Israel Sees Gas as Key to Transforming Mideast Relations

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Israeli Energy Minister Silvan Shalom
Israel’s gas bonanza “is a huge strategic advantage that allows us to enjoy both political and economic fruits,” Israeli Energy Minister Silvan Shalom said in an interview. Photographer: John Moore/Getty Images

After this summer’s war in Gaza battered Israel’s international reputation, the country’s leaders say they have a new foreign policy tool to build relations with its neighbors: natural gas.

By the the end of the year, Israel may have binding agreements to sell billions of dollars of gas to Egypt, Jordan and the Palestinian Authority. Preliminary talks are taking place with customers in Turkey, even though President Recep Tayyip Erdogan is among Israel’s fiercest critics. Gas may even help improve relationships in the Gaza Strip.

“There are now extraordinary opportunities for Israel based on energy policy, both economically and diplomatically,” said Israeli Foreign Ministry spokesman Emmanuel Nachshon. “This is a real game-changer of common interests and benefits for many actors in the region. It could also bring about better relations with Turkey, and with other regional actors with whom Israel is not yet in close contact.”

Israel’s chance to be a regional energy power comes from two mammoth fields under the Mediterranean Sea, holding more gas than the country could consume in decades. In addition to building ties with neighbors that have often been antagonistic since the state was founded in 1948, gas exports will be a fillip for Israel’s economy, improving the balance of trade and boosting economic growth by as much as a percentage point.

Israel’s gas bonanza “is a huge strategic advantage that allows us to enjoy both political and economic fruits,” Israeli Energy Minister Silvan Shalom said in an interview. “We are much more accepted in the world as a result of us finding natural gas.”

Tamar, Leviathan

The Tamar gas field was discovered off Israel’s Mediterranean coast in 2009 and the Leviathan field a year later. Together, they hold an estimated 29 trillion cubic feet.

Selling the gas to other markets may be more of a challenge than extracting it. Israel’s relations with its Arab and Islamic neighbors range from cool acceptance to virtual states of war, and getting the fuel to international markets will require the country to navigate a minefield of geopolitical hazards.

Partners in the Leviathan field, including Houston-based Noble Energy Inc., the Israeli units of Delek Group Ltd. and Ratio Oil Exploration 1992 LP signed a preliminary deal Sept. 3 to sell about $15 billion of gas to Jordan’s National Electric Power Co. over 15 years. That followed supply deals earlier this year with Jordan’s Arab Potash Co. and the West Bank-based Palestine Power Generation Co.

‘Fundamental’ Orientation

Some analysts caution against excessive Israeli optimism that energy resources may help ease regional tensions heightened by its policy toward Palestinians, and other contentious issues.

In the Middle East, “you don’t see countries change their fundamental strategic orientation because of economic issues,” said David Wurmser, director of Delphi Global Analysis Group in Rockville, Maryland.

That said, diplomatic considerations and economic interests will both play a key role in pending decisions by Egypt and Turkey on whether to form energy ties with Israel that will enable it to export gas beyond its immediate neighbors and into the global market.

“When you have something other people need, then people are prepared to talk to you. And when you talk, ice is broken in other areas,” Yaniv Pagot, chief strategist at Israel-based Ayalon Group Ltd., said in a phone interview. “Talk about economics could be a base for political communication.”

Slowing Economy

The prospect of gas exports has become even more alluring given Israel’s economic slowdown. The Bank of Israel cut its 2014 growth forecast for the country on Sept. 22, to 2.3 percent, from 2.9 percent at the end of June. The 2015 forecast is 3 percent, still below the nation’s 3.2 percent growth last year. Exports account for about a third of Israel’s $270 billion economy, with the country’s main trading partners being the U.S. and China, according to data compiled by Bloomberg.

The Tamar and Leviathan partners signed preliminary agreements this year to deliver as much as 6.25 trillion cubic feet to two liquefied natural gas terminals operated in Egypt.

Noble and Delek’s Avner Oil Exploration LP and Delek Drilling-LP units are planning to send the gas to Egypt through pipelines under the Mediterranean Sea. They expect binding agreements to be finalized by year end, pending Egyptian government approval.

Trade Reversal

That would be a significant reversal. Egypt exported gas to Israel until 2012 through a pipeline across the Sinai. Egypt canceled the contract after multiple attacks by militants on the conduit.

“We are talking about perhaps an initial $60 to $70 billion of gas sales to Egypt and Jordan over 15 years,” Pagot said. “This could translate into $2.5 to $3 billion dollars in exports a year, which would represent 1 percent of Israel’s GDP.”

Selling gas may help warm trade relations with Egypt and Jordan, which now are closer to lukewarm, totaling around $170 million and $365 million respectively last year. Importing the fuel would help Jordan and Egypt ensure much-needed energy security, said Michael Leigh, senior adviser to the German Marshall Fund of the U.S., a Washington-based public policy institute.

Energy Security

“Jordan is under tremendous pressure as a result of the violent conflicts in Iraq and Syria. Israel is making a contribution to the political stability of Jordan by strengthening the country’s energy security,” Leigh said. “Egypt is in a tight squeeze, with a drop in domestic gas production. The opportunity to import gas from Israel is an attractive way to satisfy domestic demand.”

Noble and its Israeli partners are also targeting Turkey, Delek Chief Executive Officer Asaf Bartfeld said in September. Turkey’s Zorlu Enerji Elektrik Uretim AS said last year it is in preliminary talks with Noble and Delek for a 15-year gas deal, and Turcas Petrol AS has said it’s considering building a pipeline from Leviathan at a cost of about $2 billion to import gas.

They may face opposition from the government. Turkey’s president Erdogan is a fierce critic of Israel’s policy toward Palestinians and Energy Minister Taner Yildiz said in August his country won’t participate in any gas projects with Israel unless the country changes its Gaza policies.

Business, Politics

Business probably won’t trump politics in Turkey, said Delphi Global’s Wurmser. “The ideological proclivities of Erdogan will ultimate sabotage any deal with Israel,” he said.

Israeli energy diplomacy may get another boost from a gas field discovered in 2000 by BG Group Plc about 30 kilometers off the coast of the Gaza Strip in waters under the legal authority of the Palestinian Authority, which controls parts of the West Bank. Development of BG’s Gaza Marine license has stalled due to the conflict between Israel and the Palestinians, and the internal divide between Palestinian President Mahmoud Abbas’s Fatah faction and the Hamas Islamic movement that rules Gaza and is classified as a terrorist group by Israel, the U.S. and European Union.

The Palestinian Authority’s energy and resources minister Omar Kitaneh has said that while developing the Gaza field and other joint energy projects may help ease Israel’s entry into the Middle East market, further steps are dependent on advancing the peace process. That prospect was set back in recent months by the collapse of Israeli-Palestinian peace talks in April, and the Israeli military operation against Hamas in Gaza over the summer.

Further down the road, Israeli policy makers are looking at potential links with the fuel-rich Sunni Arab nations of the Persian Gulf, with regional economies connected by gas.

“The European Union began as a coal-and-steel union in the 1950s, and theoretically, natural gas can serve the role for this region that coal served for the EU,” said the Foreign Ministry’s Nachshon.

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