Natural gas discoveries: Economic momentum for geopolitical stability

By AMIR FOSTER

NOVEMBER 29, 2017 20:45

ISRAEL HAS become the sole state in the region with proven natural gas reserves whose magnitude significantly outpaces the needs of the local market (photo credit: Courtesy) — ISRAEL HAS become the sole state in the region with proven natural gas reserves whose magnitude significantly outpaces the needs of the local market

(photo credit: Courtesy)

This past year, following the Israeli government’s approval of the gas framework, there has been significant improvement in Israel’s relationship with Turkey.

The natural gas export agreement signed a year ago between the Leviathan Partnership and NEPCO, Jordan’s state electric company, took the strategic relationship between Israel and Jordan to the next level. This upgrade in the relationship is the direct result of a new reality in the Eastern Mediterranean.

On one hand, the State of Israel has become, thanks to the discovery of natural gas, the sole state in the region with proven natural gas reserves whose magnitude significantly outpaces the needs of the local market. On the other hand, states like Jordan and Egypt, leaders of the moderate Arab states, are undergoing severe energy crises.

This reality has sharpened the understanding that the stability of the region’s moderate regimes is an important part of Israel’s national security, as well as the recognition that Israel’s natural gas trade can serve as a key factor in attaining long-term stability its relationship with those states that enjoy the fruits of this trade and the improved energy security that it offers.

The scope of the agreement between the Leviathan Partnership and NEPCO is unprecedented in the relationship between the two states. The agreement is to provide 45 BCM (billion cubic meters) of natural gas over the course of 15 years, for an estimated price of $10 billion. On an annual basis, this is over four times more than the average annual export from Israel to Jordan over the past ten years.

Jordan is poor in local energy resources, and it therefore must import nearly all the energy it consumes.

Likewise, over the years, Jordan based its electricity generation/production on natural gas; in 2016, 84% of the electricity in the kingdom was produced by natural gas. The proportion of natural gas in the overall primary energy mix in Jordan was 35%. In fact, the proportion of natural gas in Jordan’s primary energy mix in 2016 was higher than in states with significant domestic natural gas production, such as the US, the UK, Canada and Australia.

The Jordanian energy market is well aware of the importance of a stable, reliable supply of natural gas.

In 2009, when the proportion of natural gas in Jordan’s primary energy mix reached an all-time high of 40% of all energy consumption in the country, the supply of natural gas to the kingdom was critically injured, and the Jordanian economy underwent a real crisis.

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The Jordanian energy market began its downward spiral when the Egyptian gas supply shrank due to “technical problems.” It continued in 2011 with the dramatic reduction of Egypt’s gas supply to Jordan resulting from terror attacks on the pipeline that brings gas to Jordan (and Israel). By 2014, Egyptian gas exports to Jordan had become negligible, and gas’s share in Jordanian electricity production had fallen to just 7%.

The impact of the shortage of natural gas on the Jordanian economy was dramatic. The stoppage in the flow of Egyptian gas, and the resulting increase in the use of more expensive petroleum products to generate electricity, led to the doubling of Jordan’s energy expenditures. The Jordanian authorities even petitioned the International Monetary Fund for a loan to help the country deal with the rising costs of energy.

The Jordanians understood that the Egyptian gas supply would not return and they began searching for alternatives. In addition to the negotiations to acquire gas from the Leviathan Partnership, the Jordanians entered into talks with Cyprus, Algeria, Qatar and even Iraq. Ultimately, however, the Jordanians decided that the Israeli option is preferable both financially and, no less importantly, because it was more reliable and provided greater energy security. The Jordanians understood that, despite their long conflict with Israel that ended with the 1994 peace agreement, Israel is the most reliable and most stable source of natural gas, both in the long term and the short term.

The geopolitical implications of Israel being the sole state in the region with gas reserves designated for export are not limited to the Jordan deal. In recent years, several letters of intent have been signed with various entities, both local and international, that operate in Egypt.

Like the Jordanian energy market, the Egyptian energy market has undergone massive upheavals in recent years. In Egypt, the crisis was precipitated by a long freeze on the development of the Egyptian natural gas market resulting from the poor commercial conditions that prevailed there for too long, and in light of the internal instability resulting from the country’s political revolution.

In recent years, Egyptian President Abdel Fattah al-Sisi has led a real transformation, improving commercial conditions in the Egyptian gas market. Sisi’s actions, coupled with the stabilization of the Egyptian regime, have led to renewed exploration activities for gas and the development of the country’s existing gas fields. Nevertheless, even the most recent gas discoveries in Egypt, including the massive Zohr reservoir, have not managed to extricate Egypt completely from the deep energy crisis it was in.

Though it is indicated that developments in Egypt will lead to a situation wherein Egypt will be able to meet most of the local demand for natural gas in the short term, there is uncertainty in Egypt about the country’s ability to maintain its recent achievements in the gas market over the long term; the primary supply of Egyptian gas is from old reservoirs whose capacity to produce gas is rapidly diminishing.

Additionally, the development of Egypt’s energy market is far from being able to supply gas to its two gas liquefaction facilities. In light of Egypt’s severe energy crisis, in recent years, the flow of gas to these liquefaction facilities has stopped and the massive facilities, in which international companies invested billions of dollars, stand empty and desolate. As of today, it is understood that the sole available source of gas that can get these facilities up and running again is Israel.

This past year, following the Israeli government’s approval of the gas framework, there has been significant improvement in Israel’s relationship with Turkey.

Like Jordan, Turkey’s local natural gas resources are negligible, and about 99.5% of the gas consumed there is imported. The country is highly dependent on a limited number of sources of natural gas. Most problematically, from Turkey’s perspective, is that Russia and Iran, both of which have complicated relationships and numerous disputes with Turkey, are its main gas suppliers, together accounting for 75% of its gas. Consequently, and given the expected growth in the country’s consumption of natural gas, Turkey is working to broaden and diversify the sources of its natural gas imports. Thus, talks between Turkey and Israel about gas triggered the reconciliation of the two states.

Israel’s natural gas revolution is under way and having a positive impact not only on the fall in energy prices in Israel, the dramatic decrease in air pollution, and the expectation of a massive boon from gas tax revenues, but in the geopolitical sphere as well. For the first time since the founding of the state, energy has gone from being a foreign policy burden to an advantage – not only for Israel, but for the entire region.

The writer is head of Strategy and Research, Association of Oil & Gas Exploration Industries.