Israel's Energy Security: Regional Implications

In March 2010, the United States Geological Survey estimated a mean of 1.7 billion barrels (bbl) of recoverable oil and a mean of 122 trillion cubic feet (tcf) of recoverable gas in the Levant Basin Province using a geology-based assessment methodology.¹ The amount of the estimated oil is, in relative terms, not huge, but the estimated volume of gas is substantial. By comparison, Canada holds 62.0 tcf, Australia 108.7 tcf, and Indonesia 112.5 tcf; all are well-established producers.² These considerable potential hydrocarbon reserves can drastically change the region's energy outlook. However, recoverable deposits do not equate to production. It will take several years to exploit these resources. Full utilization will also depend on national strategies and whether regional states will reach an agreement on maritime borders. In other words, geologically recoverable hydrocarbon deposits are available, but geopolicy to recovering them is still being played out.

Israel is the exception. Probably more than any other country in the Middle East, Israel's energy outlook is highly idiosyncratic; with one of the most developed economies in the region, and a high standard of living, Israel requires secure and sustainable energy supplies. The Jewish state is located close to the rich oil- and gas-producing countries in the Persian Gulf and North Africa, yet political animosity has prevented any cooperation for most of the last several decades. Furthermore, worrying about antagonizing Arab producers (and later Iran), many international oil and gas companies were reluctant to start operations in Israel. These complicated geopolitical dynamics have left Israel with limited energy resources and forced it to depend on remote suppliers in Russia, Central Asia and Latin America, among others.

Israel's energy outlook started to improve in the late 2000s through an agreement with Egypt, under which Cairo agreed to supply Israel with a large proportion of its gas needs. Equally important, Israel discovered a number of natural-gas fields. These fields, when they come on line, have the potential to transform Israel into a gas exporter. This rosy scenario, however, faces a number of hurdles both in the short and long terms. The toppling of President Hosni Mubarak in February 2011 raised questions about the sustainability of natural-gas supplies from Egypt at cheap prices. Meanwhile, several of Israel's Mediterranean neighbors have claimed that the newly discovered gas fields are located inside their own borders. Bluntly put, some claim that Jerusalem steals their gas. It seems these lucrative discoveries caught everybody by surprise, including the Israeli government. After long debate, the Knesset decided to raise taxes on hydrocarbon resources.

This essay seeks to examine these recent developments in the eastern Mediterranean. In the first section, I discuss the changes in Israel's energy sector and the controversy over state taxes. In the second, I analyze the regional context — Lebanese and Turkish claims in the Levant basin. These claims and counterclaims aside, Israel is likely to move fast in developing these natural gas fields. Lebanon, Turkey, Egypt and Syria are likely to invest more resources in searching for oil and gas off their own shores. This is followed by an examination of the Egyptian gas pipeline. The analysis suggests that, rhetoric aside, Egyptian supplies will continue, but Israel will have to pay a higher price.

ISRAEL'S ENERGY OUTLOOK

Traditionally, Israel has had very limited indigenous energy resources. In 2009, the country's total petroleum production was 4.03 thousand barrels per day (tbd); crude production, 0.10 tbd; consumption, 235.00 tbd; net imports, 230.93 tbd; and proven reserves, 0.00. The figures for coal are even worse: total production, 0.000 short tons; consumption, 13.935 million short tons; net imports, 13.935 million short tons. The natural-gas sector is relatively better: total production, 55 billion cubic feet (bcf); consumption, 115 bcf; imports, 60 bcf; proven reserves, 1 trillion cubic feet.³

These very limited proven hydrocarbon reserves make Israel heavily dependent on foreign supplies to meet its energy needs. Confronting this vulnerability, Israel, like many other energy-consuming countries, has pursued a multi-layer energy policy. This includes encouraging indigenous production, diversifying the energy mix and sources, and establishing a strategic petroleum reserve.

Israeli leaders argue that promoting energy diversification and reducing their country's heavy reliance on fossil fuels will enhance not only energy security, but also broad national security. President Shimon Peres has stated, "Oil is becoming the greatest problem of our time. Not only does it pollute, but it also supports terror and violence."⁴ In November 2010, the government approved a plan to spend $600 million over the next decade to generate 10 percent of its electricity from renewable sources. Prime Minister Benjamin Netanyahu presented the plan as a security necessity: "I view this as a national goal of the highest importance because the addiction to oil has led to the Western world being dependent on the oil producing countries and harms the standing and security of Israel."⁵

Currently, solar energy provides less than 0.1 percent of Israel's energy demand, which is rapidly outpacing supply. Israel's government and bureaucracy have been slow to adopt policies to support renewable energy. In recent years, however, this stance has significantly changed. In December 2010, the Israeli company Arava Power Co. started work on the country's first large-scale solar field in the Arava Valley, a sparsely populated tract in southern Israel. The field will have a capacity of five megawatts, a tiny fraction of the country's 11-gigawatt power grid.⁶ Other plans to utilize wind power and geothermal energy are either in the planning process or under consideration. Finally, Israel already has two nuclear reactors, one at Dimona in the Negev Desert and a research facility at Nahal Soreq near Tel Aviv.

Despite the efforts to diversify, Israel is heavily dependent on fossil fuels to satisfy its growing energy needs. Coal provides about one-third of the country's energy consumption, almost exclusively in electric-power generation. All coal supplies are imported from foreign countries (South Africa, Colombia, Australia, Indonesia, Poland, China and others).⁷ Like coal, Israel's oil production is very limited. Foreign suppliers provide the bulk of the country's oil needs. In recent years, Russia, the Caspian Basin and Africa have emerged as Israel's major sources of oil.

Efforts in oil exploration were made as early as 1947 (before the state was officially created in 1948). Petroleum exploration began in 1947 on a surface feature in the Heletz area of central Israel; the first discovery, Heletz-I, was completed in 1955.⁸ Since then, a few small wells have been discovered and developed, mainly in Kokhav, Brur, Ashdod and Zuk Tamrur.⁹ The 1967 war represented a turning point in Israel's oil sector. After defeating Egypt, Israel occupied the Sinai Peninsula and controlled its oil fields for almost a decade. Thus, by 1971, the Israelis produced a "total of 43.2 million barrels of oil, approximating their country's annual domestic consumption."¹⁰ Stated differently, in the early 1970s Israel was self-sufficient in oil production due to the lucrative oil fields in Sinai.

The state of self-sufficiency did not last long. In the aftermath of the 1973 war, and following lengthy and complicated negotiations with Egypt, Israel withdrew from Sinai and lost control of the oil fields. The Pahlavi regime in Iran became the major oil supplier to Israel in the mid-1970s. The Iranian role did not last long either; in 1979, Ayatollah Khomeini led a revolution that toppled the shah. Iran's oil exports to Israel came to a halt. Anticipating the fall of the shah's regime, Israel built up a six-month oil-supply reserve in 1978.¹¹

In the mid-1980s, the Israeli government carried out a comprehensive geological analysis of the entire country. The study provided detailed exploration data and comprehensive maps of all previous petroleum explorations. Since the mid-1990s, some modest oil discoveries have been made around the Dead Sea and offshore in the Mediterranean.

To sum up, the decades-long efforts to discover oil at a commercial level have not succeeded. As of now, the country's oil production is negligible, and Israel remains heavily dependent on foreign supplies. Second, Israel has sizable deposits of oil shale. The World Energy Council estimates that Israel's shale deposits could ultimately yield as many as 250 bbl of oil.¹² This non-conventional source of petroleum is "sedimentary rock containing organic material from which liquid fuel may be extracted at a rate of 15-17 gallons of oil per ton of shale."¹³ Deposits of oil shale have been largely neglected all over the world because it is so difficult to separate the fuel from the stone.¹⁴ Usually, high oil prices make developing oil shale profitable. Given the lack of indigenous oil deposits and the country's vulnerability to interruption of supplies, Israel is trying to utilize its oil shale. However, oil-shale processing is water-intensive, and Israel's water scarcity remains a challenge to the development of this resource.

Third, Israel has two major refineries, one located at Haifa and the other at Ashdod. Their combined production meets all the country's needs of refined oil products. For decades they had been owned and operated by a government entity, Oil Refineries Limited. In order to improve efficiency and increase competition, since the mid-2000s, both refineries have been sold to private entities.¹⁵ Fourth, the Israeli government continues to play a dominant role in the ownership, operation and regulation of the energy sector. Since the early 1990s, limited measures to privatize the sector have been introduced, and foreign companies have been invited to explore and develop the country's energy deposits, particularly natural gas.

Since the mid-1990s, Israeli officials have shown great interest in natural-gas exploration and development. According to the Ministry of National Infrastructure, Israel is "actively striving to diversify the sources of energy by the introduction of natural gas as a primary, environmentally friendly, and cheaper fuel than other forms of energy."¹⁶ The search for natural-gas deposits started in the 1950s. In 1958, the Zohar field was discovered, followed by Kidod in 1960 and Kannaim in 1961.¹⁷ The three fields had very modest reserves. The breakthrough came in the late 1990s and early 2000s, when a significant volume of natural gas was discovered offshore, particularly in two fields: Mari and Noa, with combined reserves of nearly 1.5 tcf. These reserves have been developed mainly by two entities: the Yam Tetis group, a joint U.S.-Israeli consortium, and British Gas (BG) in partnership with other international companies. The Natural Gas Authority, established in 2002, is the regulatory body of the industry. The main consumers are the Israeli Electric Company and industries such as Israel Chemicals and Nesher Cement.¹⁸ In addition, natural gas is being considered as a source of inexpensive fuel for water desalination.

More substantial natural gas discoveries have been made off the coast of Gaza. In November 1999, BG signed an agreement with the late Yasser Arafat, Chairman of the Palestine National Authority, securing Palestine's first exploration license.¹⁹ Shortly after signing the agreement, BG announced the discovery of a large gas field, Marine-I, in Palestinian territorial waters (about 15 miles off Gaza). These deposits are believed to be sufficient to meet Palestinians' natural-gas needs and provide additional amounts for export. Since then, Israeli and Palestinian officials have negotiated possible natural-gas deals. Lack of political trust, however, has complicated the negotiations.

An important conclusion can be drawn from this brief discussion of Israel's energy outlook. The Israeli government, scientists and private entities have invested substantial resources and effort in diversifying the country's energy mix away from fossil fuels and into renewable sources, particularly solar power in the Negev Desert. However, as in the rest of the world, fossil fuels continue to dominate the country's energy sector. Oil accounts for almost half of the country's primary energy consumption; coal, 35 percent; and natural gas, 11 percent.²⁰ This heavy dependence on fossil fuels has made Israel vulnerable to supply interruption and price fluctuation. The recent natural-gas discoveries are likely to change these parameters.

RECENT GAS DISCOVERIES

For most of Israel's history, energy entrepreneurs searched in vain for oil and natural gas, lamenting the country's lack of energy resources in a region awash in hydrocarbon deposits. Few countries had looked so hard with so little result.²¹ Israel's luck started to turn with a modest offshore gas find in 2000. The first noteworthy hydrocarbon discovery in the area was made in March 2000 off the coast of Israel, west of the city of Ashkelon. Mari-B, Moa, and Nir gas discoveries lie 15-23 miles off Ashkelon and about 40 miles southeast of Israel's maritime border with Cyprus. This find, which ultimately was determined to contain about one tcf of natural gas, encouraged additional exploration.²² For the next several years, Israel relied on this gas as well as supplies from Egypt.

In 2009, a major offshore gas field was discovered: Tamar, containing 8 tcf, one of the largest gas finds in the world and, at the time, the largest ever for Israel.²³ The 250-square-kilometer structure is about 40 miles (65 kilometers) southeast of Israel's maritime border with Cyprus. It is a joint venture between American and Israeli companies and includes consortium participants Noble Energy, Isramco Negev, Delek Drilling, Avner Oil Exploration and Dor Gas Exploration.²⁴

In late 2010, another major gas discovery was made 80 miles (about 130 kilometers) offshore from Haifa and about 29 miles (47 kilometers) southwest of Tamar. Named Leviathan, it is estimated to contain about 16,000 tcf of gas, making it one of the world's largest deepwater gas discoveries of the past decade.

To sum up, since 2009 approximately 24 tcf of natural gas has been discovered offshore from Israel, and the fields are being developed. These abundant reserves in the Tamar and Leviathan fields far exceed Israel's domestic consumption (approximately 200 bcf annually) and could drastically change Israel both domestically and internationally. Israel's electricity sector will likely be able to switch from mainly coal to natural gas. Such a switch will improve Israel's trade balance and reduce carbon-dioxide emissions. These new reserves could also transform Israel into a gas exporter; Israeli leaders have already started exploring potential markets. In late 2010, Prime Minister Netanyahu offered to export natural gas to Greece.²⁵ Given geographical proximity and close political and economic ties, Europe seems an attractive target. Furthermore, European leaders are seeking to diversify their gas suppliers. Of course, if Israel decides to pursue this option, it will have to compete with other gas producers and exporters such as Russia, Norway and Algeria.

Another important impact of these gas discoveries will be felt in the country's financial sector. Unlike in many other countries, there is no single authority in charge of drawing up and executing Israel's energy policy. The Ministry of National Infrastructure is tantamount to an energy ministry, the Interior Ministry governs zoning and planning commissions, the Environment Ministry guides environmental impact and safety regulations, and the Ministry of Finance controls taxes and royalties. These taxes and royalties became the subject of intense domestic debates following the discoveries of Tamar and Leviathan. The question is, how much should the government take of the profit, and how much should private companies (both national and foreign) be allowed to keep?

Thanks to a 1952 law still on the books, Israel offered some of the world's best perks to energy companies, including low royalties and corporate taxes on exploration. The lucrative discoveries prompted Finance Minister Yuval Steinitz to consider changing these terms retroactively, allowing the government to extract better terms on previously assigned leases.²⁶ In April 2010, the minister appointed a committee headed by Hebrew University economist Eytan Sheshinski to examine the issue and propose an updated fiscal system. The Sheshinski Committee released its recommendations in January 2011 in favor of increasing the government's share of oil and gas revenues to between 52 percent and 62 percent, up from the current 30 percent. The tax increase would be phased in over time; fields that start production prior to 2014 would be partially exempt from the tax increase. In March 2011, the Knesset passed legislation approving these recommendations. According to Finance Minister Steinitz, the tax increase will generate one billion shekels annually for 30-40 years, starting in 2015.²⁷

Houston-based Noble Energy, Inc., stands to be one of the companies most affected by any changes to Israel's fiscal regime. Owning hefty stakes in Tamar and Leviathan, among other fields, the company is the biggest foreign player in Israel's gas industry. Little wonder that Noble, along with private Israeli energy companies, strongly opposed any change in the tax regime.

REGIONAL IMPLICATIONS

The impact of and controversy over the recent lucrative offshore natural-gas discoveries have extended beyond Israeli domestic policy to the broader regional context. The value of these massive gas deposits is estimated to be billions of dollars. The fields are located in a region characterized by deep mistrust and overt hostility between Israel and its Arab neighbors. Some of these neighbors are technically in a state of war with each other. Finally, maritime borders have not been established, opening the door for claims and counterclaims.

The Palestinians, Syrians, Egyptians and Lebanese have claimed that these gas fields might be located in their own waters and have accused Israel of stealing their gas deposits. Lebanese leaders, in particular, have been vocal in their opposition to Israeli explorations in the Eastern Mediterranean. Lebanese Energy Minister Gebran Bassil stated, "It is very clear that Israel's intentions are to aggress our resources." Hezbollah, which represents the Shiites, the largest sectarian group in the country and part of the government, vowed to defend the country's natural resources. In response, Israeli National Infrastructure Minister Uzi Landau warned that his government would respond "with all of our ability to protect our interests."²⁸

In recent months, both Lebanon and Israel have taken concrete steps to substantiate their claims. In August 2010, Beirut submitted to the United Nations its version of where the maritime border should be: the exclusive economic zone (EEZ). A few months later (November), it submitted its version of its western border with Cyprus. In mid-2011, the Lebanese government filed a complaint to the United Nations over the recent demarcation of the EEZ at the maritime border between Israel and Cyprus, and Prime Minister Nijab Mitaki created a government commission to defend the country's natural resources in the Mediterranean.

On the other side, Israel has rejected the possibility of indirect talks under a UN umbrella to resolve the dispute. Instead, it has called on Lebanon to begin negotiations on all border issues, not just the maritime border. Furthermore, the Israeli cabinet approved a demarcation of the northern maritime border. The Israeli line gives it more territory than the one that Lebanon submitted to the United Nations.

Rhetoric aside, it is highly unlikely that Israel and its Arab neighbors will go to war over these natural-gas deposits. Instead, the Lebanese government appealed to the United Nations, particularly to the UN Interim Force in Lebanon (UNIFIL), to intervene in defining the maritime border. In addition, the Lebanese parliament passed an energy law in August 2010, paving the way for the country's first offshore-licensing round.²⁹ The Palestinians, Syrians and Egyptians are also likely to intensify their efforts to attract international oil companies to explore for oil and gas in their respective offshore zones. Lebanon has already signed an agreement with a Norwegian company to explore for gas in what it considers its EEZ.

The disagreements over the gas fields in the Eastern Mediterranean are not only between Israel and its Arab neighbors, but also between Israel and Turkey. In the early 1970s, after an alleged coup attempt by supporters of a union with Greece, Turkish troops were sent to Cyprus, and the island has since been divided between a Greek Cypriot south and a Turkish Cypriot north. In December 2010, Israel signed an agreement with Greek Cyprus delineating the sea border between the two nations. Building on this agreement, Cyprus has licensed Noble Energy to explore a block bordering Israeli waters — the same Houston-based company with large stakes in Tamar and Leviathan. Turkey criticized these moves by Israel and Cyprus on the grounds that they disregard the rights and jurisdiction of Turkish Cypriots on the island.³⁰

Despite Arab and Turkish opposition, Israel (with Cyprus) is moving ahead with the exploration and development of gas fields. It is unlikely that the opposition will be able to restrain the development of these fields. Instead, Arab countries have been preoccupied by the so-called Arab Spring since early 2011. Meanwhile, post-Mubarak Egypt's reservations on exporting gas to Israel have underscored the Jewish state's sense of energy vulnerability and can be seen as an additional reason for Jerusalem's drive to accelerate the development of the gas fields.

EGYPT'S GAS PIPELINE

In 1979, Egypt became the first Arab country to sign a peace treaty with Israel. Since then, the Egyptian-Israeli relationship has been through several ups and downs, but the two sides have managed to maintain peace. This peace, however, is often described as "cold." Generally, Egyptians are not enthusiastic about having close cultural and economic ties with the Israelis. Despite this lack of enthusiasm, the Egyptian government signed a 15-year agreement with Israel in 2005. According to this pact, Egypt agreed to supply 60 bcf of natural gas a year to Israel via an undersea pipeline from the north Egyptian town of El-Arish to the southern Israeli coastal city of Ashkelon beginning in 2008. The Israeli minister for national infrastructure, Benjamin Ben-Eliezer, called the agreement "historic"; the Egyptian government said that the deal was "part of a strategy to diversify the nation's gas export markets and to increase gas exports."³¹ The agreement was executed by the East Mediterranean Gas Company: a consortium of the Egyptian General Petroleum Corporation, Merhav of Israel and Egyptian businessman Hussein Salem.

With the toppling of the Mubarak regime, the pipeline has been attacked more than once and supplies were interrupted. Former Energy Minister Sameh Fahmy, Hussein Salem and other top officials are under investigation on charges related to the gas deal with Israel. The post-Mubarak government claims that the deal caused the country losses of more than $714 million.³² The public prosecutor accuses these former officials of "squandering public funds" by permitting East Mediterranean Gas to trade with Israel at prices below global market rates.

The February explosion at the terminal left Israel (and Jordan) with no Egyptian supplies. Israel was forced to fire up the Ashkelon and Hadera coal plants to maximum capacity and convert several stations that run on natural gas to heavy fuel oil and diesel. This switch was very expensive in two senses. First, burning coal and fuel oil has adverse environmental impacts because of the higher emissions of sulfur dioxide, nitrogen oxide and particulate metals. Second, the costs of this switch to alternative fuels were estimated at from $1.5 to $ 2.0 million a day.³³

On the Egyptian side, at least four factors contributed to this public backlash against supplying gas to Israel. First, despite the peace treaty and close relations between the Mubarak regime and Israel, many Egyptians still see Israel as an enemy that occupies Arab and Muslim land. Exporting gas to Israel has always been unpopular, and activists tried to stop these shipments through the courts even before the fall of President Mubarak. Second, domestic consumption of gas is very high in Egypt, due to heavy government subsidies. The combination of a large population and generous subsidies means that a small and shrinking volume of gas is available for export. Third, though there is no global benchmark price for natural gas, comparable deals in the region show that Turkey, Greece and Italy were paying double the price Israel was paying for imported gas.³⁴ Finally, the Egyptian government's control over Sinai has never been strong and the Bedouins and other groups who resent or oppose the government in Cairo see the pipeline as a target.

On the Israeli side, it is clear that the post-Mubarak government will demand a higher price for gas. The process of renegotiating the deal is also likely to be more transparent. More important, in the wake of President Mubarak's downfall, it is unclear whether Egyptian gas will continue to flow unhindered. Responding to supply disruptions and heightened energy vulnerability, a committee overseeing oil and gas facilities approved an application by Israel's Ministry of National Infrastructures for construction of a buoy that will serve as a terminal for liquefied natural gas (LNG) carriers. The buoy will be manufactured by Norway's Advanced Production and Loading AS at a cost of $80 million.³⁵

CONCLUSION

The impact of recent discoveries of massive natural-gas deposits in the Eastern Mediterranean is likely to be felt by Israel and its neighbors. The implications of robust Israeli natural-gas development are profound and possibly transformative. The country's decades-long heavy dependency on foreign energy supplies will come to an end, and its energy security will substantially improve. The availability of indigenous gas supplies will contribute to sustainable economic development and improve the country's trade balance. Switching from coal and oil to natural gas will reduce pollution.

Regionally, when the dust settles from the Arab uprisings, Egypt, Lebanon, Syria, the Palestinians and probably Turkey are likely to renew efforts to explore for oil and natural gas in partnership with international oil companies. Their disagreements with Israel over maritime borders are not likely to end and will contribute to a sense of hostility and mistrust.