Israel’s Energy Future: A CHANGE IN THE GAME

Israel’s Energy Future:  A CHANGE IN THE GAME

The name Yuval Bartov is not well known even in energy circles, yet he did something historic and world-changing. While taking samples of rock in the Middle East in 2009, he pulled up a sample of rock that contained oil. He was southwest of Jerusalem, Israel. 

Oil in Israel

Here at the beginning of the 21st Century, energy exploration has the look of a science fiction movie. A man on a ship in the ocean sends a signal to a satellite in space, where it is sent to a robot on the ocean floor, thousands of meters under the water. Sound waves can be sent kilometers under the ground and a map can be drawn of the mineral make-up of the rock layers. One use of this technology is to improve the output of current projects, like the idea of extending the life of current wells and drilling sites. Another by-product of these advances is the creation of new players in the global energy market. Twenty years ago, no one would have thought of the eastern coast of Brazil, the Kuril Islands in the South China Sea, or the Sudan as producers of large amounts of oil and/or gas. Now Israel.

To say the least, oil and gas have never been a part of Israel’s national identity. In 1986, Israel officially abandoned its state-sponsored petroleum search. Between 1948 and 1986, it sunk 440 wells into the deserts of Israel, all of them dry. Now, all of that has changed. “We think that within a decade we can get 50,000 to 100,000 barrels a day,” says Relik Shafir, Chief Officer of the Israeli Energy Initiative.

Making matters even stranger, Israel also seems poised to become a force in not only oil, but also natural gas. In 1999, the tiny Noa field was discovered, however 2010-2014 has seen an explosion of gas field discoveries. This leaves Israel with an embarrassment of riches that no one expected, and it must now decide a number of questions. Which to exploit first? Use the energy for themselves or sell on the international market? Who to sell to? Everyone is watching and waiting for answers. “If we are successful, it will be a strong push to the economy, and to the strategic objective to become energy independent,” said Gabi Ashkenazi, Shemen Oil and Gas Chairman,“oil will be an important factor in this.”

Natural Gas, The Better Option for Today

As the oil was being discovered in Shefla, Israel’s energy prospects seemed to get even better. After a small natural gas find in the Noa field, and a slightly larger one, (Mari B), in 2000, there was an explosion in natural gas discovery in the eastern Mediterranean Sea between 2009 and 2013. Specifically, the two fields that we will be discussed are called Tamar and Leviathan.

Tamar was discovered in 2009, 80 km off the city of Haifa, and came online in March 2013. By itself, it can meet Israel’s natural gas needs for the next 25 years. It will serve as the nation’s “safety net,” leaving all the rest of their discoveries for export. When at full capacity, this find can put out 300 million c/f per day.

Leviathan is the second natural gas find, which is 50 km off the coast, in water, shared by Israel and Cyprus. This is the find that expected to turn Israel into an energy exporter. It could also provide the initial fuel to heat the Kerogen oil fields. Noble Energy, along with Delek Drilling LP, and Avner Oil Exploration (AVNRL), believes that a layer of rock below the gas field may contain the equivalent of 210 million to 1.5 billion barrels of oil. Leviathan will be drilled in 1,600 meters of water and then probe a further 6,500 meters through the rocks below. Advanced technology is absolutely imperative for Israel to realize its energy goals. It needs the know-how that has been used to drill in the U.S. Gulf of Mexico and off the coast of Brazil in deep ocean water. “Thanks to advances in drilling technology, Israeli companies and their international partners can now reach greater depths that will enable exploration at lower geological levels than ever before,” Yossi Abu, chief executive officer of Delek Drilling, said in a phone interview.

“What Israel also needs to consider is that natural gas is a better option for today,” states Dr. Gordon Hughes, University of Edinburgh. In a world that is concerned about global warming and carbon footprints, natural gas is a growing market. For example, Turkey, over the last 20 years has gone from having natural gas providing 6% of its total energy needs to almost 30%. This is a trend all over the world. “Solar and wind simply are not cost-effective enough to make a serious contribution to the world’s energy problems,” states Nicolas Loras, The Daily Signal. Natural gas can. There is also a lot of it. According to the U.S. Geological Survey, recoverable natural gas in the Levant Basin located in Israeli and Cypriot waters, amounts to 18.9 trillion c/f.

What the Future May or May Not Hold

Israel faces many challenges in exploiting its new energy wealth. According to Joshua Beagleman, Chief Operating Officer of Universal Oil and Gas, It has to get the gas and oil harvested, it has to find buyers willing to purchase it, and last of all, it has to find ways of delivering it. Due to its very controversial history in the region, many geo-political factors have to be taken into account. Its new supply will exceed the demand of the entire nation for the next 50 years. This means that it is inevitable that Israel will become a player on the international market. The amount that they possess does not make it a powerhouse, however it can be used as leverage far beyond its actual monetary worth by choosing carefully where it is sold in Europe and Asia. “Natural resources in the region, especially in energy, are providing an opportunity to co-operate with some of our neighbors, maybe with Jordan, maybe with Turkey and other places,” said Ashkenazi, “Energy is important, like water.”

Natural gas neither flows to spot markets nor is it sold en route to the consumer, like oil. There is no Global Market Price, like Brent Sweet Crude, for example. Gas is priced unique to each deal. The infrastructure to transmit gas, whether from pipelines or liquefaction is complex, demanding, and expensive. Marketing agreements and supply patterns are locked in for the long term. Even LNG is locked in this way. Countries supplying and receiving the gas link their central energy policies to the expectation of a particular supply chain and a particular diplomatic relationship. Thus, severing a given source is something that is not easily replaced by oversupply from somewhere else. All of a nation’s gas supplies are important, even when a supply is relatively small. Even small amounts of Israeli gas can carry significant leverage.

Overview of Israel’s Neighbors

The world, and arguably the Middle East, is a rapidly changing place. The list below gives a brief outlook of the countries that are Israel’s potential customers (or rivals), and how things stand in the present.

JORDAN – Jordan holds a lot of promise as an energy business associate of Israel. They have just signed a deal that will deliver 500 million c/f of gas over the next 15 years. This comes from the Tamar field. According to John Reed of Oil and Gas Magazine, There are also some in the Israeli government that favor basing an export system on building a liquefaction terminal at Aqaba on the Red Sea. This would also foster a close business relationship between the two and would advance the cause of peace. It also would be an ideal shipping point for an emerging Kurdish state. This brings about a lot of opposition in the Knesset. Even though it did not get as much negative press as some other countries, there were serious demonstrations against the government. The problems in Egypt at the time of the fall of Mubarak could make Israel wary of getting into a similar situation. The IDF, (Israeli Defense Force), was asked to guarantee the safety of a station at Aqaba from sabotage. The IDF replied that the only way to do this would be if they could actually occupy the site, making the controversy more than the site would be worth.

LEBANON – Lebanon has a dispute with Israel over what constitutes their territorial waters. They have asked the U.S. to arbitrate the matter. Sharon Usdain, National Geographic News, states that, even if granted a favorable ruling, the government does not have the strength or the longevity to negotiate a long-term deal with a multi-national company. Also, spillover from the war in Syria makes investment problematic.

SYRIA – Syria has territorial water disputes with both Israel and Cyprus. A country plagued by civil war that seems unceasing. It will be a long time before Syria can do anything but scare off business in the region.

PALESTINE – Recently, Israel signed a $1.2 Billion deal for a 20-year supply of natural gas with the Palestinian Authority. Also, early this year, Israel agreed to supply a power station in Jenin with gas from their field.

EGYPT – There is still a certain degree of bitterness from both sides of Egyptian/Israeli energy dealing. Israel saw all of the gas coming from Egypt threatened by Bedouin attacks and sabotage, and finally their supply was cut off altogether. Lingering acrimony in Egypt over corrupt members of the government selling gas to Israel at below-market prices could hamper future plans. Still, there is a lot of potential to be exploited. British diplomats have been pushing the idea of linking the Noble fields off the coast of Israel to LNG plants run by BG and BP in the Egyptian city of Damietta. Egypt itself might be another potential customer. The pipeline to Israel could be reversed, if security could be guaranteed. Another option might be an undersea pipeline to the Nile Delta, reported Calev Ben-David, Bloomberg.

Recently, the owners of the Tamar gas field plan to sign a 15-year deal to export 2.5 trillion cubic feet of gas to a Spanish-owned liquefaction facility in Egypt. Partners in the Tamar gas reserve—which include Houston’s Noble Energy, Israel’s Delek Drilling, and Avner Oil and Gas—signed a non-binding letter of intent in May to supply gas to the Union Fenosa Gas LNG plant, which is underused because of the energy crisis in Egypt. According to a report by Reuters, the deal is to be completed in 6 months, and is considered very sensitive. Egypt struggles with a surge in demand for natural gas, leaving Union Fenosa and BG Group with unused capacity at their LNG facilities in the country. Egypt’s Petroleum Ministry officials are seeking details on the deal with Union Fenosa. Any deal would have to have government approval and be “in the best interests of the country.”

CYPRUS – Israel, initially, was very enthusiastic about doing energy business with the Cypriots. After the discovery of the Leviathan field, they signed an agreement with the island nation sharing the fields. By 2020, Cyprus hopes to have Vasilikos—a processing and shipping center—up and running, shipping LNG to Europe, and possibly Asia. The early thought of running a pipeline to Cyprus, and then to Greece has cooled due to the following three reasons.

The role of Russia and Gazprom in the area;

Corruption in the government of Cyprus itself; and

Trouble with Turkey over the islands.

TURKEY – Turkey initially would seem like an ideal candidate for a gas deal with Israel. Over the last quarter century, the country has experienced a surge of natural gas consumption as an overall percentage of national energy use, up from 6% to 30%. In 2013, Israel’s Director General of the Ministry of Energy and Water Resources, Saul Tzemach said, “Turkey could be an anchor customer. There are quite a few geopolitical barriers, but if we know how to create the right conditions, it is possible. Gas could be used as a stabilizing factor that leads to cooperation between countries and includes multi-nationals and international parties with an interest in stability.” Officials in Turkey were not that eager. According to the Energy Ministry, Israel would have to first re-work any deals with Cyprus over Leviathan and a pipeline in Turkey’s favor, (the agreements were signed with the Greek-controlled half of the island). As reported in the Daily Sabah, from a national point of view, Israel would also have to:

Apologize openly for the Mavi Marmara incident

Compensate the victims and their families

End the blockade of Gaza

None of these things seem likely to happen. Even if they did, such a pipeline would be subject to political blackmail from Ankara as well as sabotage. We must remember that the instability of the Turkish pipeline system is the reason that they are interested in Israeli gas in the first place.

EUROPE – Europe has a sufficient supply of natural gas without Israel, but their supplies are not certain in any way. According to the U.S. Global Energy Survey, there are five existing pipelines, or proposed pipelines, supplying gas to Europe from North Africa.

Trans-med Pipeline- carrying 30.2 bcm/year via Tunisia and Sicily.

Maghreb-Europe Gas Pipeline- carrying 12 bcm/year via Gibralter.

Medgaz Pipeline (from Algeria to Almeria Spain)-carrying 8 bcm/year, but only now about to come online.

Greenstream(through Western Libya to Sicily)- carried 11bcm/year, but is now cut off.

GALSI pipeline-which is still being planned and will run under the Mediterranean from far Eastern Algeria.

All of these originate in the Hassi-Al-Rimi field in Algeria. In short, three pipelines carrying almost 50 bcm/year all originate in one point. However, the Europeans tried to diversify with the Trans-Saharan Pipeline to carry Nigerian gas north, and even this passes through Hassi-al-Rimi, where it joins the other three operating pipelines. This makes 18% of Europe’s gas vulnerable on this front, as reported in the U.S. Global Energy Survey.

On top of all this there is the crises in Ukraine. Not only does over half Europe’s gas flow through Ukraine—Russia and Europe have been on opposite sides of trying to bring Ukraine itself to a more Euro-centric economic policy. This has driven Russia to threaten an embargo of energy, or even the more drastic option of selling elsewhere. Israel could use this to nail down long-term agreements, and re-start Europe/Israel relations on a much brighter note.

RUSSIA – Russia is the major supplier of gas to Turkey and Europe. According to the Economist, Israeli gas trade with Europe would impact Russian domination of Europe’s gas supply. Israeli gas could stop Russia’s implied blackmail threat to cut off supply. Israeli supply, even marginal, could cause prices to drop. Unless Russia gets a controlling interest in Israel’s gas sector, Russia will feel that its’ vested interests are threatened-something neither Europe nor Israel wants.

EAST ASIA – The Economist also states that Eastern Asian nations have no vested interests in politics or religion of the area. They need gas. They will pay more. They are beginning to have gaps in supply. Europe might have problems with getting enough gas in the future, for Asia that time is now. Leviathan partners have signed an agreement with Woodside to acquire the rights to about a third of the field. They did this for liquefaction experience, marketing structure, and capital. Woodside, an Australian company, is primarily set up to market in Asia, as is CNOC, which are the only two groups that have successfully bought into the Leviathan field. The Asian countries are very concerned about shipping that goes through the Suez Canal and will want security assurances. They are also very hopeful about new source development in the U.S. and may hold off on signing large, long-term deals until they see what comes of American efforts.

In conclusion, while the destination of Israeli gas is strategically important, the context and geostrategic circumstances of how gas might be transmitted to Europe or Asia must first be examined. When examining the overall effect of the new Israeli energy wealth on the world market, there doesn’t seem to be an immediate cause for alarm for large producing countries. There are a lot of things standing in the way of huge immediate profits—environmental challenges at home as well as geopolitical issues abroad will cause Israel to go slow.


The Man Behind the Plan

In Israel’s energy endeavors Dr. Harold Vinegar is widely credited as being responsible for its successes.

According to Time Magazine, Harold Vinegar’s background in the petroleum industry was in geology, but his specialty is unconventional oil resources. Starting in 1976, he rose through the ranks of Shell Oil to become their Chief Scientist.

In 2008, he met with a man from Israel’s Petroleum Authority. He and others had been sent to Texas to try to persuade Shell to come and set up exploration and extracting of oil from the shale rock deep under Israel. However, due to the fact that Shell does business internationally, for the most part in the Middle East and North Africa, doing business with Israel was considered a risk. The company would not risk the damage to their already existing projects for something with no guaranteed return.

As a result of his negotiations with IPA, Dr. Harold Vinegar retired from Shell Oil on Oct.31st, 2008 and moved to Israel on Dec. 7, 2008 and began working for the newly established Israeli Energy Initiatives. Its parent company, Genie Energy, is chaired by Howard Jonas and has investors such as former U.S. Vice-President Dick Cheney, Michael Steinhardt, Jacob Rothschild, and Rupert Murdock.

The company discovered oil in August 2009. When asked recently how he felt about the progress of IEI, he said that he was disappointed that things were not going faster. Vinegar sees beyond the hard currency or immediate security that having locally produced energy would bring. He envisions Israel, with existing refineries, infrastructure, and seaports as a natural nexus for an “integrated energy zone.”


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