How has the Gaza war impacted the East Med gas sector?

The ongoing war between Israel and Hamas in Gaza presents a range of clear security risks to energy operations in the Eastern Mediterranean, especially in Israel. The conflict does little to improve the outlook for further integration of the natural gas sectors in Israel, Egypt, and Cyprus with a view to exports beyond the region, and this trajectory will worsen if fears of a significant escalation in fighting beyond Gaza become a reality.

However, escalation seems far from certain at the moment. In the interim, few signals that have emerged thus far suggest a wider shift in the regional dynamics that influence energy sector operations from either a political or commercial angle. Security risks to offshore gas assets in Israel are well established; and while the conflict has worsened Egypt’s energy shortfall, it is not the cause of it. More than a month into the war, it increasingly appears that established risks have worsened, though they have remained largely unchanged in nature.

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The most salient example of the conflict’s near-term impact on the gas industry was an order by the Israeli energy ministry for the Chevron-operated Tamar gas platform to halt its operations, although they have since restarted. Holding 10 trillion cubic feet (tcf) of gas, Tamar is Israel’s second-largest producing field and a key source of supply for the domestic market and exports to neighboring countries. It is also the transit point for gas from Israel’s largest field, the 22 tcf Leviathan (also operated by Chevron), to flow to Egypt. While this measure is not without precedent, a previous shut-in during a 2021 conflict only lasted 11 days and did not have a major impact on regional supply.

This time, the effects have been more pronounced as the stop to operations lasted more than a month. Egypt was importing gas via the East Mediterranean Gas pipeline, also known as the Ashkelon-Arish pipeline, but flows had ground to a halt after reaching record levels of up to 900 million cubic feet per day earlier in the year. Imports then had to take a new route through the Arab Gas Pipeline in lower volumes than Cairo had received before the war. To be sure, this development came at what was probably the worst possible time for Egypt, whose domestic gas production has begun a sharp decline resulting in supply shortfalls eerily similar to those that brought about an energy crisis a decade ago, causing power cuts to be implemented earlier this year. After the initial collapse in imports, flows recovered somewhat and Egypt has been able to ease power cuts. Since Chevron confirmed Tamar’s restart on Nov. 9, flows have presumably reached pre-conflict levels.

While this outcome highlights points that have often been made about the reliability of Egyptian liquefied natural gas (LNG) plants as a hub for regional exports, and the war has indeed exacerbated Egypt’s gas deficit, it hardly constitutes a sea change from the dynamics that were firmly established prior to the conflict. The cloudy outlook for LNG exports from Egypt to European markets ahead of winter is not the most welcome of news, but the return of gas and power shortages to Egypt before the war had already cast a long shadow of doubt over the prospect for significant exports anyway.

Politics may loom large over Israel’s gas exports to Egypt, as well as smaller volumes that flow to Jordan. Popular anger in both countries has previously been turned toward the energy trade, even leading to multiple attacks on pipeline infrastructure in the Sinai region in recent years. However, this sentiment has yet to present a tangible threat to imports of gas from Israel by either country. This situation could change as the war rages on, and Gaza’s civilian death toll continues to draw international outrage, but Cairo and Amman are both likely to resist any pressure to halt Israeli imports to the best of their ability.

Economics lie at the heart of this issue. For Egypt, the fact that a recovery in imports enabled an ease in power cuts underscores the fragility of its gas balance and the role that energy ties with Israel play. In Jordan, domestic gas production is meager. An end to imports of Israeli gas in either country would require demand to be met with expensive LNG imports, inflicting economic pain on the general population and eroding foreign exchange reserves at a time when both Cairo and Amman are already facing major economic woes. In Egypt, such a move would also cast even more doubts on its aspirations of becoming a more significant LNG exporter via its underutilized capacity at Damietta and Idku. As a result, both Jordanian and Egyptian leadership will likely take pains to shift anger toward Israel away from the energy trade, at least for the time being.

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Despite the halt in operations at the Tamar field, there is currently little to suggest that commercial interest in Israel’s upstream sector has been significantly damaged by the conflict. The Israeli energy ministry announced the results of its fourth offshore bid round on Oct. 29, revealing that 12 exploration licenses had been awarded evenly between two consortia led by Italian oil and gas major Eni and SOCAR of Azerbaijan, respectively. Entry into Israel makes Eni the only major international firm that can claim a presence in every gas-producing country in the East Med; and with BP present in SOCAR’s consortium, three international oil and gas majors have now entered the Israeli upstream (Chevron was the first to do so through its 2020 acquisition of Noble Energy). Companies have three years or more in which to start exploration, making them likely to take a longer view of the conflict before deciding upon a course of action, and it does not appear to have dented short-term interest in Israeli acreage.

Yet caution is still warranted. The potential risks for continued exports from Israel to Egypt, however small in their current form, were established above. The conflict has not, thus far, managed to drastically increase uncertainties that have existed for years around potential export routes beyond Egypt and Jordan and on to more lucrative LNG exports. Physical risks to gas assets in Israel, though at an all-time high, had been abundantly clear to any operators in its sector long before the conflict started; it was only last year that Lebanese Hezbollah made direct threats to assets at Israel’s Karish field until a U.S.-brokered agreement succeeded in delineating Israel and Lebanon’s maritime boundaries.

This raises the question of what, if anything, has truly changed for the Israeli upstream sector? The answer is most likely to be found in Israel’s domestic political landscape, which had grown increasingly volatile before the conflict. Benjamin Netanyahu’s status as the longest-serving prime minister in Israeli history has meant that the relatively young gas industry has developed almost entirely under a regulatory process overseen by Netanyahu governments, with an 18-month period between June 2021 and December 2022 representing the only exception to this dynamic. With current trends indicating that a post-Netanyahu era is now likely to be closer than ever before, the industry faces a great deal of regulatory uncertainty.

The emergence of an Israeli government that is outright hostile toward the gas industry appears unlikely for the time being. Former Energy Minister Karine Elharrar, who in 2021 announced a policy shift away from gas and a cancelation of the fourth bid round, reversed this stance when the onset of the full-scale Russo-Ukrainian conflict highlighted the strategic value of the sector. While Israel approved a relaxation on export quotas earlier in the year, support for this decision was not universal within Netanyahu’s government, indicating that risks to future growth in Israeli exports do not come only from neighboring countries angered by Israel’s handling of the Gaza war, but from Israel itself. As Netanyahu’s time leading Israel was always bound to come to an end one way or another, the political circumstances under which the industry developed always meant that any new government represents uncharted waters for the gas sector. But once public attention in Israel becomes firmly trained on accountability for the security failures leading up to the Oct. 7 terrorist attacks, it is difficult to see Israeli politics becoming less turbulent than in the recent past, which will add to uncertainty around the regulatory environment for the gas sector, or potentially risk a further deterioration in the security landscape that more directly threatens the industry.

As the war continues, uncertainty over the future of the East Med gas industry and its potential to become a major exporter to European or other markets will linger. Without a doubt, an escalation that results in major damage to gas assets, intentional or otherwise, would represent the most dire turn of events for the sector to date. However, nothing of the sort has yet taken place, and absent such an outcome, it is difficult to assert that the war has shifted the outlook for the region in a way that is either unprecedented or fundamentally changes the nature of the challenges it faced prior to Oct. 7.  

Colby Connelly is a Non-Resident Scholar with MEI’s Economics and Energy Program and a senior analyst at Energy Intelligence.

Photo credit should read MENAHEM KAHANA/AFP via Getty Images