World Review | Why Israel’s gas bonanza is fraught with export problems

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Why Israel’s gas bonanza is fraught with export problems

Why Israel’s gas bonanza is fraught with export problems
Israel's offshore gas fields could make it a major player in the Mediterranean natural gas market

FOR the first time since its creation in 1948, Israel faces the prospect of being energy self-sufficient - at least in electricity production.

Offshore gas fields could make Israel a major player in the Mediterranean natural gas market while supplying its population and industry with cheap, clean energy for more than a generation.

The discovery has been described as an historic opportunity for the country.

When fully exploited, Israel’s gas resources will reduce the country’s energy vulnerability. Its trade balance will improve when its energy import bill is reduced. And if Israel exports gas, an additional source of income will be generated along with the influx of foreign capital and the fiscal benefits the country will accrue.

The switch in electricity production from coal and oil to gas will also have environmental benefits.

Israel’s energy situation will improve with the exploitation of gas but the benefits are mainly in generating electricity. Israel will still need to import oil and will continue to be affected by events shaping the oil market.

The full exploitation of domestic gas resources will take some time to materialise given the complex political make-up of the region. The export potential – especially to Israel’s Arab neighbours – is fraught with problems.

Israel’s primary energy mix is dominated by fossil fuels. Oil provides more than 47 per cent of the country’s primary energy, followed by coal (34 per cent) and natural gas (19 per cent). Renewable energy makes a negligible contribution.

Gas entered Israel’s energy mix only in 2004, following the beginning of commercial production from the then newly discovered Mari-B field – Israel’s first offshore natural gas facility. The demand for natural gas has increased rapidly since then, fuelled mainly by the production of electricity, where gas is substituted for coal (and all other fuels). Ninety per cent of gas consumption in 2010 went on electricity generation.

Israel has been discovering gas in its waters since 1999 but the discoveries that substantially altered its energy outlook include: Mari-B (30 bcm); Tanin (31 bcm); Tamar (246 bcm); and Leviathan (480 bcm).

Mari-B is now nearly depleted. Over the next 10 years, Tamar is expected to supply between 50 and 80 per cent of Israel’s gas consumption needs.

Egypt used to supply around 40 per cent of Israel’s gas requirements. During the Egyptian revolution, however, the East Mediterranean Gas S.A.E pipeline was frequently attacked and supplies continuously disrupted.

A combination of the rapid increase in demand for electricity and therefore for natural gas, and the sense of being ‘a solitary island’ in what is perceived to be a hostile neighbourhood, has sparked public demands that priority is given to the domestic market while future gas exports are limited or even banned.

Many would argue that Israel is not, politically, an attractive destination for international oil and gas capital.

Additionally, in 2011, the government introduced new tax measures to ensure it had a greater share of potential rewards.

Strong public feeling against exporting gas can act as a disincentive for companies looking for the most economically efficient solution to exploit gas resources. These companies also have to live with the existing conflict in the region, which constrains their export options.

The dispute with Lebanon over maritime boundaries is ongoing. The civil war in Syria shows no signs of abating and there is the added problem of potential spill-over to neighbouring countries. The relationship between Israel and Turkey has been tense. Turkey opposes any hydrocarbon-related deal between Israel and Greek Cyprus until a settlement with Northern Cyprus is reached.

If Israel had a ‘normal’ relationship with its neighbours, an efficient option would have been to connect to the existing network of pipeline, sell the gas regionally and send the rest to Turkey and from there reach out to the European customer.

However, because of the prevailing political climate, other more expensive and complex options need to be considered. One possibility would be to build an onshore LNG terminal, but the right spot needs to be found, given Israel’s crowded beaches and the powerful environmental lobby.

Israel could send its gas surplus to a LNG terminal in Cyprus. It could also send its gas through a pipeline to Jordan Red Sea/Gulf of Aqaba port, Al Aqaba. For both options, terminals would need to be built and for many Israelis this would mean ceding control of a precious resource to foreign governments.

Assuming an export option is finally selected, by the time production from the Leviathan field starts (expected by 2016), gas markets are likely to look different from today.

Dr Carole Nakhle

Our Expert: Dr Carole Nakhle Dr Carole Nakhle is an energy economist, based in London, UK, specialising in international petroleum fiscal regimes, world oil and gas market developments, a ...

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