Israeli gas holds promise of better ties with neighbours

Israeli gas holds promise of better ties with neighbours 

Reuters 14-Apr-14 

Israel's drive to export its new-found natural gas could help to rebuild strained ties with old regional allies Egypt and Turkey, but could deprive Europe of a precious alternative to Russian gas. 

Israel has in recent months already signed energy deals with Jordan and the Palestinian Authority, though relations with the Palestinians are at a low ebb, and now needs to expand its export horizons to cash in on its huge energy discoveries. 

If all goes well, the latest developments could see first pipelines being laid between Israel and Turkey as soon as 2015, and gas cooperation between Israel and Egypt is also emerging, which would allow export access to Asia's major markets. 

A growing population and soaring demand have left Egypt's own liquefied natural gas export (LNG) plants in need of new supply, as domestic shortages eat into seaborne exports through the Suez Canal to the world's most lucrative market in Asia. 

This has put Israel's previous plans to pump its gas reserves into a future export plant in Cyprus on the back burner, dealing a major blow to the indebted Mediterranean island's ambitions to become a global player in the gas market. 

A Cypriot LNG export plant was due to deliver at least 5 million tonnes a year to Europe and Asia, allowing Europe to reduce its growing dependency on Russia, which has become of particular concern since the crisis in Ukraine cast a Cold War chill over East-West relations. 

Israel's new plans throw Cypriot developments into doubt as investors would require more gas than Cyprus has on offer to make returns on multibillion-dollar investments. (NPV gas calculator: here) 

"If Israel has really ditched Cyprus as a partner to develop the region's gas resources, then we (Cyprus) really do have to find quite a lot more gas if we want to become a viable exporter, and that would inevitably throw our plans back by several years," said one source involved in developing Cyprus's gas reserves. 

GATEWAY ALLIANCES 

The possibility of sanctions on Russia's energy sector in response to Moscow's annexation of Crimea and troop build-up along Ukraine's eastern border have underscored Europe's acute need to diversify its oil and gas sources. 

Israel plans to export gas by pipeline and through several floating LNG production plants, which cool gas to liquid form, so they can ship it to the world's largest markets. 

At stake for Israel is a $150 billion tax take should export deals be agreed by a consortium operating its gasfields. Its strategic re-alignment effectively places a tantalisingly close new gas province out of Europe's reach. 

"Ultimately Egypt and Turkey need energy, and the fact that we have it is creating a regional convergence of interests," an Israeli diplomatic source told Reuters. 

Egypt offers a way for the U.S.-Israeli group of companies developing Israel's giant Leviathan gas field to reach the Asian market, where LNG fetches about twice the price Europeans pay. 

"If the companies operating the fields in Israel could reach an agreement with the companies that are operating those facilities, it seems it would benefit Egypt, Israel and all the companies," said Eugene Kandel, head of the national economic council at the Israeli Prime Minister's office. 

Egypt and Israel have had only limited economic cooperation since signing a landmark peace accord in 1979. Political turmoil in Egypt in recent years has further limited cooperation between the neighbouring countries. 

Talks between the Leviathan consortium - Israel's Delek Drilling, Ratio, and Avner Oil, and U.S.-headquartered Noble Energy - and Egyptian authorities are focusing on feeding Israeli gas into the country's idled LNG export facilities. 

Britain's BG Group, which runs one of Egypt's under-utilised LNG plants and is among the world's top LNG trading firms, is in talks with the Leviathan partners. 

The favoured option is to build a sub-sea pipeline from Leviathan to link up with BG Group's offshore pipeline network in Egyptian waters, allowing Israeli gas to feed directly into its LNG plant at Idku, according to industry sources. 

If realised, this would not only revive output at Idku but also mean that Israel's first LNG exports would take place from an Egyptian plant. 

Previous land-based pipelines between Egypt and Israel were repeatedly bombed by groups opposed to links with Israel, but a subsea pipeline would be much harder to target. 

Egypt is struggling to meet rising domestic demand for energy, and a fall in domestic output and power blackouts have stirred dissent in the Arab world's most populous state. 

Israeli gas could help ease domestic shortages, take the sting out of the energy-related unrest that contributed to the overthrow of former president Mohamed Mursi, and lighten Egypt's $6 billion debt burden to energy majors like BG Group. 

As part of a twin-track export policy, Israel also aims to ship LNG to distant Asian and South American markets through a floating plant to be moored above the Leviathan field. 

"We definitely want to strengthen the economic ties with our neighbours, but we also don't want to be too exposed to possible upheavals in the region, so Israel has to have outlets that do not limit us to the region," Kandel said. 

TURKISH RAPPROCHEMENT 

Once close allies, ties between Israel and Turkey were severely damaged following a deadly raid by Israeli commandos on a Turkish yacht carrying pro-Palestinian activists trying to defy an Israeli blockade on the Gaza Strip in 2010. 

Poor relations remain a barrier to a deal on gas, though the sides are talking. 

"High-level negotiations on resolving political issues, and lower-level negotiations aimed at making progress on energy have always been held," said a senior Turkish energy official. "Normalisation on the relations will pave the way for investment and cooperation on energy." 

U.S-led reconciliation efforts in recent months could be boosted by the promise of gas. 

"There is clearly significant potential for turning East Mediterranean's new gas wealth from a potential source of conflict to a catalyst for regional cooperation," said Oxford Research Group analyst Sara Hassan. "Turkey will want at least to be seen as trying to leverage better conditions for Palestinians alongside any potential deal." 

Peace talks to resolve the generations-old conflict between Israel and the Palestinians are close to collapse, with the Israeli government beginning to impose new economic sanctions on president Mahmoud Abbas's West Bank Palestinian Authority amid mutual recriminations about the deadlock. 

Talks between the Leviathan consortium and Turkish counterparts are focusing on building a 10 billion cubic metre (bcm) sub-sea pipeline at an expected cost of $2.2 billion, giving Israel access to a major emerging market and one of Europe's biggest power markets by 2023. 

"We think construction phase for a pipeline to transport Israeli gas to Turkey could begin in the second half of 2015," a Turkish energy official said. 

A separate yet-to-be-built pipeline linking Europe with the Caspian through Turkey in 2019 could eventually also open up a new market for Israeli gas in western Europe. 

An envisaged 25-year supply deal would steady Turkey-Israel ties and boost economic links, while Turkish sanctions against Israel would be lifted and ambassadors reinstated, he said. 

"The Turkish market for natural gas is the only growing one (in the region), and the drive to diversify away from Russia will justify Israeli gas to join Azeri, Iranian and Kurdish gas," said Mehmet Ogutcu, chairman of London-based Global Resources Corporation consultancy. 

"The Turks realise that if this gas project is implemented without their involvement, they will not be a game-player in East Med. Hence, the Turkish private sector could be encouraged to take the lead and politicians follow them at a later stage," according to Ogutcu. 

CYPRUS CUT LOOSE 

Already, the gas finds are spurring progress in talks to resolve an even longer-standing dispute over territory between Turkey and Cyprus, across whose maritime boundary any Israeli gas pipeline would have to travel to reach Turkey. 

Cyprus has been divided since the north of the island was occupied by Turkish troops in 1974. 

"It does look as if natural gas could help to bring the two sides closer to a settlement since Turkey's primary aim is securing the resources to meet skyrocketing demand," said Nicolo Sartori, energy and defence analyst at the Institute for International Affairs in Rome. 

"Efforts to get the Eastern Mediterranean gas pipeline have stepped up over the past few months, with the U.S. playing a very hands-on role," said Ogotcu. "The Cyprus settlement is on top of the agenda as it will allow Cyprus to use this pipeline and add its surplus Aphrodite gas." 

That could persuade Cyprus to give its consent to a pipeline that went through waters claimed by both the Greek-speaking and Turkish halves of the island. Since last year's downgrade of gas reserves at Cyprus's flagship Aphrodite field, it does not have enough gas to underpin its planned LNG export plant at Vassilikos. 

Cypriot officials had counted on additional supplies from Israel to make the export project feasible, encouraged by the fact that Noble and Delek, two of Leviathan's main developers, also own Aphrodite. 

Deepening Israeli reluctance to share its gas with a rival Cypriot project has stalled those talks. 

Analysis: Israel’s Economic Dominance of the Middle East

Analysis: Israel’s Economic Dominance of the Middle East; Foreign Currency Reserves Dwarf Neighbors 

The Algemeiner 08-Dec-13 

The Bank of Israel said on Friday that foreign currency reserves hit a record $80.59 billion at end-November, after breaking the $80 billion threshold, for the first time, in October. In 2004, Israel held only $25 billion. 

As Israel’s dollars-in-the-bank have grown to dwarf the reserves held by many of its neighbors, economists said the windfall from its natural gas deposits will help Israel fight above its weight-class, and compete directly against the oil-rich nations of the Middle East in the coming years. 

“Israel’s ability to put spare cash in the bank for emergencies very much signifies that the Israeli economy is growing, especially compared to its Arab neighbors,” said Professor Joseph Pelzman, the Institute for International Economic Policy the Elliott School, George Washington University Professor of Economics, International Affairs and Law, in Washington, D.C., and a permanent visiting professor at Ben Gurion University of the Negev, in Be’er-Sheva. 

“What I found fascinating is that the world hasn’t really understood how marvelous the Israeli economy has become and, obviously will expand much faster, as its natural gas makes Israel a participant in the global energy business — and this because of the anti-Israel sentiments on many international levels that have worked to preclude Israel from being recognized,” Professor Pelzman said. 

Professor Pelzman’s latest book, Economics of the Middle East and North Africa, was published in September, 2012. “What was so remarkable,” he said, “is that my book is the very first economic study to compare Israel with its actual Arab neighbors in the Middle East, and the Jewish state really shines. Until now, in every single study by economists at the university, institutes, and especially at global institutions, including the United Nations or the World Bank, Israel is usually put up against European countries, even though it would be one of the smallest states, but, more importantly isn’t even in that region — Israel is in the Middle East.” 

Israel’s $80.6 billion in the vault was particularly favorable compared to its more populous neighbors. 

In Cairo, the Bank of Egypt said the country’s foreign currency reserves stood at $18.6 billion at the end of October. The figure does not include any of the recent pledges from Saudi Arabia, the United Arab Emirates and Kuwait of $12 billion dollars in aid following the July 3 military coup that ousted Egypt’s Islamist President Mohammed Morsi. 

Meanwhile, in Damascus, before the start of its civil war three years ago, the International Monetary Fund estimated Syria’s reserves  – a state secret — at about $18 billion. But by April, 2013, Reuters reported that those reserves had dipped below $4 billion. At the time, Syrian central bank governor Adeeb Mayaleh told Reuters that Iran had already granted a $1 billion credit line to Syria, and that Damascus was close to an agreement with Russia and Iran to obtain fresh funds before it completely ran out of money, financing the civil war against the Free Syrian Army. 

Israel’s neighbors to the North and East, Lebanon and Jordan, have $51 billion and $12 billion of foreign reserves in the bank, respectively. 

But, as has been the case since the first American and British firms began exporting oil from the Middle East before World War II, energy exporters Saudi Arabia, with $700 billion, Libya, with $130 billion (same as net energy-importer Turkey), and Algeria, with $121 billion have the most foreign currency reserves in the region. 

Meanwhile, Iraq’s foreign currency accounts, with $80 billion, now stand at the same level as Israel, boosted by Iraqi oil pumping. 

In Tehran, the Central Bank of Iran has an estimated $69 billion, despite a decade of  global economic sanctions against the Ayatollah’s regime. With last month’s U.S.-brokered agreement in Geneva, the Iranians are expected to add $7 billion to that total, all money held in frozen international bank accounts. If the Islamic Republic sticks with the international community, and follows through with its new commitments, Iran could be able to return openly to the energy markets, where oil-starved countries, including India, which was once one of Iran’s major buyers, with $5 billion worth of crude per year, could help make the country very wealthy, again. 

Israel’s growth, until now, has largely been due to very high investment in research in development. 

In order to sustain its competitive high-tech edge, Israel dedicates 4.5% of its GDP to research and development, the highest proportion in the world, ahead of the Organization for Economic Co-operation and Development (OECD) (2.3%), Sweden (3.8%), Finland (3.5%), South Korea (3.4%), Japan (3.3%), the U.S. (2.8%), Germany (2.7%) and Canada (1.7%), noted former Israeli Ambassador Yoram Ettinger, in a recent Op-Ed published by The Algemeiner. 

But with the discovery of vast fields of underwater natural gas reserves, economists hope to see the prudent policies of the past continued, allowing Israel to avoid a terrible outcome of its natural resources windfall, called “Dutch disease,” a term coined in 1977 by The Economist magazine to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. 

Off the coast of Haifa, the Tamar field, Israel’s first major hydrocarbon discovery, is believed to hold over 10 trillion cubic feet of natural gas. On the international market, at $5 per thousand cubic feet, Tamar’s gas would be worth $50 billion. 

In 2010, U.S. developer Noble Energy signed an agreement with Israel’s Delek group to develop the field. Meanwhile, other major fields, including Leviathan, an even larger natural gas reserve, is expected to begin supplying energy in 2015. 

Israeli Energy Minister Silvan Shalom said that by not importing from the open market, Israeli natural gas is already saving the country’s economy $300 million a month, a figure that could reach as high as $1 billion as more electricity generation switches to gas fuel and the economy grows. 

“It means it will bring a huge improvement to the Israeli economy because the gas will be much cheaper. We will cut the tariff for electricity. We will cut the tariff for water that is produced by electricity, and all the products that are produced in Israel will be much cheaper,” Shalom told Bloomberg in November. 

In 2018, Israel will transfer the government’s share of the resource profits into the Israeli Sovereign Wealth Fund. Economists hope that Israel maintains is prudent economic policies, using the cash for growth, rather than wasteful spending. 

“The danger of ‘Dutch disease’ comes if all this resource money is spent in non-productive ways — importing luxury goods from abroad or ‘white elephant’ public projects that don’t increase productivity,” said Professor Pelzman. 

He said the Bank of Israel, under Professor Stanley Fischer, the prior central bank chairman, who was followed in the role this year by Dr. Karnit Flug, who had been Acting Governor of the Bank of Israel since Fischer stepped down at end-June, was very successful. 

“Under Fischer, Israel had the best macro policy, a lot of advantages, with no recession or  price reductions, with a monetary policy that didn’t rely on quantitative easing [lowering interest rates] as the Americans did. As a result, Israel didn’t have the hollowing out problem, like in Japan or the U.S., with the outsourcing of both low-labor skill manufacturing jobs and hi-tech jobs overseas. Because of Fischer’s policies, Israel continued to invest in high technology and added-value jobs, which is how Israel competes at the highest levels, with or without these added natural resources.” 

“Obviously, Israel could get inflation if all this new money suddenly entered the economy or was put into unnecessary construction projects or unneeded infrastructure, but as long as the path is followed to focus on hi-tech exports, education, science and applying all those lessons to the tough spots in the economy, Israel will emerge much stronger,” he said. 

“Beyond all the numerical comparisons, what Economics of the Middle East and North Africa showed was the impact of policy choices in how the world compares Israel to its regional rivals. What the Israeli miracle shows is how a state can maintain its identity – in this case, Jewish – while embracing the best of what is available from around the modern world,” Professor Pelzman said. 

“In the case of the Arab countries, the question is, how did the inventors of ‘algebra’ totally lose their relevance in the global market of ideas, and thus their position among the world economies?  And the answer is that in their zeal for self-preservation from any Christian influences, Muslim countries totally closed themselves off to the world’s ideas, and never thought about the consequences,” he said. “What we’ve done in this comparative study is try to understand their policy choices, as it relates to economic strength, and by comparing that point-by-point to Israel, yes, the Arab countries certainly do not come off well.” 

In January, Professor Pelzman’s graduate-level economics class, with the same title as his new book, will begin at George Washington University’s Elliot School of International Affairs, and is expected to attract many Arab students from GW’s Institute of Middle East Studies (IMUS). What he’s waiting for is the response from the Kuwaiti government, major financial backers of IMUS, which haven’t caught wind of the new course, or any of its controversial conclusions, including all the ways Israel’s economy is superior to its Arab neighbors. 

“This is going to really tick them off,” Professor Pelzman said.