Israel Moves Toward Energy Independence

As CEO of Delek Drilling, an Israeli oil and gas exploration company, Zvi Greenfeld is a self-proclaimed optimist in an extremely risky business. But even Greenfeld was taken aback by the news on Aug. 11 that the huge natural gas reserves off the country's central and northern Mediterranean coast discovered by Delek and its partners in January are 16% bigger than estimated just one month ago. Independent energy experts reckon this once energy-poor country now has enough natural gas to meet its needs for the next two decades and may ultimately even transform itself into an energy exporter.

The discovery has raised hopes of further gas finds in a region that to date has been largely unexplored. Delek Drilling and its partners, Houston's Noble Energy (NBL), Avner Oil Exploration, Isramco (ISRL), and Dor Gas hold 16 additional expanses that cover 9,000 square kilometers, more than 20 times the size of the Tamar tract, which initial estimates value at $15 billion. In the near future, extensive seismic tests will be conducted to decide on additional drillings during 2010.

"The Tamar and Dalit discoveries significantly increase the probability of finding gas and/or oil in adjacent areas in the eastern Mediterranean," says Delek Drilling's Greenfeld. "If we find more gas, then there is a greater chance Israel will become an exporter."

Wider Searches The Israeli find has whetted the appetite of international companies for exploring off the nearby waters of Cyprus, Lebanon, and Syria. In May the Greek Cypriot government gave Noble Energy the green light to start searching for oil and gas off the island's southern coast by the end of the year.

With gas not expected to begin flowing until 2012, it is investors who are the big winners from the discovery to date. Shares in three of the Israeli partners involved in the drilling—Delek Drilling, Avner Exploration, and Isramco—have skyrocketed by 300% to 1,000% on the Tel Aviv Stock Exchange since the beginning of the year, making them the top performers on the local market.

Energy experts believe that the discovery of gas also will have a dramatic impact on the Israeli economy in the decades to come. "This will lead to an even greater diversification of our economy which has depended on the high-tech and defense industries for much of its recent growth," says Ohad Marani, board chairman of Israel Natural Gas Lines, the state-owned gas distribution network and a former director general of the Finance Ministry. The technology sector already accounts for more than 50% of all industrial exports and was a major contributor to the five years of rapid growth the Israeli economy experienced through 2008.

Few expect natural gas to become a major Israeli export item in the foreseeable future as it would take years to develop any new discovery. Moreover, the gas from the Tamar and Dalit finds are expected to be sold locally to meet rapidly growing demand. Israel's National Infrastructure Ministry predicts that demand will triple from 4 billion cubic meters annually this year to 12 billion cubic meters in 2016 as power plants and industry rapidly switch from oil to gas, a far more environmentally friendly fuel. At present, the only sources of supply come from a small field off Israel's southern Mediterranean coast that is expected to be depleted within a few years and from Egypt.

Balance of Payments Boost Initially, the local economy will benefit from billions of dollars in investments in infrastructure for bringing the gas on shore as well as the construction of a $1 billion, 500-kilometer-long distribution network. And once the gas starts flowing in 2012, the state coffers are likely to swell. "The state treasury will make over $5 billion in royalties and corporate taxes from the production of gas at the Tamar field alone," estimates Gal Reiter, energy industry analyst at Clal Finance & Brokerage, a leading Tel Aviv investment bank.

Additionally, Israel's balance of payments is likely to show an even larger surplus in the coming years as the country reduces its dependence on imported oil and coal. In 2009, Israel will shell out $5 billion for fuel imports. That figure could drop significantly as a greater percentage of local energy needs is met by the offshore gas. "Five years from now gas will provide one-third of our energy as power plants and industry switch over," predicts Amit Mor, CEO of Eco-Energy, a Herzliya-based energy consulting firm. By comparison, gas accounts for 15% to 20% of energy supplies in the U.S. and most Western European countries. Israel's National Infrastructure Ministry is considering adapting the country's bus fleet and possibly cars to run on natural gas.

The local discoveries of natural gas, while significant, have yet to place Israel in the league of some of its neighbors such as Saudi Arabia. But few doubt that the country which for decades has been dependent on importing nearly all of its energy needs has entered a new era of far greater economic independence.

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