Israel to export gas, but domestic use comes first

* Israel sets cap on natural gas exports at 500 bcm

* All offshore fields must be connected to Israel

By Ari Rabinovitch

JERUSALEM, Aug 29 (Reuters) - Israel will allow a significant amount of its newly found natural gas to be exported, but first it must keep enough reserves to satisfy its own needs for 25 years, a government panel decided on Wednesday.

Ending months of uncertainty that cast a shadow on the country's fast-developing energy sector, the committee set a cap of 500 billion cubic meters (bcm) of gas that can be exported from the cluster of fields discovered off Israel's coast.

Oil and gas companies had been looking for guarantees they could sell reserves abroad because Israel is a relatively small market. For itself, Israel will set aside 450 bcm.

"The name of the game is certainty," said Shaul Tzemach, director-general of the Energy Ministry and head of the committee tasked with shaping the nascent exploration industry. "So whoever does explore, and does make a discovery, will know they have a market to sell to."

Nineteen new wells are expected to be drilled in the next two years at a cost of about $2 billion in an area of the eastern Mediterranean larger than the country itself.

The companies also hope to find oil in the layers beneath the gas deposits.

Israel is already setting up a natural gas wealth fund and government officials have said total revenues from gas sales could reach $130 billion by 2040.

The first big field, Tamar, with estimated reserves of 274 bcm, was discovered by a U.S.-Israeli consortium in 2009. It is set to go online mid-2013 and the group has signed multi-billion dollar contracts to supply Israeli energy companies.

The Leviathan field, discovered a year later, holds an estimated 480 bcm, making it the world's largest offshore find of the past decade. It is expected to begin production in 2017, and Texas-based Noble Energy has said it is studying export options, including as liquefied natural gas.

ENERGY SECURITY

It is likely that future discoveries will be much smaller than Leviathan and Tamar, Tzemach said, which is why the committee set up a sliding scale on export restrictions.

Wells with more than 200 bcm must keep at least 50 percent for the local markets, while wells between 100 and 200 bcm need to hold 40 percent. Fields of 25-100 bcm need a minimum of 25 percent, and those smaller will have no quota.

While a goal for Israel is to attract major foreign oil and gas companies and investors, the report made clear the number one concern is its own energy security.

Consumption of natural gas in Israel is forecast to quadruple by 2040 as it becomes a more important fuel for electricity generation and even transportation, reaching more than 27 bcm annually.

"The main principle the committee worked with was ensuring energy security for the Israeli public," said the report, which will be brought to the government for final approval.

Just last year Israel lost much of its natural gas supplies when saboteurs in Egypt's unruly Sinai peninsula repeatedly blew up a gas pipeline. Facing a shortage, Israel has turned to more expensive and polluting fuels, like diesel and fuel oil.

The committee decided that all new fields, even those that had been earmarked for export, must have a pipeline connecting them to Israel. For smaller fields where the cost of such infrastructure might outweigh the benefits, the government will help find alternatives, and even foot the bill, if necessary.

There had been talk that some fields farther away from Israel's coastline would connect to Cyprus's network instead.

There is also a likelihood of discovering gas fields straddling the maritime border between Israel and Cyprus, Tzemach said, in which case they are exempt from the restrictions and will be handled separately.