Israel’s gas discoveries saw it heralded as a future energy superpower but, to date, have only caused frustration. Nigel Wilson reports from Jerusalem.
Since the Leviathan and Tamar fields were discovered, Israel’s fledgling gas industry has zigzagged with gusto. The biggest global finds of 2011 and 2012 respectively, amounting to a potential 910 billion cubic metres of natural gas between them, appeared to mark a dramatic turning point in the country’s economic fortunes. It would be enough to supply Israel’s domestic energy demand for decades, with plenty left over for export.
Elated Israeli politicians hailed the dawn of a new era for Israel as a regional energy superpower. There was even giddy talk that the discoveries could help thaw political and trade relations with hostile regional neighbours, while the European Union was also touted as a potential market.
Early momentum led to preliminary agreements to sell gas to its immediate neighbours, Jordan and Egypt. Further plans to develop the gas bonanza progressed steadily, as Israel acted to seize the moment and capitalise on strong regional demand.
However, the gas discoveries also had an unexpected impact on Israel itself. Having spent decades importing energy, the state lacked the legislation and regulatory infrastructure to transition to an energy producer and exporter. Israel’s vibrant media questioned the fairness of a single consortium, consisting of Texas-based Noble Energy and the Israeli company Delek Drilling, controlling Israel’s main energy resource. Anti-monopoly campaigners called for more competition in the sector to ensure lower prices for Israeli consumers, while supporters warned that government intervention would trigger a wave of capital flight.
As the Israeli public debated the merits of competition in the gas sector, development of the smaller Tamar field, with a potential 280 billion cubic metres of gas, went forward steadily. However, in December last year, Israel’s chief antitrust regulator David Gilo shocked the establishment when he ordered ownership of Leviathan, with its potential 628 billion cubic metres of natural gas, to be broken up.
With early national elections called for March this year, and young Israelis enduring a cost-of-living crisis, ownership of the gas fields became a red-hot political issue. Plans to develop and export the gas were delayed again, as the re-elected Benjamin Netanyahu built a coalition government. A public debate over gas ownership is certainly healthy for Israeli democracy but the delays could also prove costly to a country that wants to attract foreign investment. The regional market has already shifted and could look very different by the time the consortium and the government reach agreements over pricing and ownership.
Step on the gas
The regional energy market is extremely attractive for producers at present, with demand outweighing supply in a number of eastern Mediterranean states. Moreover, regional governments facing energy shortfalls are willing to pay well to ensure they keep up with booming consumption levels, as they seek to head off unrest.
Egypt, a former exporter, is still recovering from a period of political and economic volatility that left it with an energy deficit. Cairo saw three presidents in as many years from 2011 to 2013, coinciding with an energy shortfall that saw the state re-routing gas meant for export to its own booming domestic market. As foreign companies pulled out of the country, Cairo faced a yawning energy gap that Israel is keen to fill.
Jordan too, facing acute energy shortages, is an obvious destination for Israeli gas. Despite some political animosity from the Jordanian parliament, a US$500mn deal for up to 2.2 billion cubic metres of gas over 15 years was approved by the Israeli government in May. A US$15bn arrangement to provide 45 billion cubic metres to Jordan’s National Electric Power Company hinges on Israel’s internal dispute over Leviathan. Jordan’s current lack of alternatives means Israel stands a good chance of sealing the deal if regulatory hurdles are overcome in the coming months.
“Everybody should understand that right now, there is a window of opportunity to export gas to Egypt and Jordan. It will not last forever,” says Amit Mor, CEO at Eco Energy, an Israeli energy consultancy. “Currently, the most viable market is Egypt. There are two ideal LNG liquefaction plants already,” he says.
Indeed, the Egyptian government in May authorised private firms to import gas from Israel. The decision is a green light for the provision of 5 billion cubic metres from Tamar to Egypt’s Dolphinus Holdings over seven years. However, amid the regulatory uncertainty surrounding the Israeli project, two preliminary agreements to provide 71 billion cubic metres and 105 billion cubic metres to Spanish Union Fenosa and British Gas respectively, have remained unratified.
“The Egyptian contract and the Jordanian contract are necessary for financing the Leviathan project. If they are not going to materialise, due to political considerations or others, the Leviathan development looks like it will be postponed,” says Mor.
With a pipeline to Turkey seemingly out of the question due to political animosity between the countries, Israel considered a plan to supply the EU via a joint pipeline with Cyprus. In the wake of Russia’s annexation of Crimea and its ongoing role in Ukraine, energy security and diversification have become central concerns for leaders across Europe, which relies on Russia for around a third of its gas needs. Israel sought to capitalise on the gaping chasm between Moscow and Brussels and late last year, proposed a pipeline that would carry between 8 and 15 billion cubic metres of natural gas to southern Europe annually.
We’ve got company…
Israel is not alone in its ambitions to become an energy power in the region and the period of regulatory pondering has weakened its chances of securing major contracts on favourable terms.
The Aphrodite gas field, discovered off the southern coast of Cyprus in 2011, is estimated to contain up to 128 billion cubic metres of natural gas. Like Israel, Cyprus has made preliminary agreements with both Jordan and Egypt. The same Noble-Delek consortium that controls Leviathan also controls Aphrodite’s plans to construct a pipeline to Egypt, with capacity for 8 billion cubic metres a year.
“Israel is not going to have the market to itself,” says Catherine Hunter, senior energy analyst for the East Mediterranean and North Africa at IHS. “It has to make the most of this current lack of gas in the region to cement a presence.”
In the coming years, Egypt plans to revive its own natural gas industry and has welcomed a US$12bn investment from BP in partnership with Russian company DEA – the biggest single injection of foreign direct investment in Egyptian history – in March this year. The British company raised the prospect of conducting further exploration for domestic consumption, as Egypt seeks to attain energy self-sufficiency by 2020.
Another regional producer, albeit currently restricted to a peripheral role due to economic sanctions, is Iran, which has the potential to upset Israel’s export plans. When it comes to natural gas, the Islamic Republic is something of a paradox. It sits atop the world’s second-largest natural gas reserves but it was a net importer until last year. Tehran has in the past pronounced its ambition to become a major gas exporter but its record of turning preliminary agreements into sales is woeful.
Furthermore, the fact that Iran has been locked out of international debt and trade markets for many years has meant it has struggled to acquire the modern machinery or capital required to get the gas out of the country – even if it were permitted to export as it pleased.
“There’s a lot to be done and the supply prospects are not that brilliant at the moment,” says Paul Stevens, fellow at Chatham House. “If sanctions do come off then they have a strong incentive to look at the way in which they are trying to develop the South Pars resources.”
However, Iran could quite feasibly supply a good amount of the Middle East, should sanctions be lifted. “If we’re talking pipelines then you’ve got Turkey,” says Stevens. “Iraq could be a potential market. This is a region which is sitting on two-thirds of the world’s proven gas reserves and yet everybody has gas shortages of one sort or another. So they’re surrounded by export markets.”
In a drastic move after the Israeli elections, chief regulator David Gilo announced he would step down from his post this year. He denounced Israeli Prime Minister Benyamin Netanyahu for backing development over promoting competition in the sector. The announcement came after the government relinquished its call for Noble and Delek to sell gas separately, while also dropping the demand that Noble drastically reduce its holding in Leviathan.
“There was always a desire on the Israeli government side to sort it out. It’s just that they wanted to resolve quite a few issues at once,” says Hunter. “Never say never because there have been so many regulatory hurdles that have come up. I think it will be resolved, the issue is how long it takes to resolve and what that means in terms of the development timeframe.”
Gilo’s announcement was promptly followed by a dramatic event within the government. Israeli finance minister, Moshe Kahlon, asked to be withdrawn from all decision-making relating to the gas fields, with authority being passed to the prime minister. Kahlon, who had campaigned on a pledge to break up the monopoly, cited a personal relationship with a stakeholder in the project. With Netanyahu in charge of the gas portfolio, development of Leviathan could potentially resume within months, and Israel might end up seizing the moment after all.