Natural Gas Isn't Just About Israel

The debate over how to apply antitrust laws to the energy industry overlooks the strategic importance gas should be playing in the region. Regulatory delays risk vital Israeli interests.

Off Haifa coast, oil rig at enormous Leviathan natural gas field.
Albatross

For the first time in its history, Israel has the potential to anchor itself politically and economically to the Middle East.

Israel’s energy exports can serve as the basis for enhancing strategic relations between Israel and Egypt. They could also serve as the foundation for political and security cooperation with Greece and Cyprus at a time when Israel’s security and interests are threatened by surrounding enemies.

The Leviathan field has the potential to be the linchpin that transforms the region into an integrated energy zone. Its gas can assist Egypt in recovering from dual energy and economic crises, and enhance economic links for Israel with Egypt and Europe. These are large markets where demand is growing and diversification of supply is not.

But right now Israel finds itself in a state of dangerous introspection. Regulatory indecision has delayed development of the giant Leviathan offshore gas field, threatening both the future of energy cooperation between Israel and its neighbors and the development of a valuable national asset.

Policy indecision about how to apply antitrust laws in the case of Noble Energy and Delek Group, which control nearly all of Israel’s natural gas production, have caused the companies to suspend development of Leviathan and expand production at the Tamar field.

Israel cannot afford further delays. Faced with an increasingly unstable Middle East, Israeli regulators must take into account the nation’s vital interests by resolving the antitrust issues quickly and creating the foundation for signing long-term gas contracts between Israel and its neighbors – not only Egypt, but Jordan, Cyprus and potentially Europe.

Not just antitrust, Israel needs a clear policy and an articulated strategy – one that is currently lacking. That is because in a volatile oil pricing environment, international oil companies must manage their capital with high precision. Companies need to know they have locked in customers through long-term gas contracts in order to commit to spending the billions of dollars it will take to develop the gas fields. Uncertainty and needlessly restrictive regulatory policy makes complicate the task.

What of the export options?

Turkey was once considered the ideal regional market for Israeli gas. However, following the 2010 Mavi Marmara incident, a provocation aimed at creating discord between Israel and Turkey, the close and productive strategic relationship between Jerusalem and Ankara has ended. A rapprochement is not in the offing any time for the foreseeable future.

'Political feasibility'

Regarding the prospects for energy cooperation with Israel, Turkish Energy Minister Taner Yildiz has this to say: “We never talk about the economic feasibility of a project without political feasibility. Our national policy is based on this understanding. It is out of the question to proceed on any energy project [with Israel] unless a permanent peace is established in Gaza.”

Unrest in Gaza and the West Bank supported by Hamas leaders stationed in Istanbul renders any such “permanent peace” unlikely for at least the short term.

As Turkey has altered its strategic focus from the West to the Middle East, Turkish and Israeli policies have become increasingly at odds. Turkey’s once-heralded foreign policy of “zero problems with neighbors” in practice is now “problems with all neighbors.” Turkish foreign policy has alienated Israel, Cyprus and even Egypt and has isolated itself from the region’s emerging energy and security partnerships.

Consequently, Egypt, under the al-Sisi regime, has become the alternative principal market.

The Israel-Egypt relationship has been a cornerstone of Israeli security since 1974. Egypt’s president not only backs the global campaign against Islamic State extremists, but is leading his country toward an economic turnaround and strengthening regional relations. He has cut energy subsidies to revitalize the economy, launched a broad crackdown on the Muslim Brotherhood and IS militants, and works closely with Cyprus, Greece and Israel.

Egypt’s new government has cast its lost with the West and is now seeking to overcome the natural gas shortage it faces by importing expensive liquefied natural gas and possibly also Israeli and Cypriot natural gas via pipeline. Meanwhile, Egypt’s idle LNG-export plants could be used to process Israeli gas for export to Europe and create an important market for Leviathan, the discovery of the giant Zohr field in Egypt notwithstanding – Egyptian officials have said the Zohr field’s gas will probably be earmarked for the domestic market.

Win-win situation

Egypt hosts two idle LNG plants in Damietta and Idku. Damietta has a production capacity of 6.8 billion cubic meters annually, while Idku can produce 9.8 billion cubic meters. If Israeli gas is delivered, per the letters of intent signed in 2014, the Tamar and Leviathan deals could fulfil two-thirds of the two plants’ productive capacity.

This is a win-win situation for Egypt, Israel and the LNG plants’ European owners. The idled Egyptian LNG plants need natural gas that they can no longer source in Egypt. The Leviathan partners don’t have to build their own LNG plants, which would involve a huge amount of time and expense. Thus, with Egypt facing its worst energy crunch in years, access to Israel’s Leviathan and Tamar fields, as well as Cyprus’ Aphrodite field, offers the best hope of restarting LNG exports from Union Fenosa’s and BG Group’s (Shell) Egyptian plants, and ending their heavy financial losses, even with the recent discovery of the Zohr field.

The Egyptian government is unlikely to block Israeli and Cypriot exports to the plants. They make economic sense and offer long-term benefits for Egypt, by restoring investor trust and freeing up more gas for domestic use.

In any case, Egypt will need to import gas until its own production ramps back up. Despite efforts to revitalize Egypt’s natural gas sector, legacy production is likely to fall over the next five years, while consumption will continue to grow.

It is bold and strategic moves that shape the oil and gas industry. History also favors the bold. In Israel’s case, political deadlock and regulatory pressure can affect its role as a net provider to the provision of energy security in the region. With new gas coming online offshore Egypt, Cyprus, East Africa, the United States and Australia, it is in Israel’s interest to lock in long-term contracts with Egypt. A real alternative is to run the risk of being relegated to a secondary position as a supplemental supplier in its own backyard in what may become a glutted market.

Israel should be providing the regulatory certainty that will enable the Leviathan and Tamar partners to negotiate from a position of strength, while enabling Israel to forge strategic relations. At a time of political volatility, Israel will be able to maximize both geopolitical benefits by exporting gas.

The writer, a former analyst and researcher at the Hudson Institute, is an independent energy analyst based out of London.