Israel’s Unnatural Dreams For Its Natural Gas
October 23, 2013 § 6 Comments
On Monday, Israel’s High Court cleared the way for Israel to export 40% of its new natural gas bonanza after rejecting petitions that challenged the government’s export plan. The Israeli government harbors high hopes of reaching $60 billion in profits over the next two decades from natural gas exports, and so the High Court’s decision is being celebrated as paving the way for an economic windfall. The problem is that there are some very big and intractable regional issues that have to be settled before Israel sees even a shekel from gas exports, and the prospect for all of this coming together is quite slim. If anything, Israel’s natural gas fields are going to end up sparking competition and regional destabilization rather than the opposite.
There are two ways for Israel to export its natural gas. The first is via pipeline to Turkey and hooking up with the planned TANAP or TAP pipelines in order to send Israeli gas to the rest of Europe. The prospects of Israel and Turkey cooperating on a pipeline deal at this point are laughable when the two sides cannot even agree on something as basic and simple as compensation for the Mavi Marmara deaths, not to mention the most recent unpleasantness between the two countries. Let’s assume for a moment though that cooler heads are able to prevail and mutual economic interests override the basic domestic politics of both countries, there is still a thornier problem of geography. A pipeline from Israel to Turkey has two possible routes. The first runs through Lebanon and Syria, which is a non-starter for all sorts of obvious reasons. The second route is undersea and has to travel through Cyprus’s exclusive economic zone. Given the animosity between Turkey and Cyprus and Turkey’s adamant insistence that is does not and never has occupied any part of Cyprus, reconciliation between these two parties over an issue that has been dubbed a diplomats’ graveyard is not on the horizon. It is true that there are many good reasons for a deal to happen, from the fact that there is a lot of money at stake to the fact that Turkey is completely isolated on the Cyprus issue and is the only country in the world that even recognizes the Turkish Republic of Northern Cyprus as an independent state, but that doesn’t mean that movement is imminent. Greek Cypriots overwhelmingly rejected a painstakingly negotiated federal model in 2004, and there is no reason to think that opinion on this has changed. What this means is that a pipeline, which would be the most cost-effective and easiest solution, is out for now.
The other way for Israel to export its gas is to liquify it and ship LNG to Turkey and other destinations. This comes with its own set of challenges as well. The first is that liquifying natural gas is an expensive process that reduces profit margins as compared to shipping it via pipeline. On top of the process itself, it requires building an LNG terminal that takes approximately 3-5 years to build and costs somewhere between $5 billion and $10 billion, which cuts into profits even further. An LNG terminal is unlikely to be built in Israel itself due to legal and environmental challenges, which again leaves Cyprus as the natural partner, but absent reconciliation between Turkey and Cyprus, shipping LNG to Turkey from a Cypriot LNG terminal is likely off the table. Without a Turkish market for gas, Israel is not going to expend the time and resources to build a LNG terminal in Cyprus to then have it essentially be bricked. Even assuming that Turkey and Cyprus are able to patch things up and Israel goes the LNG route, the security challenges posed by protecting an Israeli LNG terminal that is in Cyprus rather than in Israel and then protecting Israeli tankers plying the waters of the Eastern Mediterranean are enormous. Israeli ships carrying Israeli natural gas are immediately going to become an attractive target for all manner of jihadi and terrorist groups, and the Israeli Navy does not now have the capacity to protect such a potentially large venture.
So the bottom line is that a boom in natural gas exports is not assured by any means. No matter which way Israel turns, the path to huge profits from natural gas is complicated by geopolitics that have so far proved immune to easy resolution. In the short term, the answer is likely to send natural gas to Jordan, which will be profitable to a limited extent since Jordan is not a very big market. Another cheap alternative with much larger potential is to export to Egypt, but despite Energy Minister Silvan Shalom’s insistence that this avenue is open, the Egyptians claim that they have no interest in buying Israel’s natural gas.
Looking at the bigger picture, Israel’s long term problem may be more serious than simply not having a viable market for its exports. Turkey and Egypt both project very high growth in energy demand with no real energy resources of their own at the moment, and they are sitting next to countries – Israel and Cyprus – that are resource rich and with whom they do not have great relations. In addition, there are claims on Eastern Mediterranean gas fields being made by Lebanon and by the Palestinians in Gaza, not to mention Northern Cyprus’s claims to the fields claimed by the Cypriot government. How these tensions will be resolved is unclear and anyone’s guess, but a very combustible situation is developing, and the idea of major resource conflict at some point is not all that far-fetched. Should the Israel-Turkey-Cyrpus triangle not get resolved to each party’s relative satisfaction, the Eastern Mediterranean may very well become a lot less placid.
Turkey and Iranian Oil
April 26, 2012 § 6 Comments
One of the obstacles, if not the largest obstacle, to peeling Turkey away from Iran is the economic ties between the two, particularly when it comes to energy. Turkey imports 90% of its oil, and Iran was its largest supplier until 2007 when Russia took the top spot. Through March of this year, Turkey was importing 200,000 barrels per day from Iran, which accounted for 30% of Turkey’s oil imports and 7% of Iran’s oil exports. This is obviously a huge barrier for the U.S. to gaining closer cooperation from Turkey in pressuring Iran over its nuclear program, and the announcement last month that Turkey was slashing its oil purchases from Iran by as much as 20% was accordingly a big deal.
Turkey does not import oil from Iran because it is necessarily a supporter of the regime, but because Iran has been a convenient source. There are, however, real bilateral energy issues between the two that make Turkey receptive to U.S. entreaties to get its oil from elsewhere. Turkey consumes around 1.3 trillion cubic feet of natural gas annually and it imports 24% of its gas from Iran, but Iran charges Turkey more than $500 per 1000 cubic meters of gas, which is more than it charges any other country and $100 more than the market price. In contrast, Turkey pays $350 for gas from Azerbaijan and $400 for Russian gas. Turkey is stuck because it signed a 25 year deal with Iran in 1996 and because it has no way of replacing Iranian gas imports, which Tehran knows full well, and in the last few weeks Turkey has taken Iran into international arbitration over its natural gas price gouging. The gas price has become an even bigger problem in the past year as energy prices have risen across the board fueled by insecurity about global energy supplies, which led to a 40% increase in Turkey’s energy imports in 2011 as compared to 2010. The point here is that Turkey may very well be actively looking into ways to reduce its reliance on Iranian oil anyway, U.S. pressure or not. The agreement to buy oil from Libya in conjunction with reducing Iranian imports is a good first step, since it gets Turkey’s foot in the door with the new Libyan government, and might eventually lead to Saudi concessions on price as well.
It is in this context that today’s news that Turkey is starting oil and gas drilling in northern Cyprus should be viewed. Obviously this is partly a response to Cyprus’s own oil and gas exploration, but TPAO’s drilling is not merely symbolic. Turkey’s energy needs are enormous and growing, and the question is whether it will have to continue relying on Iran or if it can fill the gap somewhere else. If the answer ends up being the latter, it will have the effect of isolating Iran further and making a resolution to the nuclear issue that does not involve military strikes more likely. To that end – and to continue beating a dead horse from previous posts – a Turkish-Israeli rapprochement would help Turkey soften the blow from Iranian natural gas once the Tamar and Leviathan natural gas fields are up and running in 2013. In any event, keep an eye out for Turkey exploring any possibility open to it as far as oil and gas are concerned, since that will yield clues as to how the Iranian nuclear standoff is likely to be resolved.