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.

The Apology And What Comes Next

March 25, 2013 § 8 Comments

As everyone knows by now, on Friday Bibi Netanyahu talked to Tayyip Erdoğan (for the first time since Netanyahu was elected in 2009!) after being handed the phone by President Obama and apologized for operational mistakes causing the deaths of nine Turks aboard the Mavi Marmara in 2010. Netanyahu also agreed to pay compensation to the families of the deceased, and both men somewhat fudged the issue of the Gaza blockade by noting that Israel has already lifted some restrictions and pledging to work together going forward to ease the humanitarian situation in Gaza. This formula should not be surprising; in November I wrote the following:

All this aside, there seems to me to be an obvious out here. As I mentioned above, the real long term sticking point here is the demand that Israel end the Gaza blockade, but the imprecise language makes this a point that can easily be massaged. Israel is not going to end its naval blockade, particularly given the renewed focus on Iranian missiles that are being shipped to Sudan rather than directly to Gaza in an effort to avoid the Israeli navy. There is also, however, the land blockade that is enforced by both Israel and Egypt, and if Israel and Egypt jointly loosen restrictions on the land crossings to allow more goods in and out of Gaza, then Israel and Turkey can both reasonably claim victory, and it might pave the way for the countries to make up. Unless something changes though, feel free to ignore any and all news reports about secret talks and back channel negotiations between Ankara and Jerusalem.

As readers of this blog know, I have maintained for awhile that Israel was ready and willing to apologize to Turkey but that I did not think Turkey was prepared to accept an apology given the domestic political benefits for Erdoğan and the AKP of feuding with Israel. Indeed, over the past few months there have been reports of Ahmet Davutoğlu and other Turkish officials rebuffing Israeli attempts to meet and lay the groundwork for a rapprochement. That the apology was suddenly offered and accepted took me by surprise, and got me thinking about what would make Turkey change its calculus. I wrote a piece for Foreign Affairs identifying Turkey’s suddenly more pressing need for better intelligence in Syria given the chemical weapons angle and Ankara’s desire to meet its energy demands through channels other than Russian natural gas as the primary reasons, and noting that the timing here is also related to the successful talks with PKK leader Abdullah Öcalan. Here’s the core of the argument:

For Ankara, the Syrian crisis has been a major headache. Turkey has suffered a loss in trade, been forced to rely on NATO for Patriot missiles to defend against border threats, and accepted just under half a million Syrian refugees. Ankara’s demands for Assad to step down have fallen on deaf ears, and its requests for NATO intervention in the form of a no-fly zone and heavy arms for the Syrian rebels have also been brushed aside.

All this has been unfortunate for Turkey’s leaders, but it was the recent introduction of Syrian chemical weapons into the equation that really changed Turkey’s calculus; now more than ever, the country needs better intelligence and allies to bring an end to the civil war or at least prevent it from spilling over. Turkey cannot afford to have chemical weapons used anywhere near its border with Syria, and the longer the fighting goes on, the greater the chances of a chemical weapons strike gone awry. Israel simply has better intelligence on regional developments than Turkey does, and Turkey can use that help to monitor Assad’s weapons stores and troop movements on both sides. In addition, whereas the United States and other NATO countries have been reluctant to support the Syrian rebels in any meaningful way, Israel has a greater incentive to make sure that the moderate Sunni groups prevail over the more radical jihadist elements of the opposition. As the situation in Syria heats up, Turkey and Israel will be thankful that they can talk to each other and coordinate.

Another area in which Turkey needs Israel’s assistance is energy. Turkey’s current account deficit, which stood at $48.8 billion in 2012, is almost entirely a result of the country’s reliance on oil and natural gas imports; Turkey has no natural resources of its own. Furthermore, Turkey is paying through the nose for both Russian and Iranian natural gas, due to onerous price contracts. Earlier this month, I talked with a number of people in Turkey — government ministers, opposition politicians, business tycoons, and trade group leaders — and they all mentioned Turkey’s growing energy needs and lamented the country’s overreliance on Russian and Iranian natural gas. Israel, meanwhile, has just discovered two major natural gas basins, the Tamar and Leviathan fields, off its coast in the Eastern Mediterranean. Since Turkey has no hope of smoothing over ties with Cyprus, its longtime adversary, which has been the other main beneficiary of the Mediterranean gas boom, it will likely turn to Israel as a natural gas supplier. With Turkey’s economic growth slowing, Israel’s potential as a partner makes reconciliation more attractive now than at any point in recent years.

Because it is – in my view – Turkey that changed its mind on reconciling, I focused on the Turkish side of things in the FA piece, so I thought I’d now write a little bit about the Israeli side. From Israel’s perspective, making up with Turkey has made sense for awhile now, and the reasons to do so only grew stronger with each passing day. First, there is the regional dynamic in the Middle East, which is hardly trending in Israel’s favor post-Arab Spring. While I do not think that Israel has anything to fear from new governments in the region, the upheaval has opened up power vacuums in the Sinai and Syria that allow hostile non-state actors to operate with impunity. Add to this the existing threats from Hamas and Hizballah and the distinct possibility that the Jordanian government falls, and Israel desperately needs any friend who will have her. Making up with Turkey means that at least Israel is not entirely alone in the region, and being able to coordinate with Turkey and with Jordan (so long as King Abdullah remains in power) will be extremely helpful in containing the spillover threat from Syria. While I highlighted the urgency for Turkey in my FA piece, Israel’s biggest concern with regard to the Syrian civil war has always been the transfer of chemical weapons to hostile non-state actors, and now that the chatter around chemical weapons has increased, apologizing to Turkey took on an urgency for Jerusalem that was absent before.

Second, Turkey has successfully blocked Israel from NATO military activities and summits, and the ability to get back in the game has always been important to the Israeli government. While the Noble Dina naval exercises with Greece and the U.S. that Israel began doing in 2011 are nice, they are a poor substitute for Israel being able to use the vast Turkish airspace for aerial training or being able to participate in NATO military exercises. Israel has attempted to ramp up its military relations with Greece and Cyprus in response to the freeze in relations with Turkey but this has always been a suboptimal solution, and Israel has felt this acutely as the government has become increasingly preoccupied with possible threats from Iran. Furthermore, Israel’s defense industry has had billions of dollars in contracts with Turkey suspended by Ankara, and being able to resume sales to Turkey should provide a nice jolt to the Israeli economy.

Nobody should expect Israel and Turkey to go back to where they once were. Turkey does not feel as alone in the region as it once did, there is still a benefit from having cool relations with Israel, and too much has taken place between the two, from Davos to the Mavi Marmara to the “Zionism is equal to fascism” kerfuffle of a month ago. It is unfortunately not surprising to already see Erdoğan backing away from his commitment to normalize relations, although it will happen sooner rather than later since this is only Erdoğan playing politics in response to some hardline domestic criticism over the deal with Israel. Exchanging ambassadors and resuming limited military and intelligence cooperation does not negate the fact that bashing Israel will remain a potent element in Erdoğan’s box of tricks, and I expect to see issues big and small arise between the two countries, particularly as things remain static on the Israeli-Palestinian front and settlement building in the West Bank continues. Nevertheless, this restoring of formal ties is good for both sides, and I hope that both countries can get over their past issues and begin work on developing a healthier relationship.

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.

Today’s Depressing News Roundup

April 23, 2012 § Leave a comment

There is so much to talk about on the Israeli and Palestinian fronts today that I don’t even know where to begin, so I thought I would just write about a bunch of stuff in one post.

First up, Mahmoud Abbas and Salam Fayyad are apparently now not even on speaking terms, with Abbas refusing to return Fayyad’s calls or schedule a meeting with his own prime minister. I wrote last week about the tension between the two men and what Fayyad might be thinking so no need to rehash it, but to state the glaringly obvious, this is a recipe for absolute disaster. Fayyad cannot continue in his post if Abbas literally refuses to interact with him, and Fayyad leaving will mean the collapse of any PA credibility, much of the PA’s international support will evaporate, conditions on the West Bank will deteriorate which may very well lead to an outbreak of mass violence, and Hamas will move in to fill the power vacuum. Despite everything else going on, this is the most important development of the weekend, and also the one with the potential to create the most long-lasting havoc.

Moving on, Egypt has unilaterally terminated its gas export deal with Israel (technically with East Mediterranean Gas Company, which is the entity that handles the exports), prompting a slew of responses ranging from Shaul Mofaz’s opinion that this is a possible breach of Camp David to Bibi Netanyahu’s Alfred E. Neuman what-me-worry impression since he says that Israel’s natural gas reserves will soon make it energy independent anyway. Netanyahu claims that this is nothing more than a business dispute that has nothing to do with politics, and Egypt says that the government was completely uninvolved in the decision, yet for some strange reason Israeli Deputy Foreign Minister Danny Ayalon met with the Egyptian ambassador today to get clarification on the reasons behind the gas cutoff. Methinks the the prime minister doth protest too much. This is just the latest headache for Israel on the Egyptian front, and while it is not going to put the peace treaty in jeopardy, Avigdor Lieberman’s contention that Egypt presents a bigger danger to Israel than does Iran is going to be a growing theme on Israel’s right. This is a perfect example of how the conflict with the Palestinians does Israel tangible harm and is not just a public relations problem, since canceling the gas deal is going to be immensely popular in Egypt – where public opinion suddenly matters a great deal – and until the Leviathan and Tamar gas fields are online, the loss of 40% of Israel’s current natural gas supply is going to be felt by Israelis in a big way with higher utility prices. The hollow insistence by both sides that this is purely about business and not about politics means that there is a face-saving way to rectify the problem (Israel renegotiates the deal and agrees to pay a higher price that corresponds to the market), but it is surely a harbinger of more bad things to come between Israel and Egypt.

Finally, there is the open fighting between Netanyahu and Barak over enforcement of the High Court’s evacuation order of Ulpana, with Netanyahu considering enlarging the scope of a military land acquisition order in order to bring the neighborhood under its aegis. Of course, he cannot do so with the defense minister’s acquiescence, and all signs point to Barak standing firm against it. In case you are wondering why Barak is all of a sudden standing up to Likud hardliners and taking on settlements, as he did earlier this month during the Beit Hamachpela mini-crisis in Hebron, it is because his new Atzmaut Party is going to need more votes to meet the Knesset threshold whenever the next elections are called, and Barak figures this is a good way to gain some support from leftwing voters who might not appreciate his recent hawkish stance on Iran. I am glad that Barak is using his muscle to prevent the government from ignoring High Court orders, but the reason this makes it into a blog post summarizing depressing news is that the clash between Barak and the rest of the governing coalition is accelerating, with Likud’s most influential hardline muckraker Danny Danon calling yet again yesterday for Barak to be thrown out of the cabinet. As I have discussed in depth before, Netanyahu cannot do this while confrontation with Iran looms, so what he is likely to do instead is retroactively authorize a number of illegal West Bank outposts in order to placate his base and quiet the potential revolt within Likud. This is not a good development, and just serves as the latest reminder that Israel’s domestic politics do not in any way, shape, or form encourage moderation or long term strategic thinking these days.

P.S. No, I did not forget about the news that Turkey has banned Israel from participating in a NATO summit, but it deserves its own blog post later today.

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