Reports of Turkish Accord Raise Hopes for Israeli Gas Sector

Energy shares rally in expectations that diplomatic agreement will lead to a gas export agreement.

Courtesy Albatross

Israeli energy shares rose on Tuesday amid reports that Israel and Turkey are due to wind up talks aimed at normalizing relations on Sunday, a move that could unlock the giant Turkish energy market to Israeli natural gas exports.

“If a reconciliation agreement with Turkey is indeed signed, the impact of Leviathan [Israel’s biggest gas field] could be significant. It could be a real win-win situation,” said Noam Pinko, energy analyst at Psagot Investment House.

“For the Turks it would mean paying lower prices than they pay the Russians and Iranians today; from Leviathan’s perspective, it would be a major anchor and prices would be higher than in the contracts it is supposed to sign with Egypt.”

Unnamed Turkish officials told Turkey’s Hurriyet Daily News on Tuesday that Israeli and Turkish negotiating teams would likely conclude a deal at a Sunday meeting at an unnamed European capital. If final terms are reached, an agreement would be officially signed in July.

The news lifted all the shares of the Leviathan partners on the Tel Aviv Stock Exchange: Avner ended up 1.7% at 2.48 shekels (64 cents), Delek Drilling was up 1.5% at 13.39, and Ratio was ahead 3.5% to 29 agorot. Trading in Texas-based Noble Energy, the leading partner, was more restrained, with shares up just 0.2% to $36.81 by late afternoon local time in New York.

Reports about ongoing talks have been circulating, which has caused the TASE Oil and Gas index to climb about 10% in the last six weeks, compared with just 1% for the benchmark TA-100 index.

Turkey represents a potentially huge market for Israel. It uses about 50 billion cubic meters of natural gas annually, nearly all of it imported. Most of the gas comes from Russia, with whom Turkey has had strained relations since Russia intervened in the Syrian civil war, as well as from Algeria, Qatar, Nigeria and Iran.

In the past it was paying about $10 per million British thermal units, but with the collapse of world energy prices Turkey is now believed to be paying something closer to the $5 per MBTU that Europeans pay for Russian gas.

Turkey is a natural market for Leviathan gas, which can be piped underwater from Israel. But prospects for Israeli exports were scuttled in 2010 after Israeli commandos raided the Turkish ship Mavi Marama when it tried to break Israel’s Gaza blockade, leaving 10 dead.

“We believe Turkey’s need for diverse energy sources and Israel’s ability to supply significant quantities [of gas] from Leviathan were the major triggers for advancing the reconciliation talks that had been going on for six years since the Mavi Marama,” said Gal Reiter, energy analyst at the Bank of Jerusalem. “Its dispute with Russia moved things along faster, but even before the deterioration of relations Turkey had a problem.”

Leviathan is not yet in production. Under the partners’ development plan, they will be spending as much as $4 billion to bring capacity to 12 BCM by 2019-2020, with plans to sell the gas domestically as well as to Jordan and the Palestinian Authority. The second phase calls for boosting production another 9 BCM for export to more distant markets, with Egypt and Turkey being the most likely destinations.

“After signing an export contract with Jordan, which is already under negotiation, the central scenario is still exports to liquefied natural gas plants in Egypt, but Turkey is an option and could even be an additional market,” said Liran Lublin, energy analyst at IBI Israel brokerage & Investments.

Pinko warned, however, that a diplomatic agreement does not automatically translate into a gas accord. “The road from a reconciliation agreement to a gas agreement with Turkey is going to be long and there are number of obstacles along the way – first and foremost is that the pipeline would have to pass through Cyprus, whose relations with Turkey have been very problematic,” he said.