How Woodside's Leviathan Withdrawal Affects Israeli Export Options
Woodside’s withdrawal from the Leviathan deal leaves the door open to various speculations regarding Israel’s export strategy. The parties were engaged in serious talks that could have led to the Australian giant acquiring 25% of the Leviathan - a 19 Tcf field located 130 kilometers of Haifa, in waters 1,500 meters deep and operated by Noble Energy. The parties had previously signed an MOU on February 7 preparing for the final signing in March 27. The closing of the deal failed to happen as expected in March due to a disagreement between the company and the Israeli Tax Authority. Despite Woodside and the Leviathan’s partners pledge to pursue their pourparlers, they recently declared the end of the negotiations saying they had ‘failed to reach a commercially acceptable outcome’.
Woodside and the Leviathan partners' decision to part ways has numerous ramifications. The Australian company would have brought in its LNG expertise. Without it, it is unlikely that Israel will opt for an onshore LNG terminal to export its natural gas to export markets. If Israel did not prove to be too lenient towards Woodside, it is perhaps because the newly hydrocarbon-rich country has other plans for itself. And it is not to be dismissed that it might be inclined to diversify its export routes to ensure its robustness vis-à-vis adversity. Such a philosophy would not be hazardous; in fact, Israel suffered for a long period of time from its dependence on Egyptian gas supplies. The disruption in the flow of gas from its Egyptian neighbour due to the sabotage of the Arab Gas Pipeline was a wake-up call for Israel to achieve energy independence and strengthen its energy security. When it comes to export routes, and given the complicated geopolitics of the region, a combination of various scenarios is foreseeable.
Jordan too experienced a similar vulnerability towards Egypt, given that the Hashemite Kingdom has been also highly reliant on imports from Egypt to satisfy domestic demand. Jordan suffered from the disruption in the flow of gas in the aftermath of the Arab Spring and is currently undergoing a severe energy crisis due to that. Israel, taking advantage of the momentum, and whilst it studies possible solutions to reach further markets, decided to start by exporting to its immediate neighbours: a Jordan in desperate need of cheap natural gas imports to substitute the Egyptian gas, an Egypt suffering from domestic gas shortages due to export obligations and a growing population, and the Palestinian Authority.
In January 2014, the Leviathan partners entered a USD 1.2 billion deal to sell 4.75 bcm to the Palestine Power Generation Company. In February, the Tamar partners agreed to sell the Jordanian firms Arab Potash and Jordan Bromine 1.8 bcm of natural gas over 15 years for USD 500 million. Furthermore, the partners of the Tamar field signed a letter of intent with Spanish firm Union Fenosa Gas to supply gas to the company’s existing gas liquefaction facilities in Egypt. Israel would not only be selling gas to the Egyptians, but would use their export terminals to reach export markets, such as Europe or Asia where gas prices are higher than the rest of the world.
Whilst exporting to immediate neighbours seems a logic and simple endeavour, Israel is unlikely to limit itself to its environs. How Israel would achieve such reach is still a matter of speculation. Because a deal with Woodside is no longer a possibility, the remaining options would be using Cyprus’ projected LNG terminal in Vassilikos, using an FLNG or exporting gas via an undersea pipeline that would connect the Leviathan field to the Turkish coast.Turkish energy companies Turcas Petrol and Zorlu Holding have recently announced that they are considering building a pipeline which may cost $2-$2.5 billion and could supply 7-10 billion cubic meters of gas annually to Turkey via a 500-kilometer undersea route.
The prerequisite to such a solution remains the same: a solution to the Cyprus conflict given that such a pipeline would have to cross Cyprus’ exclusive economic zone. Joe Biden’s recent visit to the island created new hopes that the talks would this time progress and potentially reach a settlement. The second necessity is the reestablishment of trust between Israel and Turkey: despite Netanyahu’s apology to the Turks in March 2013 over the Mavi Marmara flotilla incident and the restoration of their diplomatic ties, to date, their relationship remains fragile.
Karen Ayat is an analyst focused on energy geopolitics. Email Karen on ayat_karen@hotmail.com. Follow her on Twitter: @karenayat