Pipe Dream? Israeli Gas Exports to Turkey Hinge on Palestinian Issue

New report warns against counting on Ankara as a customer for Leviathan gas any time soon.

Avi Bar-Eli
Avi Bar-Eli
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File photo: Drilling platform at the Leviathan natural gas field.
File photo: Drilling platform at the Leviathan natural gas field. Credit: Albatross
Avi Bar-Eli
Avi Bar-Eli

Now that Australia’s Woodside Petroleum has pulled out of the Leviathan offshore gas field, taking its expertise in liquefied natural gas with it, the future of Israeli energy exports seemingly lies with finding customers in the region.

But a report by the Institute for National Security Studies, which is affiliated with Tel Aviv University, warns that Turkey – the biggest potential customer for Israeli natural gas – isn’t likely to make any deals so long as diplomatic relations between the countries don’t improve. Regional markets like Turkey could get their gas delivered cheaply and quickly by pipeline, while distant markets like East Asia require the gas to be liquefied at dedicated plants and then sent by tanker.

But INSS is skeptical that Turkey will import Israeli gas, noting, “An agreement that resolves the dispute between Israel and Turkey is a necessary condition for an agreement over exporting Israeli gas to Turkey. Commercial businesses trying to advance exports stand no chance of achieving their goals without a solution,” the report states. Its authors include Dr. Oded Eran, the former Israeli ambassador to Jordan and the European Union; Dan Vardi, former CEO of Israel Natural Gas Lines; and researcher Itamar Cohen.

The report comes as Israeli-Turkish relations have taken another turn for the worse. Turkish Prime Minister Recep Tayyip Erdogan has sharply criticized Israel’s military offensive in the Gaza Strip. Once close partners, the two countries have been at odds since at least as far back as 2010 when Israeli commandos stormed the Turkish ship Mavi Marmara, which was attempting to break a Gaza blockade, leaving nine Turkish citizens dead. A settlement – which is expected to include Israeli compensation to the families of those who died – has evaded the two countries.

A presentation in April by one Leviathan partner, the Delek Group, didn’t even mention the prospect of exporting gas directly to Europe or via Turkey.

Even if there are signs that it may be slowing – its foreign currency reserves dropped from $50 billion in 2010 to $33 billion in 2013, while international credit agency Moody’s has lowered its rating to a negative outlook – Turkey remains a huge and important customer for energy. Its natural gas consumption has grown two-and-a-half-fold since 2002, to about 45 billion cubic meters (bcm) a year. That number is likely to reach 60bcm by 2020 and 76bcm in 2030, the report says.

Right now, some 58% of Turkey’s gas is imported from Russia and another 19% from Iran. The latter is the source of the close commercial ties between the two countries. But with energy bills alone accounting for a fifth of its trade deficit – some $20 billion a year – Turkey aims to diversify its sources of energy and find cheaper alternatives. It wants to import gas by pipeline from Iraq, starting in 2017, and has put out feelers about doing the same from the Leviathan field through a undersea pipeline that would deliver 600bcm of gas a year.

Moreover, Turkey envisages itself as a key transit point for energy to the even bigger European market, especially after the Trans-Anatolian TANAP pipeline linking it to Italy is completed in 2019. TANAP will initially have only a 10bcm annual capacity, but that would later be expanded.

Turkey also has a reciprocal role to play as an energy corridor for Israel, the authors note. About 90% of the oil that Israel imports comes from the Central Asian republic of Azerbaijan, reaching Israel via a pipeline running from the Azerbaijan capital, Baku, to the southern Turkish city of Ceyhan. It is then shipped in tankers to Israel. However, during the entire period of strained ties between Israel and Turkey, the flow of oil has never been disrupted by the Turks.

“The Israeli-Turkish connection on such a critical issue to Turkey from a strategic standpoint could convince the government in Ankara to maintain a balanced relationship with Israel,” the study says.

But the INSS report warns exporters – chief among them the Leviathan partners Noble Energy of Texas, as well as Israel’s Delek Group and Ratio – that the potential for Israeli energy exports to Turkey won’t be realized until political differences are settled. Pointing to the precedent of the Israeli-Egyptian energy accord of 2005, they say any purely commercial agreement with Turkey would have to be predicated on a political agreement between the two countries, even if the commercial agreement was reached first.

Israel Electric Corporation, the state-owned utility, reached an agreement with Egypt’s East Mediterranean Gas, which was building and operating the pipeline that would ship the gas to IEC. Given the problematic diplomatic relations between the two countries, though, the two governments also signed a pact under which Cairo committed to guaranteeing gas supplies to IEC for 15 years.

“At an early stage in the gas-export talks, the two countries will have to enter negotiations on a framework agreement that, even if they are dealing only with nondiplomatic issues, will have huge diplomatic importance,” say Eran, Vardi and Cohen. “It doesn’t necessarily mean that there will be any direct connection between such an agreement and a solution to the crisis in Israeli-Turkish relations ... but we must assume that Turkey won’t be ready for any gas agreement in the current circumstances, even if gas supplies are a strategic Turkish interest.”

The report is bearish on any such agreement right now. Despite the fact that Erdogan, Turkey’s vocally anti-Israel prime minister, is expected to be elected to the more ceremonial post of Turkish president later this month, no easing of tensions between the two countries is likely to happen in the short term, the authors contend. Erdogan’s Islamic orientation has undermined the once-powerful influence of the Turkish army in domestic politics and shifted the center of power to his ruling AKP party, bringing the military ties that were so central to the Turkish-Israeli relationship to a halt.

“It can be assumed that as long as tensions between Israel and the Palestinians continue, and no diplomatic solution is found to the conflict, and as long as Israel maintains its policy toward Hamas, the tension between Jerusalem and Ankara will persist, even if a formula for the resolution of the Marmara issue is found and even if Erdogan himself steps out of the political arena (but his party remains in power),” the authors write.

Bilateral trade has defied political tensions to reach $5 billion a year, but the study suggests that Turkey’s failure to gain admission to the European Union continues to negatively affect Israel’s prospects of doing business there. The rule of law remains weak, as do regulatory transparency and business standards.

Moreover, even though Turkey is a member of the North Atlantic Treaty Organization, membership does not automatically mean that Ankara identifies with NATO’s policies, the study says. As examples, it notes Turkey’s refusal to allow the United States to operate on its territory in the military offensive against Iraq in 2003, as well as Turkey’s security and economic ties with China and Iran, and its failure to condemn Russia’s recent takeover of the Crimean Peninsula from Ukraine.

Recent events have shown that the presence of Western business in Turkey has not prevented Ankara from taking controversial steps – for example, a temporary Turkish ban on the social networking website Twitter.

Aside from the Palestinians and the Mavi Marmara, another source of potential conflict between Turkey and Israel is the latter’s cooperation with Cyprus – a third of which is occupied by Turkey – on natural gas. Cyprus and Turkey are engaged in a long-simmering dispute over the maritime borders between northern Cyprus and the rest of the island, and the right of the Cypriot government to make decisions on gas policy and revenues unilaterally. Yet for Israel, Cyprus – whose offshore gas fields sit astride Israel’s – is a potential partner in energy development.

Turkey's Prime Minister Recep Tayyip Erdogan and Palestinian President Mahmoud Abbas during an Iftar in Istanbul, Turkey, July 18, 2014.Credit: AP

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