Looking to the future

Natural gas discoveries enable Israel and its neighbors to enjoy geopolitical and economic benefits.

November 20, 2016 12:48
Amir Foster

Amir Foster. (photo credit: Courtesy)

Approval of the gas framework has brought an end to the freeze in the Israeli gas sector, a freeze that was, inter alia, due to the regulatory uncertainty that prevailed in the sector for too long. Indeed, in the period since the framework was approved, activities in the Israeli natural gas sector have gained momentum.

The Leviathan partnership has announced that it is allocating $120 million for detailed engineering planning of the Leviathan project.

The development plan for the Leviathan reservoir has been approved by the government and contracts have been signed to sell natural gas from Leviathan in the local market. There are reports on a deal to sell the Karish and Tanin reservoirs to the Greek company Energean. The Energy Ministry has announced a series of dramatic measures to reduce the use of coal-fired power stations in favor of producing electricity with natural gas. Israel is about to reopen the sea for oil and gas exploration, and there will shortly be a tender for allocating 24 new licenses. The jewel in the crown of the positive events in the gas sector in recent months is the signing of the historic agreement to export natural gas to Jordan, on a scale of $10 billion, alongside the renewal of contacts related to exporting Israeli gas to Turkey.

Jordan has no significant sources of indigenous energy, and relies heavily on massive import of gas and oil. In practice, Jordan must import 97% of the energy it uses.

Until 2003, when it began importing significant quantities of natural gas from Egypt, gas consumption in Jordan was relatively negligible and was based on local production, mainly from the Risha gas reservoir in the northeastern part of the country.

Importing gas from Egypt made it possible for the Kingdom of Jordan to revolutionize its electricity production, making gas the main source of energy, with 91% of its electricity production in 2009 being based on natural gas. In that same year, the share of gas in the overall energy mix in Jordan reached a peak of 40% of total energy consumption in the kingdom.

In 2010, more than six years after the agreement was signed between Egypt and Jordan, the first signs of the looming energy crisis began to be felt in Jordan. That year the Mubarak regime was still in control in Egypt, but the country began to reduce the quantities of gas exported to Jordan due to “technical problems.”

By 2011, as a result of terrorist attacks on the pipeline carrying gas to Jordan (and also to Israel), there was a dramatic reduction in the gas supply, until in 2014 Egyptian export to Jordan ceased almost completely, and the share of natural gas in electricity production in Jordan fell to just 7%. The hope for a return to a regular supply of gas from Egypt vanished when it emerged that Egypt itself was in the throes of the largest energy crisis for decades, due to reduced gas production capacity in Egypt, on the one hand, and an increase in local demand on the other. This situation eventually led to the almost complete cessation of Egyptian gas exports, both by pipeline as well as LNG from Egypt’s liquefaction facilities.

The cessation of Egyptian gas exports to Jordan had a dramatic impact on the energy sector and on the kingdom’s economy. It led to the increased use of costly petroleum products for electricity production, and significantly higher expenditures on various energy products.

In 2009, Jordan’s total energy expenses stood at 11.3% of its GDP.

As a result of the end of gas imports from Egypt, the significant increase in consumption of petroleum products, combined with the increase in crude oil prices, meant that total expenditure on energy products in 2012 reached 21.1% of GDP. In nominal monetary terms, expenditure on energy between these years more than doubled. In addition, this situation led to an increase in government subsidies for energy products, and the Jordanian government was forced to turn to the International Monetary Fund for a loan to help it cope with growing expenses. In 2012 the IMF approved a $2 billion loan to Jordan.

The developments described above had a very significant impact on Jordan’s economy, and alongside the massive rise in energy costs, public debt in Jordan increased from 57% of GDP in 2009 to 81% in 2014.

After it was understood in Jordan that the gas supply from Egypt was unlikely to return, they began looking for alternatives. Initial contacts with regard to exporting gas from Israel to Jordan began in 2011. In 2014 these contacts developed into the signing of a memorandum of understanding between the sides. Because of the lack of regulatory certainty and the freeze in the Israeli gas sector at the end of 2014 following the decision by the Antitrust Commissioner at the time, David Gilo, to retract from the agreed decree with the gas companies, it was understood in Jordan that they needed to consider other alternatives.

In 2015, the Jordanians held negotiations with Cyprus, Algeria, Qatar and even Iraq, to try and find a suitable alternative to the Israeli option.

These contacts did not develop into an agreement between the sides, and the Jordanians were left without any long-term agreement to guarantee a gas supply to the kingdom.

In view of the gas framework’s approval, emerging certainty in the Israeli gas market, and progress towards developing the Leviathan reservoir, Jordan decided to revisit the Israeli option. It was understood in Jordan that the enormous gas reservoirs found in Israel and the proximity to the Jordanian market made gas imports from Israel the natural and best option, both in economic terms, and in terms of long-term reliability of supply. Finally, in September this year, an agreement was signed between the Leviathan partnership and NEPCO, the Jordanian electricity company. Under this agreement, the Leviathan partnership will sell natural gas to Jordan over a period of 15 years for a total of 45 BCM, with an option to increase the quantity. The estimated scale of the deal is $10 billion, and the date for the start of supply has been set at the end of 2019. Until that time, Jordanians will import liquefied natural gas through facilities established in Aqaba Port, which began operating in 2015.

In addition to the situation in the Jordanian energy market, other energy markets in the region have also been undergoing changes in recent years, alongside significant geopolitical developments. As mentioned earlier, Egypt’s energy market is in deep crisis, and there are signs that the latest gas finds in the country, foremost among them the huge Zohr reservoir, will not be able to supply the quantities of gas required for regular operation of its gas liquefaction facilities. Due to the ongoing reduction in the production capacity of the existing gas wells, together with increased demand for gas, even gas supply to the local Egyptian economy over time is in doubt. In light of this, during 2014 two memorandums of intent were signed for the export of gas from the Tamar and Leviathan reservoirs to Egyptian liquefaction facilities, and in 2015 a memorandum of intent was signed for the export of gas from the Leviathan reservoir to Egypt’s local market.

Another country that is a potential market for Israeli gas is Turkey.

Like Jordan, local natural gas resources in Turkey are negligible, and 99.5% of the gas it consumes is imported.

Around 85% of the natural gas is imported to Turkey through pipelines, and 15% is imported as liquid natural gas. Turkey suffers from a paucity of supply sources, and is highly dependent on a small number of natural gas sources. This problem is exacerbated when taking into account that Turkey’s main source for gas is Russia, followed by Iran. In effect, almost three quarters of the total supply of gas to Turkey is from Russia and Iran – two countries that have a complex relationship and many areas of dispute with Turkey, in particular in light of current events in Syria. Given this situation and the country’s high reliance on natural gas for the generation of electricity as well as supplies to industry and households, Turkey is taking steps to decentralize and expand its sources for importing natural gas. In recent months there has been a reconciliation between the government of Israel and Turkey, and contacts on the subject between the countries have begun.

Some 22 years after the historic peace agreement between Israel and Jordan, we are once again witnessing a historic agreement between the countries – the gas agreement.

This is the most important economic agreement between the countries, an agreement that has been signed thanks to the discovery of enormous gas reservoirs in Israel. It is a notable example of the fact that in addition to the economic, energy and environmental benefits to Israel resulting from discovery of the gas reservoirs, the natural gas also enables Israel and its neighbors to enjoy geopolitical benefits resulting from trade in natural gas. The energy and economic cooperation being forged between countries of the region, currently based on export of Israeli natural gas, is likely to create a long-term stabilizing anchor between Israel and the axis of moderate states in our region.

The writer is head of strategy and research, Association of Oil & Gas Exploration Industries.

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