Gas Adds Energy to Israeli Diplomacy Dominated by Conflicts

Israeli foreign policy, dominated by conflict with its neighbors, may be entering a new era as the country turns into a natural-gas producer.

Exploiting energy discoveries off its Mediterranean shore will require Israel to soon decide on how much it wants to export, by what means and to which markets. That’s influencing relations with Cyprus, Turkey and Lebanon, spurring concern from rival producer Russia, and attracting interest from potential customers China and South Korea.

“This a new age for Israel,” said David Wurmser, director of Washington-based Delphi Global Analysis Group. “While the quantities are still modest in global terms, Israel could strategically leverage marginal amounts of gas for major impact if it utilizes them correctly.”

Energy is already offering a potential bridge to Turkey. While the two countries work on restoring diplomatic ties frayed by a deadly Israeli raid three years ago on a Turkish-led flotilla bound for the Gaza Strip, Turkish Energy Minister Taner Yildiz was talking last month about joint energy projects. The country is the most feasible route for future Israeli natural gas exports, he told reporters in Ankara on May 28.

Israel has thus far discovered about 950 billion cubic meters of offshore gas, sufficient to fill the country’s domestic needs for decades with enough left over for export. It would be worth about $340 billion, equal to 36 percent more than the country’s gross domestic product, based on calculations from today’s prices in the U.K.

Pond Size

While those numbers are a fraction of the reserves held by gas powerhouses such as Russia and Qatar, the U.S. Geological Survey estimates that the East Mediterranean basin, which also includes the territorial waters of Cyprus, Lebanon and Egypt, may hold as much as four times what’s been found to date.

“The gas could be a geopolitical game changer for Israel, if it makes the right decision,” Gal Luft, senior adviser to the United States Energy Security Council in Washington, said in an interview on a visit to Israel last week. “That decision is whether it tries to become a minor player in the global liquefied natural gas market, or a big fish in a smaller pond by exporting to regional isolated markets.”

Prime Minister Benjamin Netanyahu’s ministers agreed this week in principle to allow 40 percent of the gas to be exported, a person familiar with the matter who was not authorized to comment officially said today. That’s below the about 50 percent recommended last year by a government appointed panel. The final decision will need to be approved by the cabinet.

Mixed Effect

The gas finds have had a mixed effect so far on relations in the region. Israel’s ties with Cyprus have strengthened thanks to the gas fields that straddle their maritime border.

In Turkey, where the Islamist-rooted Prime Minister Recep Tayyip Erdogan has been facing down protesters saying he’s too autocratic, a report on the possibility of Israeli gas links is being readied for the premier should ties with the Jewish state normalize, Yildiz, the energy minister, said last month.

The discoveries have also exacerbated tensions for Israel. Its neighbor Lebanon, which has begun its own offshore energy exploration, is disputing a maritime border zone measuring 854 square kilometers (330 square miles). Militant group Hezbollah, which fought a war with Israel in 2006, has vowed to protect the Lebanon’s offshore resources.

Exploring Options

Most of Israel’s gas is contained in two offshore fields in the Mediterranean Sea: Tamar, which began production in March, and Leviathan, about twice Tamar’s size. Commercial production of gas at Leviathan is expected around 2016, according to Houston, Texas-based Noble Energy Ltd.

The government’s gas export policy has to allow for “multiple options,” Binyamin Zomer, director of corporate affairs in Israel for Noble, said on the sidelines of a gas industry conference in Tel Aviv last week. “We will explore every opportunity, but if the range is too limited, some of those opportunities will be lost.”

Noble’s partners in Tamar and Leviathan include Israeli companies Delek Drilling Ltd., Ratio Oil Exploration Ltd., Avner Oil & Gas Lt. and Isramco Negev 2 LP. Shares in the four companies have all performed better than the benchmark TA-25 index over the past 12 months, rising as much as 26 percent.

Political Backdrop

“The companies will ultimately be the ones deciding how the gas will be exported and to what markets,” said Pinhas Avivi, an Israeli Foreign Ministry official who served on the gas exports panel advising the government. “Of course we will give recommendations to the companies and can help by creating the right kind of political environment.”

So far, the gas companies have only signed contracts for Israel’s domestic market, including a 15-year deal with Israel Electric Corp. Australia’s Woodside Petroleum Ltd., which has experience in liquefied natural gas production, agreed in December to acquire 30 percent of the Leviathan field for an initial $696 million, though the deal is still pending.

One export option they are looking at is constructing a floating LNG platform in Israeli waters. That could avoid many of the regulatory and environmental obstacles that might delay an on-shore facility, Avivi said.

Korea’s Daewoo Shipbuilding & Marine Engineering joined with the Tamar partners to set up Levant LNG Marketing Corp. and examine building a floating LNG platform at that field.

Gazprom Eye

Israeli gas has also attracted the interest of Russia’s OAO Gazprom, the world’s biggest natural gas producer, which in March signed a preliminary arrangement to buy gas from Levant LNG. Gazprom will decide whether to go ahead with the deal by the end of this year, the Moscow-based company said on Feb.6.

The company “is not a standard economic enterprise because it has an overlay that is tied to the elites and policies of Russia,” said Wurmser, who served as a foreign-policy adviser to former U.S. vice-president Dick Cheney. With the entry of Gazprom, “Israel essentially begins to lose control over gas policy at that point,” he said.

Israel, though, would be unwise “to compete directly with Russia,” said Avivi.

One way to sidestep that would be to export via Turkey, which serves as a regional gas hub and needs increasing amounts of energy for itself to realize Erdogan’s dream of vaulting the country into the top 10 of the global economic elite.

Turkey Pipeline

“A pipeline from Leviathan to Turkey is not unrealistic,” Ratio Chief Executive Officer Yigal Landau told Bloomberg in February. Liquefying the gas for export to Asian markets is still “the first obvious option,” he added.

Avivi, who served as Israeli ambassador to Ankara from 2003 to 2007, said the two countries maintained some $4 billion in trade during the past three years even as the diplomatic crisis over the Gaza blockade deaths continued.

Energy policy may also influence the political situation in Cyprus, which has been divided since 1974 after a Turkish invasion of the north of the island.

Exporting to Turkey might require construction of a pipeline routed through Cyprus to avoid the hostile waters of Lebanon and Syria. That prospect appears more feasible given the Israeli-Turkish rapprochement and as the financial crisis in Cyprus and Greece forces the countries to look at attracting outside investment in their energy industries.


Rather than looking that far afield, “Israel should first and foremost consider exports to its immediate neighbors, Jordan and the Palestinians,” according to Michael Leigh, senior adviser to the German Marshall Fund of the United States, a Washington-based public policy institute.

Jordan, like Israel, was cut off from Egyptian gas imports last year after multiple attacks by militants on the Sinai pipeline system. Israeli gas could help stabilize its economy when it is being strained by a flood of refugees fleeing Syria’s civil war, now in its third year, Leigh said.

It is also in Israel’s geopolitical interest to use the gas to help develop the Palestinian economy, he added, including “coming to grips with allowing and encouraging the development of a potential gas field off the Gaza coast.”