Eastern Mediterranean energy market. Interview with Karen Ayat

The Eastner Mediterranean is attracting the attention of the energy analists and international companies after the discover of the natural gas offshore Leviathan and Tamar. This discover means that the region could become in the future a natural gas energy seller with significantly consequences in the local economies. We met Karen Ayat, energy analyst specialised in the Eastern Medirerranean market, with the aim at understanding better the current situation in the region and the future developments.

How the offshore Leviathan field  could increase the Israeli economic development? In your opinion, could it represent the “key” to change and to improve the Arab-Israeli relations?

“The Leviathan field is located 130 kilometers of Haifa in waters 1,500 meters deep. It is Noble Energy’s largest discovery offshore Israel and is estimated at 21 Tcf. In a June 2013 decision, the Netanyahu cabinet approved gas exports at a 40% quota of the proven reserves. The High Court of Justice ratified the contested decision in October 2013. The Israeli government believes that the sale of gas will bring it as much as 60 billion shekels to the Israeli economy, funds that will be allocated to employment opportunities, infrastructure, health and education projects. The government is also taking various measures aimed at counteracting the potential downside of a resource boom (such as preventing the Dutch Disease).”

Energy may not fundamentally alter the historically tensed relations between Israel and its Arab neighbours. However, temporary partnerships may happen such as sale deals between Israel and Jordan or Israel and Egypt. Such deals remain fraught with political sensitivities and the Arab governments will need to manage domestic sentiments when announcing deals with their Israeli government. For example, and to justify the recent talks between the American Noble on behalf of the Leviathan partners and Jordan’s State Owned National Electric Power Co, Jordanian officials said it was not a deal discussed between the state of Jordan and the state of Israel. The Jordanian Government explained the talks as being held being Jordan’s National Electric Power co and the Texan company Noble Energy.

Some analysts, particularly those based in Russia, has argued in the last months that the Israeli military operation in Gaza, caused according to Tel Aviv after the death of the three Israeli teenagers and with the purpose of fighting terrorism, was a strategy thought by Israel to limit the Palestinian gas exports to Arab countries. What do you think about this idea? Could we consider the last military operation a direct consequence of the improving relations between British Gas Group and the National Electric Power Company (NEPCO) of Jordan?

“Israel does not need to attack gaza in order to prevent it from exploiting the gas. Israel has imposed a land, air, and sea blockade on the Gaza Strip since 2007. I believe the recent Israeli action on Gaza is independent from the gas. The Gaza Marine field was discovered in 1999, and since, Palestinians were unable to develop their field, estimated at 1 Tcf (hence commercially interesting for the Palestinians). The inability of the Palestinians to bring their field to production is due to the political problems with Israel. I find it difficult to imagine a successful development of the Gaza Marine field that will lead to sales to export markets. However, hypothetically speaking and assuming that the Gaza Marine field reaches development stage, it does not compete with Israeli gas given its size (1 Tcf as opposed to 21 Tcf in the Leviathan).

Thanks to its position, could the Gaza Marine field represent a direct competitor for the Leviathan field? What are the difference between the two fields? Which has the best marketing strategy at the moment?

“I do not think that the Gaza Marine field competes with the Leviathan given its relatively small size. Furthermore, I find it difficult to believe that the Gaza Marine field will be developed as long as problems with Israel persist.”

What could be the Israeli export strategy in order to sell the natural gas to European and Asian markets?

“Israel’s export strategy has been the object of various speculations. Israel’s talks with Woodside led to believe the country was exploring an LNG possibility. However, talks with the Australian giant fell when a tax dispute with the Israeli opportunities arose. A pipeline from Israel’s Leviathan to the Turkish coast was also thought to be a possibility. However, the recent Israeli action on Gaza destroyed this scenario as it deteriorated the recently ameliorated (by the Obama-brokered Israeli apology) the Turkish-Israeli diplomatic relations. Such a scenario is also complicated by the division of Cyprus. Cyprus was for a while hoping to get the contribution of Israel in the building of its Vassilikos LNG. The Israelis did not express such an interest.

Therefore, Israel is likely to adopt its own export strategy. In fact, years of dependence on Egyptian gas have taught Israel a lesson, that is not to depend on a foreign state. Israel suffered from the disruptions of Egyptian gas and is unlikely to put its gas exports under the control of a foreign state. To avoid doing that, the country will most likely opt for a diversification of routes to ensure the continuous and uninterrupted flow of Israeli gas to export countries.

Talks between the Leviathan partners and Jordan’s State Owned Electric Power Co. revealed the interest of Israel to take advantage of the momentum, that is Jordan’s quest of energy security and its need to reduce a spiking energy bill due to the purchase of expensive fuel products in replacement to the disrupted flow of Egyptian gas. Talks between the Tamar and Leviathan partners with the operators of facilities in Egypt also revealed Israel’s intention to use Egypt’s export terminals to reach distant markets. Egypt will therefore not only buy some of the Israeli gas, but also facilitate its transport to lucrative markets, such as Europe and more importantly Asia where gas has a very high price tag.”

Israel is looking for a way to export its natural gas while Cipro is involved in drilling explorations in order to define its export strategy. Could the two countries cooperate and help each other? In which way?

Cyprus has the ambition to become an energy hub for the Eastern Mediterranean via its planned LNG terminal at Vassilikos that would welcome and process gas from neighbouring countries. However, Israel has not expressed an interest to pool costs and efforts with the island in order to allow it to take a final investment decision for the construction of the facility. Cyprus is now conducting further exploratory activities (by ENI/Kogas and soon by TOTAL and again by Noble) in the hope to encounter additional amounts of gas and commence the construction of the terminal. A collaboration with Israel could be possible in the future, but in the near term, Israel is planning its own solutions.

Noble has drafted an export strategy that is currently being reviewed by the competent Israeli authorities. It is expected that the strategy will encompass sales to immediate neighbours as well as ways to sell to far-reaching markets via pipeline and LNG.”

Do you think that the East Mediterranean could be involved into the European energy strategy with the purpose of diversifying the import route of gas, especially after the Ukrainian crisis and the tension between the European Union and the Russian Federation?

“European efforts to increase energy security and loosen Russia’s grip over the European market coincide with the emergence of the Eastern Mediterranean as a natural gas producing region. However, I do not believe that the East Med will free Europe from Russia. Several reasons are opposed to such a scenario: the quantities in the East Med are relatively modest, East Med gas will not reach the European markets immediately (Cyprus is still conducting exploratory activities, the construction of its LNG terminal when it discovers sufficient amounts of gas will also require 6-10 years, Lebanon has not even launched its first licensing round and Israel’s Leviathan will reach production 2018 and the export strategy is still being finalised).”

Interview written by Giuliano Bifolchi and published originally in Italian on Notizie Geopolitiche.