Israel has in recent months already signed energy deals with
Jordan and the Palestinian Authority, though relations with the
Palestinians are at a low ebb, and now needs to expand its export
horizons to cash in on its huge energy discoveries.
If all goes well, the latest developments could see first pipelines
being laid between Israel and Turkey as soon as 2015, and gas
cooperation between Israel and Egypt is also emerging, which would
allow export access to Asia's major markets.
A growing population and soaring demand have left Egypt's own
liquefied natural gas export (LNG) plants in need of new supply, as
domestic shortages eat into seaborne exports through the Suez Canal
to the world's most lucrative market in Asia.
This has put Israel's previous plans to pump its gas reserves into a
future export plant in Cyprus on the back burner, dealing a major
blow to the indebted Mediterranean island's ambitions to become a
global player in the gas market.
A Cypriot LNG export plant was due to deliver at least 5 million
metric tons a year to Europe and Asia, allowing Europe to reduce its
growing dependency on Russia, which has become of particular concern
since the crisis in Ukraine cast a Cold War chill over East-West
Israel's new plans throw Cypriot developments into doubt as
investors would require more gas than Cyprus has on offer to make
returns on multibillion-dollar investments.
"If Israel has really ditched Cyprus as a partner to develop the
region's gas resources, then we (Cyprus) really do have to find
quite a lot more gas if we want to become a viable exporter, and
that would inevitably throw our plans back by several years," said
one source involved in developing Cyprus's gas reserves.
The possibility of sanctions on Russia's energy sector in response
to Moscow's annexation of Crimea and troop build-up along Ukraine's
eastern border have underscored Europe's acute need to diversify its
oil and gas sources.
Israel plans to export gas by pipeline and through several floating
LNG production plants, which cool gas to liquid form, so they can
ship it to the world's largest markets.
At stake for Israel is a $150 billion tax take should export deals
be agreed by a consortium operating its gasfields. Its strategic
re-alignment effectively places a tantalizingly close new gas
province out of Europe's reach.
"Ultimately Egypt and Turkey need energy, and the fact that we have
it is creating a regional convergence of interests," an Israeli
diplomatic source told Reuters.
Egypt offers a way for the U.S.-Israeli group of companies
developing Israel's giant Leviathan gas field to reach the Asian
market, where LNG fetches about twice the price Europeans pay.
"If the companies operating the fields in Israel could reach an
agreement with the companies that are operating those facilities, it
seems it would benefit Egypt, Israel and all the companies," said
Eugene Kandel, head of the national economic council at the Israeli
Prime Minister's office.
Egypt and Israel have had only limited economic cooperation since
signing a landmark peace accord in 1979. Political turmoil in Egypt
in recent years has further limited cooperation between the
Talks between the Leviathan consortium — Israel's Delek Drilling,
Ratio, and Avner Oil, and U.S.-headquartered Noble Energy — and
Egyptian authorities are focusing on feeding Israeli gas into the
country's idled LNG export facilities.
Britain's BG Group, which runs one of Egypt's under-utilized LNG
plants and is among the world's top LNG trading firms, is in talks
with the Leviathan partners.
The favored option is to build a sub-sea pipeline from Leviathan to
link up with BG Group's offshore pipeline network in Egyptian
waters, allowing Israeli gas to feed directly into its LNG plant at
Idku, according to industry sources.
If realized, this would not only revive output at Idku but also mean
that Israel's first LNG exports would take place from an Egyptian
Previous land-based pipelines between Egypt and Israel were
repeatedly bombed by groups opposed to links with Israel, but a
subsea pipeline would be much harder to target.
Egypt is struggling to meet rising domestic demand for energy, and a
fall in domestic output and power blackouts have stirred dissent in
the Arab world's most populous state.
Israeli gas could help ease domestic shortages, take the sting out
of the energy-related unrest that contributed to the overthrow of
former president Mohamed Mursi, and lighten Egypt's $6 billion debt
burden to energy majors like BG Group.
As part of a twin-track export policy, Israel also aims to ship LNG
to distant Asian and South American markets through a floating plant
to be moored above the Leviathan field.
"We definitely want to strengthen the economic ties with our
neighbors, but we also don't want to be too exposed to possible
upheavals in the region, so Israel has to have outlets that do not
limit us to the region," Kandel said.
[to top of second column]
Once close allies, ties between Israel and Turkey were severely
damaged following a deadly raid by Israeli commandos on a Turkish
yacht carrying pro-Palestinian activists trying to defy an Israeli
blockade on the Gaza Strip in 2010.
Poor relations remain a barrier to a deal on gas, though the sides
"High-level negotiations on resolving political issues, and
lower-level negotiations aimed at making progress on energy have
always been held," said a senior Turkish energy official.
"Normalization on the relations will pave the way for investment and
cooperation on energy."
U.S-led reconciliation efforts in recent months could be boosted by
the promise of gas."There is clearly significant potential for
turning East Mediterranean's new gas wealth from a potential source
of conflict to a catalyst for regional cooperation," said Oxford
Research Group analyst Sara Hassan. "Turkey will want at least to be
seen as trying to leverage better conditions for Palestinians
alongside any potential deal."
Peace talks to resolve the generations-old conflict between Israel
and the Palestinians are close to collapse, with the Israeli
government beginning to impose new economic sanctions on president
Mahmoud Abbas's West Bank Palestinian Authority amid mutual
recriminations about the deadlock.
Talks between the Leviathan consortium and Turkish counterparts are
focusing on building a 10 billion cubic meter (bcm) sub-sea pipeline
at an expected cost of $2.2 billion, giving Israel access to a major
emerging market and one of Europe's biggest power markets by 2023.
"We think construction phase for a pipeline to transport Israeli gas
to Turkey could begin in the second half of 2015," a Turkish energy
A separate yet-to-be-built pipeline linking Europe with the Caspian
through Turkey in 2019 could eventually also open up a new market
for Israeli gas in western Europe.
An envisaged 25-year supply deal would steady Turkey-Israel ties and
boost economic links, while Turkish sanctions against Israel would
be lifted and ambassadors reinstated, he said.
"The Turkish market for natural gas is the only growing one (in the
region), and the drive to diversify away from Russia will justify
Israeli gas to join Azeri, Iranian and Kurdish gas," said Mehmet
Ogutcu, chairman of London-based Global Resources Corporation
"The Turks realize that if this gas project is implemented without
their involvement, they will not be a game-player in East Med.
Hence, the Turkish private sector could be encouraged to take the
lead and politicians follow them at a later stage," according to
CYPRUS CUT LOOSE
Already, the gas finds are spurring progress in talks to resolve an
even longer-standing dispute over territory between Turkey and
Cyprus, across whose maritime boundary any Israeli gas pipeline
would have to travel to reach Turkey.
Cyprus has been divided since the north of the island was occupied
by Turkish troops in 1974.
"It does look as if natural gas could help to bring the two sides
closer to a settlement since Turkey's primary aim is securing the
resources to meet skyrocketing demand," said Nicolo Sartori, energy
and defense analyst at the Institute for International Affairs in
"Efforts to get the Eastern Mediterranean gas pipeline have stepped
up over the past few months, with the U.S. playing a very hands-on
role," said Ogotcu. "The Cyprus settlement is on top of the agenda
as it will allow Cyprus to use this pipeline and add its surplus
That could persuade Cyprus to give its consent to a pipeline that
went through waters claimed by both the Greek-speaking and Turkish
halves of the island. Since last year's downgrade of gas reserves at
Cyprus's flagship Aphrodite field, it does not have enough gas to
underpin its planned LNG export plant at Vassilikos.
Cypriot officials had counted on additional supplies from Israel to
make the export project feasible, encouraged by the fact that Noble
and Delek, two of Leviathan's main developers, also own Aphrodite.
Deepening Israeli reluctance to share its gas with a rival Cypriot
project has stalled those talks.
(Additional reporting by Orhan Coskun in Ankara and Henning
Gloystein in London; editing by Will Waterman)
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