Israel's Action in Gaza and the Impact on Turkey Energy Relations

Israel’s export strategy has been the object of speculation since the country’s Supreme Court ratified in October 2013 a June 2013 decision by Netanyahu’s cabinet to export about 40% of the country’s offshore natural gas reserves. Based on a total estimate of 900 billion cubic meters (BCM), the Israeli government in June decided to allocate 540 billion cubic meters (BCM) for the domestic market and allow the export of the remainder. But how will Israel reach export markets, via which route and using which technology?

Noble Energy, the operator of Israel’s giant Leviathan field - which estimate was recently increased to 21.95 trillion cubic feet (Tcf) from 18.91 Tcf- has been studying various export options including LNG and pipeline scenarios. Israel has announced that it will start by exporting some of its natural gas to its immediate neighbours: Egypt, Jordan and the Palestinian Authority. Israel’s neighbours are in fact in need of the product and could import Israeli natural gas via pipeline.

Egypt had historically been the main natural gas supplier for both Israel and Jordan until the Arab uprising in 2011 that led to the sabotage of the pipeline transporting Egyptian gas to Jordan and Israel. Egypt is now suffering from domestic shortages due to increasing Egyptian consumption, ongoing export obligations and flat production. In the absence of Egyptian gas, Jordan too entered a severe energy crisis that forced the Kingdom to import expensive fuel products and implement efforts to develop indigenous resources that include wind and solar, shale oil, natural gas and nuclear.

Selling gas to its immediate surrounding via pipeline will only slightly reduce Israel’s export quota. Israel will look to reach further markets with larger appetites: Europe and Asia. The Leviathan partners considered selling part of the Leviathan (25-30%) to the Australian firm Woodside in exchange of its LNG expertise, as LNG will offer Israel the flexibility to reach lucrative markets regardless for their geographical locations. However, the negotiations between Israel and Woodside failed to reach an agreement due to the Israeli authorities rigid positioning in regards to tax and the parties’ failure to agree on the field development costs. Using Cyprus’ planned LNG terminal at Vassilikos to reach export markets was also advanced as an option but Israel has not expressed a decision to pool costs with the island for the construction of the multi-billion dollar facility and seems to have opted for alternative routes.

A pipeline from Israel to the Turkish coast would give Israel access to Turkey’s internal market and Europe. Israel’s March 2013 reconciliation with the Turks over the Mavi Marmara incident led to believe that the likelihood of a Leviathan-Turkey pipeline was increasing. Turkey, with a large and growing domestic demand and expiring contracts is an attractive customer. Turkey could also serve as a gateway to Europe.

However, various obstacles stand in the way of such a deal: the division of Cyprus and the deteriorated relations between Turkey and Israel. Firstly, Cypriot officials repeatedly expressed their opposition to an Israeli-Turkish deal that would bypass their agreement given that such a pipeline would have to cross Cyprus’ EEZ (to avoid Lebanese and Syrian waters).  Secondly, the historically strong diplomatic ties between Israel and Turkey soured in 2010 following the Mavi Marmara incident that led to the killing of nine Turks on board of the ship. The renewal of the friendship became contingent on three conditions set by the Turks: Israel’s apology to Turkey, a financial compensation to the families of the victims and the lifting of the Gaza blockade. Netanyahu apologized to Turkey in March 2013 and promised to financially compensate the families of the victims. However, the ongoing Israeli assault on Gaza will no doubt impede the normalisation of the diplomatic relations between Israel and Turkey, and hence cause a major obstacle to the Leviathan-Turkey pipeline.

Does Erdogan’s harsh speech stem from noble principles or is it animated by populism and the desire to please Arab friends? And did Israel lose its interest in resuscitating its friendship with the Turks? Has Israel decided that it will use Egypt’s export terminals instead and given up on pleasing Turkey? Currently, Egypt seems to be Israel’s only access to energy markets. Israel’s Tamar and Leviathan partners have signed letters of intent to sell respectively 4.4 BCM and 7 BCM annually to Union Fenosa and BG. The gas will be delivered to Egypt via pipeline and then headed to Asian markets. The deals are expected to be signed by the end of 2014.