How Israel’s Energy Reserves Could Change the Middle East

The Mediterranean Sea off the coast of Israel could hold as much as 122 trillion cubic feet of natural gas and 1.7 billion barrels of oil, according to a 2010 report by the U.S. Geological Survey. 

Lignet 9-27-13  Israel’s vast offshore reserves of natural gas offer a novel opportunity to soothe long-standing tensions in the Eastern Mediterranean. With Cyprus, Greece and Turkey desperate to gain access to the Israeli gas, Jerusalem could find itself in a strong position to push for peace and harmony across the region.

Both Turkey and Cyprus want to become regional energy hubs, with a Turkish company offering to build a $2.5 billion pipeline from Israel and the government of Cyprus eager to build a $10 billion liquefied natural gas terminal. That gives the Israeli government leverage to use its large hydrocarbon deposits to reshape the political landscape of the Middle East. While Israel is likely to lure more major international energy companies to sign oil and natural gas deals, fear of backlash from anti-Israeli sentiments across the Middle East and North Africa could dissuade others from partaking in Israel’s energy bonanza.

Background

Israel made headlines four years ago after a consortium of U.S. and Israeli energy companies — led by Houston-based Noble Energy (NYSE: NBL) and Israel’s Delek Group (Tel Aviv: DLEKG) — discovered immense quantities of natural gas in the deepwater offshore Tamar field in 2009 and the Leviathan field in 2010. The U.S. Department of Energy believes the two blocks may contain a combined 28 trillion cubic feet of natural gas.

The Levant basin, a triangular swath of the Mediterranean Sea between Cyprus and Israel, has dispelled the adage of late Israeli Prime Minister Golda Meir, who once said of Moses that he led the Jews “40 years through the desert…to bring us to the one spot in the Middle East that has no oil.” A 2010 report by the U.S. Geological Survey estimates the region could contain about 122 trillion cubic feet of recoverable gas, 1.7 billion barrels of recoverable oil, and 5 billion barrels of natural gas liquids.

The region’s considerable untapped reserves are attracting numerous companies hoping to tap the next natural gas deposit or buy the gas, including Australia’s Woodside (ASX: WPL), Italy’s Eni (NYSE: E) and Russia’s state-owned natural gas company Gazprom (London: OGZD). Meanwhile, Shemen Oil and Gas Resources Ltd. (Tel Aviv: SMOG) recently claimed to have found “significant” indications of oil about 10 miles off the coast of Israel and estimated its Yam 3 exploration block could hold 227 million barrels of oil in addition to natural gas.

The country may also have gigantic shale oil and gas deposits, which could see Israel the beneficiary of a potential domestic onshore energy boom. According to the New Jersey-based Genie Energy’s (NYSE: GNE) subsidiary Israel Energy Initiatives, the nation has at least 250 billion barrels of high-quality shale oil.

Commercial production of the country’s natural gas is just beginning, as Tamar only started pumping gas in March. Leviathan, which is expected to yield 750 million cubic feet of gas per day, is not scheduled to go online until 2016.

Obstacles remain before Israel can sell the gas, which a government commission estimated could generate $300 billion. Debate over export limits continues to rage, although in June the Israeli cabinet decided to limit exports to 40 percent of production and save the remainder for domestic use. Next month the country’s high court will review whether the policy requires approval from the Knesset — Israel’s legislature — before the quotas go into effect.

Cyprus may also have natural gas deposits of 39 trillion cubic feet, according to estimates by the country’s state energy company. The island nation first struck commercially viable quantities of gas in late 2011 and has since been aggressively expanding its relationship with Israel.

In August, the two countries signed a memorandum of understanding, along with Greece, to cooperate on energy production and security as well as connect their previously isolated electric grids to the pan-European electricity grid within three years. The Cypriot government also wants to build a $10 billion liquefied natural gas terminal to facilitate transporting the gas by tanker. Cyprus intends to send Energy Minister Giorgos Lakkotrypis to Israel for talks on the issue next month.

Meanwhile, Turkey, which has some of the world’s most expensive gasoline prices at the pump, is seeking to get a piece of the action. A senior executive with Istanbul-based Turcas Holding recently presented Israel with a proposal to build a $2.5 billion undersea pipeline that would be nearly 300 miles long and capable of carrying 565 billion cubic feet of gas per year.

Israel-Turkey relations — strained since the Israeli navy raided a Turkish ship trying to bypass Israel’s blockade of Gaza in May 2010 — continue to struggle despite a U.S.-brokered rapprochement in March. Moreover, Cyprus and Turkey remain at loggerheads over the Turkish-administered enclave of Northern Cyprus, which has been occupied since 1974.

The Turkish government has demanded all revenues from the drilling be split evenly across the entire island. Turkey’s energy minister also suggested on Sept. 25 that his country could conduct drilling operations in Cyprus’ exclusive economic zone in three weeks pending approval of Turkish Prime Minister Recep Tayyip Erdogan.

Lebanon also disputes a 300-square-mile slice of the Mediterranean Sea that includes a section of Israel’s Leviathan gas field. However, sectarian violence spilling over from Syria’s 30-month civil war has paralyzed Lebanese politics and prompted the government to delay the bidding process for five other exploration blocks until December.

Analysis

Israel’s plentiful natural gas could enable its government to assume a novel role as peacemaker for the Eastern Mediterranean. Meanwhile, Israel may struggle to ensure internal politics does not threaten the exploration, production and sale of its massive energy resources.

Israel, which already has one of the strongest economies in the Middle East, will almost certainly benefit dramatically from gas exports. The Israeli government’s decision to keep 60 percent for domestic use appears to be prudent, as sabotage of Egypt’s pipeline to Israel over the past year has reinforced the benefits of energy independence. The Tamar field alone has the potential to meet domestic demand for the next 25 years.

In addition, Israel has been blessed with numerous options to develop and bring its gas to market. The country can build its own LNG plant, or make another on Cyprus to focus on global shipping, or it can construct pipelines to Turkey or Greece if Israel decides to keep its gas exports localized.

Cyprus, meanwhile, is mired in an economic crisis and in March became the fifth member of the eurozone to receive a bailout from the European Union and International Monetary Fund. It is anxious to use its gas reserves to reverse its weak financial outlook. The recent discoveries could also serve as a good “incentive” and be “a catalyst for peace for the region,” said Lakkotrypis, the island nation’s energy minister

However, the U.S. Energy Information Administration recently noted that territorial disputes “jeopardize joint development of potential resources in the area and could limit cooperation over potential export options.” 

Israel’s relationship with Turkey is likely to be tested by Ankara’s animosity toward Cyprus and Greece. While the Israeli government may not be able to resolve the status of Northern Cyprus, it may be able to use its gas deposits as a bargaining chip to persuade the two nations to reduce regional tensions.

Meanwhile, instability in Lebanon and Syria hinders their exploration and production of Mediterranean gas. The hostility of both Beirut and Damascus toward Tel Aviv may render the Turkish pipeline a pipe dream. Israel technically remains in a state of war with Lebanon’s Shiite militant group Hezbollah, which the United States labels a terrorist organization.

Conclusion

Israel has a historic opportunity to soothe tensions in the Eastern Mediterranean thanks to the broad appeal of its colossal energy resources. As Israel moves forward with the development of its oil and gas deposits, the country is likely to find unexpected partners to help the Israeli government promote peace over violence and growth over destruction in the region.

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