Why the UAE’s Billion Dollar Investment in Israeli Natural Gas Is a Cause for Concern

How much weight should the UAE's anger over the Jerusalem violence hold should the nation own one-fifth of Israel’s main energy source?

Avi Bar-Eli
Avi Bar-Eli
The Tamar gas field from above
The Tamar gas field from aboveCredit: Albatross
Avi Bar-Eli
Avi Bar-Eli

“The United Arab Emirates has expressed concern over the acts of violence committed by right-wing extremist groups in the occupied East Jerusalem, which have resulted in injuries among civilians.

“The Ministry of Foreign Affairs and International Cooperation... called upon the Israeli authorities to assume responsibility toward de-escalation and putting an end to all aggressions and practices that perpetuate tension and hostility...

“The Ministry also underlined the necessity of preserving the historical identity of the occupied city of Jerusalem and maintaining maximum self-restraint to avoid the region slipping into new levels of instability in a way that threatens peace.”

Thus the Emirates News Agency phrased the regime’s official response to the violence in Jerusalem, which has sparked unrest in the Arab world.

On Monday, nine hours later, Yitzhak Tshuva’s Delek Group announced that Mubadala Petroleum, Abu Dhabi’s government-owned energy investment subsidiary, had signed a memorandum of understanding to buy 22 percent of the rights to the Tamar offshore natural gas field for $1.1 billion.

Yitzhak Tshuva at the Tamar gas fieldCredit: Moshe Binyamin

Tamar is 90 kilometers west of Haifa, in Israel’s territorial waters.

How much weight would such a declaration by a foreign government hold should that government own one-fifth of Israel’s main energy source?

And if the Emiratis are protesting the Israeli authorities’ move to block off the stairs outside the Damascus Gate in Jerusalem, would the Israel Competition Authority warn them and their partners in Tamar against abusing their monopolistic power over Israel’s energy market?

These are the main questions sparked by Delek’s announcement to the Tel Aviv Stock Exchange. Neither have anything to do with the actual commercial details of the deal. There are two reasons the geopolitical aspects of the deal are drawing attention: First off, Israel previously blocked Chinese and Russian investments in its offshore gas fields, way before they reached the point of a memorandum of understanding.

Second, this is the sixth deal in which business interests are taking priority over geopolitical and defense interests – following Israel’s plan for its natural gas industry, after the sale of submarines to Egypt, after the deal to export natural gas to Egypt and Jordan, after the sale of the F-35s to the UAE and after the deal signed to transport oil from the Gulf to Trans-Israel pipeline facilities in Eilat and Ashkelon. And there’s no indication whether these deals serve national or private interests.

Each one of these deals has the potential to improve Israel’s standing, but ultimately, before the Israeli public benefits, a lot of money is going to change hands. For instance, the plan for the natural gas industry’s promise to reduce the price of natural gas for consumers has not yet borne fruit, but Noble Energy and Tshuva have already received billions of dollars.

This is happening as the details of the transactions are being kept under wraps due to their sensitivity. Furthermore, Prime Minister Benjamin Netanyahu, who is insisting on blocking a strategic discussion over allowing foreigners to invest in strategic Israeli assets, prefers to manage the risk inherent in these investments on his own.

The memorandum of understanding between Tamar and Abu Dhabi shouldn’t be a surprise. First off, under the plan for Israel’s natural gas industry, Delek is required to sell off its holdings in Tamar by the end of 2021; second, the Ministry for Strategic Affairs and the Shin Bet security service warned at the beginning of the year that Gulf nations would ramp up their investments in Israel within the next few months.

Mubadala Petroleum stand at the Abu Dhabi International Petroleum Exhibition & ConferenceCredit: Bloomberg

Third, Mubadala has an interest in developing the regional natural gas market, by virtue of its 10 percent holding in the license for Egypt’s Shorouk concession, which includes the major Zohr natural gas reserve. Fourth, Tshuva’s business operations are in dire straits, and the going-concern warning included in Delek’s financial reports means he needs a quick infusion of cash.

It’s likely that the memorandum was signed after a pre-ruling by the Israeli authorities. It’s likely that the pre-ruling came from energy sector bureaucrats, and not from the defense establishment, whose officials have complained that they’re finding out only from the newspaper that strategic assets are falling into foreign hands. It’s also likely that the pre-ruling was given because the Emiratis won’t have a majority share in the reserve, and won’t have veto power, and won’t be involved in actually operating the reserve, a role that will remain in the hands of U.S.-based Chevron.

The deal still needs to receive approval from the Energy Ministry’s oil regulator, the Oil Authority and possibly also the Competition Authority. But it’s hard to imagine that Israel would take the risk of disappointing its new strategic partners.

If there are any surprises here, it’s the relatively low price that the deal ascribes the gas reserve, of $5 billion. Six years ago, Harel bought a 3 percent share of the reserve at a valuation 2.5 times higher. True, energy prices were different then, and this came before the profitable gas sales of the past few years.

Either way, the deal raises a few points. Let’s start with the positive ones:

* Even though the deal is at an early phase, it’s good to see that Tshuva is addressing concerns that he won’t meet the deadline to sell his holding in the Tamar reserve;

* It’s good that the buyer is a strategic player interested in developing the regional gas industry, including that of neighboring Egypt, given that further development of Israel’s offshore natural gas fields depends on exports, including direct sales to Egypt and Jordan;

* The fact that the buyer is Arab should mitigate political concerns of other international players considering investing in Israel;

* A new international, non-American player in Israel’s natural gas market could dampen the strength of Chevron, which holds shares in the Tamar, Leviathan and Dalit offshore reserves, and encourage the competitive pricing of gas, should the Emiratis choose to play this role;

* The Emiratis’ choice to invest in a strategic asset is an expression of the mutual desire for normalization, and could further strengthen the diplomatic front against Iran.

And now for the negative points, which go beyond whether crucial national infrastructure should be owned by an Arab nation. These include the following:

* The fact that the buyer is a government entity and not a private corporation raises the concern that the investment may not be motivated by competitive considerations. It could instead be used as a diplomatic tool that doesn’t prioritize service to customers;

* The buyer being a government entity could limit the regulator’s power in the future when it comes to enforcement and sanctions, for example over environmental offenses;

* In some cases Mubadala’s interests in Egypt could lead it to oppose exporting Israeli natural gas to Egypt.

Israel's Tamar gas field is 90 km off the coast from Haifa

As for whether a foreign entity should be investing in national infrastructures, a minority share in a natural gas reserve shouldn’t concern us too much. The problem is that it gives the owners access to Israel’s defense preparations at land and sea, as well as some access to military intelligence, geopolitical considerations and government discussions.

While other countries have increased their oversight over foreign investments in strategic assets, particularly during the coronavirus pandemic, when businesses in crisis were an attractive takeover target, Israel has been dragging its feet with everything that has to do with guarding its strategic interests, preferring to handle the matter in a less-than-organized manner and through unofficial channels.

An advisory panel formed two years ago to examine sensitive investments has limited power, and in practice the substantial discussions regarding vetoing foreign investments are conducted in Netanyahu’s close circles, generally the National Security Council – unofficially, without documentation or transparency.

This chaotic situation, along with the increasing sensitivity of Chinese investments in Israel, and investments by the UAE and Russia, pushed the Ministry for Strategic Affairs and the Shin Bet to draft a sizable report on the matter a year ago.

The report proposed an organized, professional system that the government could use to decide whether to approve a foreign investment in various infrastructures. But to date, Netanyahu has refused to bring it up for discussion in the security and political cabinet.

For the record, the report categorizes Israel’s natural gas industry as particularly sensitive, and it would have required an interministerial panel to meet and discuss the matter immediately, without the prime minister’s involvement at this stage.

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