gas, mainly from Tamar. Both are “extremely important” for domestic demand, he said.

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“In addition to this, of course, we need the revenues which are going to be significant for such a little country like Israel,” Steinitz said. “It’s a golden opportunity to cooperate in the Middle East and to strengthen the axis of peace between Israel, Egypt and Jordan and to cooperate with them together with Cyprus and maybe in the future also with Turkey. It’s also a growth engine that we need to boost the Israeli economy.”

Velda Addison can be reached at vaddison@hartenergy.com.