This Sunday, the government is due to discuss policy on gas exports. Russia, Turkey, the US and Cyprus are all closely following the decision making process. The question that interests these countries is not so much whether Israel will export gas, as how. Constructing a pipeline to Turkey would give Israel entreé to the geopolitical arena and to the major league. Official and unofficial Israeli representatives are already talking to their Turkish counterparts. Several senior figures in the Turkish government have recently spoken in favor the export of gas, and for its part Israel has authorized special energy envoy Michael Lotam to coordinate negotiations with the Turks. In an exceptional step, the Antitrust Authority director gave the go ahead to the Leviathan gas field partners to open business negotiations with Turkish companies, because of the political importance of such talks.
The argument over the method of exporting gas begins where the argument about exports as such ends. The amount of gas that the government will approve for export will be sufficient for one large export project. Two possibilities are on the agenda: laying a pipeline on the seabed from the Israeli gas reserves to Turkey; or constructing a huge land-based installation for liquefying gas that will enable the gas to be exported to China and the markets in the East.
Economists versus politicians
The contest between the Turkish pipeline and the LNG installation is taking place on several levels simultaneously: economic, political, and strategic. At the economic level, a victory on points emerges for the LNG installation. The reason for that is that gas prices in China and the East are currently 50% higher than the price that would be obtained via a pipeline to Turkey. The Tzemach committee on gas exports had in mind the LNG option and no other. Since constructing an LNG facility will cost $10-15 billion, as much gas as possible needs to be exported to justify the project. During the Tzemach committee hearings, National Economic Council head Prof. Eugene Kandel calculated for the other committee members the minimum quantity of gas that would justify constructing a standard installation with two production lines (trains). The quantity of gas that the committee recommended for export was determined according to that calculation. The final quantity decided upon by the Minister of Energy and Water Resources reduces the Tzemach safety margin but still leaves enough gas to make constructing an LNG installation worthwhile.
The possibility of constructing such an installation drew Israel to Australian company Woodside, which specializes in constructing similar installations in Australia. Woodside agreed in principle to invest $1.5 billion in buying 30% of the Leviathan field, with the intention of constructing the installation for exporting the gas produced to its customers in China.
Woodside's CEO recently declared in an interview with an Australian newspaper that the company had no intention of going through with the Leviathan deal if it was decided to export the gas from it by a different method, and not via an LNG installation. Woodside's stance has prompted different approaches by its prospective partners. US partner Noble Energy is considered a firm supporter of Woodside's position. The Israeli partners in Leviathan on the other hand, Delek Group Ltd. (TASE: DLEKG) and Ratio Oil Exploration (1992) LP (TASE:RATI.L), are perceived as wavering between the LNG installation and the Turkish option.
Alongside its clear advantages, the LNG installation also has large disadvantages. The main one is the difficulty in finding a suitable coastal site in Israel for building it. This is a huge and dangerous plant that must be a distance of one kilometer away from the nearest residential area. The state controlled Eilat Ashkelon Pipline Company (EAPC) wants to construct the plant in the Gulf of Eilat in order to shorten the distance to the East, but the Ministry of Environmental Protection has already announced that it will oppose such a project. The State of Israel has been trying for five years to build a small gas terminal in the Hefer Valley and Dor Beach area. It is very doubtful whether it is capable of deciding upon, and obtaining the permits for, constructing an LNG installation.
The gas pipeline to Turkey, by contrast, is a relatively simple project that does not require special permits and approvals. This is a project similar to the pipeline that connects the Tamar gas field to the Israeli shore, and it can be completed within two years. Turkey is of course a gateway to Europe, but the Turkish market alone could absorb the quantities of gas that Israel can supply. It is a market growing at the rapid rate of 3% a year, currently consuming 50 billion cubic meters (BCM) of gas a year. Russia supplies two-thirds of that quantity, with the rest coming via pipelines from Iran and Azerbaijan, and a small amount in the form of liquefied gas that Turkey imports from Algeria. All the sources apart from the Russians sell the gas to Turkey at a much higher price than the prices the Israeli developers could offer. Even those prices, they say on the Israeli side, are highly profitable for the developers. Israeli sources estimate that the payback period for the investment in the Turkish project would be just two years, so that even if a crisis were to erupt in Israel-Turkish relations, the risk is not all that great.
This is where the political level comes in. On this level, the pipeline to Turkey beats the LNG installation by a knock-out. "The pipeline to Turkey is a diplomatic instrument that could have a dramatic effect on our standing in the region," diplomatic sources in Jerusalem told "Globes". "The LNG installation, on the other hand, has no geopolitical utility. You can't 'paint' Israeli gas sold to China."
Gas and politics are very closely bound up with each other, especially in our region. Gas, it turns out, has considerable influence on the diplomatic and strategic planes. Take for example Hezbollah secretary-general Hassan Nasrallah, who has spoken out against Israel's gas discoveries several times in the past. Since Lebanon itself started encouraging gas exploration, Nasrallah has fallen silent. "The money in gas is so big that it gives even Nasrallah pause," an Israeli source in Jerusalem says, pointing out that the Iranians want to participate in developing the Lebanese gas reserves. Another example that arose recently is the possibility that Prime Minister Benjamin Netanyahu promised Russian president Vladimir Putin that Israeli natural gas would not reach Europe, in return for Putin freezing the sale of S300 ground-to-air missiles to the Syrians. This possibility was raised in a question submitted in the Knesset by Meretz chairperson Zahava Gal-On. Netanyahu has yet to respond to this question, but the subject of gas did arise in the recent meeting between the two leaders.
As far as is known, the US administration is an enthusiastic supporter of the Israeli-Turkish pipeline link-up. Just as the Americans are putting pressure on Israel to supply gas to Jordan, the Palestinian Authority, and perhaps even to Egypt, they see in the laying of a gas pipeline to Turkey a way of strengthening ties between the two most important US allies in the Eastern Mediterranean.
The Turkish option also entails political risks. The first is that the Russians generally oppose anything that they perceive as being in the interests of the US. Beyond that, Putin's administration is busy defending the interests of Gazprom. The Russian government gas giant is engaged in a battle for survival to keep its European customers, and any rival gas source is seen as a threat. Even if Israel undertakes that its gas will not find its way to Europe via Turkey, the Russians are liable to object to the gas reaching the Turkish market.
Another country with a big stake in Israel's decision is Cyprus. This small country wanted to construct an LNG installation on its soil via which to export Israeli gas to the East, but in effect the Tzemach committee rejected that idea. A pipeline to Turkey would be liable to leave the gas discovered off Cyprus's shores in the ground, but on the other hand it could be that the pipeline will have to traverse Cyprus's Exclusive Economic Zone, in which case Israel and Turkey will have to secure Cyprus's agreement.
The experts are not unanimous about the diplomatic potential of the gas. Dr. Brenda Shaffer, an expert on Central Asia, argues that gas pipelines between countries don't ensure peaceful relations between them. As an example, Shaffer cites the blowing up of the Egyptian gas pipelines in Sinai, which led to energy crises in Israel and Jordan. Israel government sources however see things differently. "The difference between a deal with Turkey and the Egyptian gas deal is that here the stick is in our hand and not over our head," an Israeli source told "Globes".
Published by Globes [online], Israel business news - www.globes-online.com - on June 19, 2013
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