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Jun 27, 2013 | 10:46 GMT

7 mins read

Israel Contemplates Exporting Natural Gas

(Albatross via Getty Images)
Summary

Israel intends to become a natural gas exporter, but it will need to overcome several challenges before it can make this intention a reality. Political and technical limitations will make it difficult to determine how much profit there is to be made from natural gas, as will the uncertainty over how much would be used for domestic consumption. Israel has taken the first steps needed to become a natural gas exporter, but even if it resolves these issues, it will take years for the country to see any strategic benefit from exporting this commodity.

After nearly two years of internal debate, the Israeli Cabinet approved Prime Minister Benjamin Netanyahu's recommendation that 40 percent of Israel's natural gas reserves be reserved for export. The potential benefits of exporting natural gas are manifold: In theory, it could increase Israeli security, establish economic ties with Israel's neighbors and transform future energy development in the Eastern Mediterranean. However, several issues will hinder Israel's evolution into a natural gas exporter.

Domestic Consumption

There is still a debate Israel over whether it should consume its natural gas domestically or sell it on foreign markets. The countries on which Israel has long depended for its energy needs — Egypt, for example — have not always been able to deliver energy reliably. But the Tamar field, which came online March 30, has secured Israel's access to reliable natural gas for the first time in the country's history.

The Israeli Energy Ministry estimates that Israel will consume 7 billion cubic meters of natural gas in 2013, and it expects that number to climb to 12.5 billion cubic meters by 2020. Tamar contains approximately 238 billion cubic meters of recoverable reserves, which will provide some 50 percent to 80 percent of Israel's domestic energy needs for the next decade, according to government estimates. If Tamar continues producing at its current rate, it will supply Israel with more than 2 billion cubic meters of natural gas in 2013 alone.

There is significant domestic opposition from some Israeli political parties, which want Tamar's reserves to be designated for domestic consumption. Labor Party leader Shelly Yachimovich has threatened to go to Israel's High Court of Justice if the Cabinet does not allow the export issue to be discussed in the Israeli parliament. Small protests numbering in the hundreds and low thousands have been held in Tel Aviv and other cities in recent months. Some protesters even demonstrated outside the energy minister's home on May 11.

Determining how much energy Israel would allocate for export illustrates the dissonance within the country. In October 2011, the Israeli government formed the Tzemach Committee to formulate an export policy, and the committee submitted its recommendations in August 2012. In the report, the committee recommended that 53 percent of Israel's projected natural gas reserves be exported (this was the number advertised to foreign companies interested in investing in Israel).

The fact that it has taken almost a year for the Israeli government to adopt an official position — and that it bowed to pressure from the opposition to reduce the amount of natural gas made available for export — shows how slow the process has been. And there is every reason to believe the process will continue to move slowly. The Tzemach Committee was criticized for using estimated offshore reserves instead of proven reserves, which total roughly 730 billion cubic meters, when it came up with its recommendations. But estimates do not always yield actual reserves — as was the case with the Sara and Myra fields, which were believed to have 180 billion cubic meters of natural gas but turned out to be dry. This fueled the domestic opposition to natural gas exports, and any similar failure will likewise exacerbate political tensions. Disagreements between the Tamar partners and the government over building a new pipeline will also further complicate the issue.

Liquefied Natural Gas Facilities

Assuming the Cabinet's decision actually resolves the broader export issue, the government will have to determine how it would export the natural gas. The Tzemach Committee put forth a specific strategy: Reserve enough natural gas for export to convince a foreign company to build a liquefied natural gas facility that would enable Israel to export to faraway countries such as China. This way, Israel could fetch a better price and eliminate the security challenges inherent in pipeline construction. Russian energy giant Gazprom has already signed a 20-year contract to export natural gas from the Tamar field via a floating liquefied natural gas vessel reportedly being built by Pangea LNG. Of course, such terminals are not without risk. Israel is concerned that Hezbollah could acquire anti-ship missiles from the Syrian regime.

Exporting liquefied natural gas is incredibly expensive. Estimates for the construction of a liquefied natural gas facility and subsequent development of the larger Leviathan field are as high as $15 billion. Those costs are justifiable only if a significant amount of natural gas is made available for exports, but that clashes with Israel's strategic interests to capitalize on its newfound energy security and to use its resources to manage relationships with its neighbors. The deal with Gazprom differs somewhat. Russia's motivations are as geopolitical as they are financial — Moscow wants to control the flow of natural gas from the Eastern Mediterranean to Europe.

Russia's interest in the Tamar field demonstrates its willingness to participate in projects even if they are not highly lucrative. The agreement with Gazprom concerns a relatively small amount of natural gas — some 50 billion cubic meters over 20 years. It also requires Tamar operators to build a second pipeline connecting the field to Israel before any exports can be considered, a condition with which the Tamar partners are unhappy. Notably, Gazprom also submitted the largest bid of any company for a stake in the larger Leviathan natural gas field, but Israel chose an Australian company partly because it did not want to be beholden to Russian strategic interests. It is unclear whether Israel can maintain that relationship if less natural gas is available for export and if finance minister's tax legislation is passed.

Pipelines

Some in Israel advocate eschewing liquefied natural gas exports entirely. They argue that Israel should build infrastructural links, specifically pipelines, with regional neighbors to strengthen strategic relationships instead of developing costly infrastructure to export to countries with little real bearing on Israel's security. The Israel Antitrust Authority recently allowed the Israeli partners of the Leviathan field to enter preliminary talks with Turkey, Jordan and the Palestinian Authority. (The legality of the partnership is under investigation.) The antitrust body authorized the partners because it recognized the potential strategic importance of such talks and did not want internal Israeli legal considerations to hamper them.

Achieving National Security in the Periphery

Israel Periphery

Political hostility and overall regional instability severely limit the extent to which pipelines are even feasible. Existing infrastructure would make it relatively easy to connect Jordan to Israel's natural gas network south of the Sea of Galilee or to an area near Sodom, but political obstacles remain. When reports surfaced on Feb. 15 that Israel had been in secret talks with Jordan on potentially supplying Amman with natural gas, Jordan vociferously denied it. Then on May 8, the Jordanian parliament unanimously called on Amman to expel the Israeli ambassador, underscoring how the Hashemite regime will have to pursue such projects cautiously to avoid negative political attention.

Despite these obstacles, Israel is continuing to pursue exports to Jordan. Included in the Cabinet's June 23 decision was a provision that 20 billion cubic meters of natural gas from the Tamar field be made available for exports to Jordan and the Palestinian Authority before the Leviathan field is developed. With Turkey, politics is not the problem. Though Israel's rapprochement with Turkey has been somewhat muted since Netanyahu's flotilla apology, the two have shown the ability to work together on issues of mutual strategic importance, and the United States is interested in seeing that cooperation continue. The problem is that a pipeline to Turkey would have to traverse Lebanon and Syria, both of which are unable and unwilling to allow construction, let alone guarantee the pipeline's security. An underwater pipeline is possible in theory, but is technically challenging and has not garnered much interest. The fact that Egypt is absent from consideration shows just how badly security in the Sinai has deteriorated and the degree to which Egyptian President Mohammed Morsi's government is constrained.

Israel is thus weighing three options: keeping its natural gas for itself, exporting it to regional neighbors via pipeline, or exporting via liquefied natural gas facilities to be constructed by foreign companies. Ultimately, Israel will pursue the latter two, and while it will struggle in the process, it is important to consider that Israel has little experience in dealing with domestic energy resources.

Domestic politics will continue to prolong development and policy decisions even as seemingly contradictory policies, such as the finance minister's proposal to tax exports, are put forth. As the process stalls, Israel's natural gas reserves will mean little for anyone besides Israel.

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