Israel’s Natural Gas Sector: A Regional Perspective

Israel’s recent natural gas discoveries have the potential to transform the country into a major supplier of natural gas to the Eastern Mediterranean and beyond. Israel’s Leviathan field alone is believed to contain tens of billions of dollars worth of natural gas, and is the world’s largest offshore natural gas discovery of the last decade. In addition to representing a tremendous boon for Israeli domestic energy needs, the finds are likely to result in significant windfalls for the Israeli state and could dramatically impact the political economies of neighboring states.

Having signed export deals with Jordanian and Palestinian companies totaling $1.7 billion, Israel is positioning itself to become a powerhouse in the Levant’s natural gas export industry, which could improve regional relationships. Uzi Landau, Israel’s water and energy minister, believes that “exporting natural gas to [Israel’s] neighbors will promote trust that could promote regional peace.”[1]

Despite this prospect of enhanced relations and Israel’s proximity to Egypt and other nations in desperate need of inexpensive energy, current political realities make regional export agreements tricky. As Israel selects trade partners, chooses methods of export, and navigates the launch of its natural gas sector in one of the most politically turbulent regions of the world, it will simultaneously play an instrumental role in defining the dynamics of Euro-Mediterranean politics and economics.

Existing Agreements

The West Bank: In January 2014 Israel signed its first natural gas export deal through which the Palestinian Power Generation Company (PPGC), the Palestinian Authority’s electric utility company, will purchase $1.2 billion worth of Israeli natural gas over a 20-year period. The gas will be shipped to a $300 million power plant that PPGC plans to build in the West Bank city of Jenin, with gas sales scheduled to commence in 2016 or 2017 when the Leviathan field will begin producing.

The deal could reduce Palestinian dependence on Israel’s electric grid, through which Palestinian energy needs are currently met. Under the existing arrangements, the Palestinian Authority has accrued a sizeable debt to the Israeli Electric Company due to habitual missed payments.[2]

While the deal will not ease the West Bank’s heavy reliance on foreign energy, it has motivated the construction of a substantial Palestinian power plant, which should allow Palestinians to produce their own electricity, increase their capacity to manage energy, create jobs in the West Bank, and provide the basis from which to launch future energy partnerships.

It will be several years before Israeli natural gas begins powering the West Bank, and PPGC is contractually permitted to reduce the amount of gas it will purchase from Israel.[3] Despite such uncertainties, the energy accord represents a breakthrough in Israeli-Palestinian relations, and is likely to not only increase Palestinian control of the West Bank’s energy industry, but also lead to better lives for its citizens.

Jordan: In February 2014, Israeli and Jordanian officials signed a contract through which Israel will sell $500 million worth of natural gas to Jordan over 15 years. The gas will be obtained from Israel’s smaller, albeit substantial, Tamar field, and sales are scheduled to begin in 2016 upon the completion of preliminary pipeline infrastructure. The deal may later be expanded up to a $30 billion partnership, potentially transforming Israel into Jordan’s primary gas supplier.[4]

The arrangement is particularly important for energy-poor Jordan, as the Egyptian gas that until recently satisfied 80 percent of Jordanian electricity needs has become increasingly unreliable and expensive due to numerous pipeline assaults in Egypt’s Sinai Peninsula. The pipeline, which once supplied substantial quantities of gas to both Israel and Jordan, has been attacked more than ten times since Hosni Mubarak was ousted in 2011, at a cost to Jordan of over $1 million per day.[5]

The United States, which helped broker the deal, is also keen to see Jordan buy Israeli natural gas. Jordan could potentially look east to Arab neighbors or Russia to satisfy its energy needs, yet the deal with Israel safeguards Jordan’s western-oriented policies and interests.[6]

Potential Partnerships: Regional Pipelines vs. Liquefied Natural Gas (LNG)

The question of whether to use pipelines or LNG is key in determining where to export natural gas. Pipelines are favorable in that their construction is far cheaper than building facilities to liquefy natural gas, and they are a logical option as Israel’s neighbors are in desperate need of gas. Yet geopolitics raise doubts as to their advantage. Liquefying natural gas would allow Israel to ship its product to Asia, where the price of natural gas is far higher than in the Euro-Mediterranean area. Yet the upfront costs of LNG terminals are high and construction requires sizeable plots of land, which Israel lacks. 

Turkey & Cyprus: With its hefty domestic energy needs rapidly rising and easy access to European markets, Turkey is perhaps the most significant prospect for Israel’s exports. Yet Israeli-Turkish relations drastically deteriorated in May 2010, when nine Turkish citizens, part of a group attempting to deliver aid to Gaza, were killed by Israeli soldiers. Israel’s subsequent apology and compensation for victims’ families, combined with the potential for a highly lucrative natural gas partnership, prompted a thawing in relations, with dialogue underway to map out an energy partnership.[7]

One export option is the construction of a pipeline in the seabed between the Leviathan and Turkey’s southern coast, which would cost approximately $2 billion. For geographical reasons such a pipeline may have to traverse politically divided Cyprus’s maritime space, and agreements may be required with both formally recognized Greek Cyprus and the Turkish-controlled north.[8] As Turkey does not recognize the Greek government in Cyprus and disputes Cyprus’s claim to the waters south of the island where additional natural gas has been discovered, it will likely demand that the Turkish north be involved in the island’s natural gas provisions.[9] The Greek-Cypriots may not be willing to consent to such a deal.

There has also been consideration of a joint venture between Israel and Cyprus. On April 16, 2014, the consortium of firms with a stake in the Leviathan bid to supply Cyprus’s state-run natural gas corporation, Cypriot Natural Gas Public Company (DEFA), with approximately $210 million of natural gas annually for up to 10 years. The deal would involve constructing a pipeline between Israel and Cyprus, which would begin supplying DEFA with gas in 2016 or 2017.[10] If Cyprus accepts the bid, the deal may represent an ostensible win for both Israel and Cyprus. However, with growing Turkish energy demands and the potential to revive a strategic partnership of geopolitical importance, Israel would be remiss to exclude Turkey from its natural gas dealings in the long term.

Egypt: Despite Egypt’s own substantial natural gas reserves, the nation must now seek gas suppliers as a result of its export obligations, heightened domestic demand, stymied gas exploration, and general mismanagement.[11] The pipeline that runs through Egypt’s unstable Sinai region that once supplied Israel with 40 percent of its natural gas needs could be used to move gas from Israel to Egypt, yet recurrent pipeline raids would likely resume. A maritime pipeline to Egypt’s Nile Delta may be a sounder option.[12]

In any case, gas sales to Egypt may allow Israel to utilize Egypt’s existing LNG facilities, which would permit export of Israeli gas to distant markets (most notably Asia). However, due to security issues, potential Asian customers are hesitant to transport Israeli natural gas through the Suez Canal.[13] Even if logistical options could be resolved, Israel may be reluctant to partner with a country as politically unstable as Egypt appears today.

An Uncertain Future

Despite Israel’s small size, through its energy resources it has the potential to play a major role in the geopolitical and energy map of the region and beyond. As Russia threatens to hold Europe hostage with its natural gas, Israel’s gas could enable Europe to diversify energy supplies and wean itself off of Russian energy products. Israel’s natural gas may thus permit it to influence key relationships and change the structure of the regional political economy. But whether Israel and its Euro-Mediterranean counterparts can collaborate to maximize what is perhaps the region’s greatest opportunity for strategic partnerships, prosperity, and stability remains to be seen.