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Massive natural gas discoveries in Israel could well
sour relations between the US and Russia.
Relations amongst the countries of the Middle East
revolve around religion and historic allegiances. The region's Muslim
countries are divided into Sunni and Shiite camps while Jews and Christians
are in a constant battle for representation. The historic Camp David peace
accord between Egypt and Israel has provided a cornerstone for regional
relations for years (though it is showing signs of strain in the post-Mubarak
era), and the United States has long supported these two nations alongside
Saudi Arabia and its allies while Russia shored up Iran, Syria, and those in
the opposing group. Grievances often go back decades, if not longer, and
there are so many interested parties that it is nigh impossible to move
without stepping on someone's toes.
But there is one force that is more powerful in the
pulsing Middle East than even religion: energy.
Oil and gas mean money and power, two great enablers
that make anything possible. Why else would one of the world's most
conservative Muslim countries – Saudi Arabia – align itself so
closely with the United States, a showcase of liberal thought and personal
freedom?
As the birthplace of three major religions, the
Middle East was destined for conflict, but the presence of vast energy wealth
has amplified and complicated those tensions a hundredfold. It's a global
truth that those with energy resources hold the cards and those without
domestic energy supplies have to do whatever is necessary to ensure they are
dealt a hand. The Middle East is home to a disproportionate number of
countries in the former category – countries bloated with the power
that comes with oil wealth.
Not every country in the region fits that bill,
however. For years Israel's Achilles heel has been energy – or a lack
thereof. Netanyahu's old joke is that Moses led his people through the desert
for 40 years to the only place in the Middle East without any oil. Decades of
drilling and digging yielded no significant hydrocarbons, leaving Israel with
no choice but to spend 5% of its GDP buying fuel from neighboring
suppliers… with whom its interests conflicted and its relations were
uneasy at best.
Now that is all changing. In recent years, trillions
of cubic feet of natural gas have been discovered in Israeli waters while 250
billion barrels of shale oil have been outlined in the country's rocks.
Whether Israel will become a significant oil producer is still very
uncertain, as the economics of its shale deposits are far from proven, but
the nation is already preparing for a future funded by natural gas exports.
This shift will generate welcome cash flow for
Israel, but even more significant than the country's newfound wealth will be its
newfound political might. Israel is already receiving visits from new friends
and potential business partners, some of them countries that have avoided or
even opposed Israel until now. Russia is leading that pack, having pointedly
placed itself at the front of the line of nations wanting to secure a piece
of Israel's gas pie – and this is the same Russia that usually supports
two of Israel's greatest enemies, Iran and Syria.
In the boiling, roiling Middle East, new allegiances
are never simple. Befriending one nation almost always requires you to turn
your back on another, and changing camps is not easily forgotten. Those
wanting access to Israel's natural gas will also have to navigate a
treacherous international obstacle course, as contested maritime borders mean
that Syria, Lebanon, Turkey, Greece, Cyprus, and even Gaza all lay some claim
to Israel's vast offshore gas fields.
But remember: the wealth and power that come with
energy are a great enabler. Israel will develop its
gas riches. To do so, the country will need partners and buyers, and those
who line up to participate will be doing so in the full knowledge that an
Israel with energy wealth represents a completely new player in the Middle
Eastern game (a development that could well ignite a "Cold War" over energy).
Israel's
Natural Gas Revolution
The story of Israel's romance with natural gas
starts in 2000, when a consortium led by Noble Energy drilled into an
offshore target called Mari-B. A few holes later, the group had defined 1
trillion cubic feet (TCF) of recoverable natural gas, and by 2004 the Mari-B
field was in full production. Israelis embraced a domestic energy resource:
natural gas consumption rose as quickly as the country could build
infrastructure to produce and transport it.
One good discovery often prompts another, and such
was the case with Israeli gas and Noble Energy. In 2006, the American firm
snapped up the chance to earn into the nearby Tamar block, which had not yet
been drilled because the previous operator had shied away from the area's
exceptionally high underground pressures. Noble's geologists ran every test
they could and decided Tamar's potential was worth the risk. They were right:
with two wells, Noble defined 9 TCF of gross natural gas resources at Tamar,
of which 6.3 TCF are considered recoverable. It was the largest deepwater natural gas discovery in the world in 2009, and
it came just in time.
As the graph above shows, Israel's natural gas
revolution quickly pushed demand from almost zero to beyond Mari-B's ability
to supply it. Fortunately, there was a country close by with lots of natural
gas for sale: Egypt. In 2005, the East Mediterranean Gas Company pipeline
opened, connecting the Egyptian city of El Arish to the Israeli port of
Ashkelon. By 2008, Israel had 170 MCF of gas pouring in from Egypt every day.
Mari-B supplied the rest, and Israel became dependent on natural gas to
produce 20% of its electricity. However, all good things must come to an end.
Today, Mari-B is running dry, and relations with
Egypt are on rough ground. The peace accord between Egypt and Israel only
thinly concealed the never-extinguished Egyptian enmity towards Israel, and
the Egyptian opposition – everyone from Islamists to Arab nationalists
and leftists – has long regarded the Camp David accord with disgust.
The gas deal that built and filled the pipeline was a tangible product of
that hated peace accord, and the opposition has declaimed it since the day it
was signed, certain that Israel and Mubarak had conspired to cheat Egypt out
of its gas revenues.
Those opposition parties are now filling the seats
of Egypt's parliament. The parliament itself is frozen, caught in a complex
legal limbo, but no matter – a series of bombings disabled the gas
pipeline to Israel last year, and it has not been operational since. The days
of Israel relying on Egypt for gas – and of Egypt pocketing a nice
stream of revenue from Israel – are over.
Thankfully for Israel, timing is everything.
Development work at Tamar is running on schedule, and the first wells are
expected to come online before the end of the year. A smaller field called Noa was sped into production to bridge the gap until
Tamar can start supplying Israel's needs.
It won't be long, however, until Israel is pumping far
more gas than it needs.
Beyond
Tamar
Mari-B was a big discovery and Tamar was even
bigger, but they both pale in comparison to the reservoir that Noble drilled
into next. Shortly after delineating 9 TCF at Tamar, Noble spudded a drill
into a nearby field call Leviathan and hit a home run. The Leviathan field is
absolutely enormous, home to 17 TCF of gross natural gas resource.
Adding in a 7-TCF discovery in offshore Cyprus and
several other, smaller discoveries near Leviathan, Noble has now discovered
no less than 35 TCF of gross natural gas resource in the region. It is far
more gas than Israel could ever use.
Export plans are already afoot. Noble and partners
aim to build a liquefaction plant so that Tamar's gas wealth can be exported
globally in the form of liquefied natural gas (LNG). They actually hope to
build a floating facility, in large part because land is so precious in
Israel, and to that end they are watching Royal Dutch Shell's progress as it
builds and commissions the world's first floating LNG plant for use in a
field off Australia.
Even though it will be years before any LNG is
produced in Israel, Russia is so keen to get its hands on Israeli LNG that
state energy giant Gazprom has already signed a letter of intent with the
Noble group to discuss a deal to buy 2 to 3 million tonnes
of LNG annually, starting in 2016. A few months later, Russian President
Vladimir Putin visited Israel, and among the announcements associated with
that historic trip came news that Gazprom is setting up an Israeli subsidiary
to help develop Leviathan.
Once the massive Leviathan field also gets into
production, Israel will need every natural gas export avenue it can find. To
that end, the country has been carefully cultivating its relationships with
Cyprus and Greece, through which pipelines to Europe
would pass (Turkey will not allow Israeli gas to cross its lands). It seems
Israel's gas wealth is already generating new international allegiances:
Israel, Russia, Cyprus, and Greece seem to be gravitating towards each other
to form a new team in the Middle Eastern game.
New Camps
in the Old Battleground
That things are changing so quickly is no surprise.
The countries along both coasts of the Persian Gulf erupted into global
prominence in the 1970s when world energy shortages catapulted them into
previously unimagined wealth and political influence. If Israel emerges as a
new power, those Arab countries will remain rich, especially because their
energy is cheaper to produce than the more unconventional sources being
outlined elsewhere in the world, including in Israel.
But what they keep in money, they may lose in clout.
With other oil and gas streams coming on line, such as Canadian oil-sands
crude and Arctic oil, we may be heading into a time when the world doesn't
care all that much about what happens in the Persian Gulf (as long as nobody
gets frisky with nukes).
OPEC nations will not be the only ones to cede
ground to an energy-rich Israel – Turkey could be another big loser.
For years Turkey was governed by a secular party, which actively sought out closer
relations with Israel. Now the Islamist AK party is in charge, and relations
with Israel are on the outs. If Israel does emerge as a new energy powerhouse
and establishes a cozy circle with Russia, Greece, and Cyprus, Turkey will
feel like someone who ditched a long-time friend right before she won the
lottery. More generally, Turkey's ambitions to play a larger role in the
politics of the eastern Med will have suffered a significant setback.
Egypt will also struggle with Israel's rise. As much
as many Egyptians decried the deal to sell their gas to Israel, the fact is
the deal generated considerable incomes for state coffers. That income has
now evaporated, just as the country convulses through the aftermath of a
revolution. Moreover, Egypt's role as a regional powerhouse stemmed almost
exclusively from its secular governance and its peace with Israel –
these factors were so important in the old Middle East that the US government
supported Egypt to the tune of $3 billion annually. Now Islamists are in
power, and the path forward in Egypt's relationship with Israel is very
uncertain. We see the country's power waning in the coming years as it finds
footing in the new Middle East.
Then there's the United States, which will find its
importance to Israel fade if the Jewish state becomes an energy giant with a
dance card full of suitors. In the long run, the US could be hurt most of all
if its best Middle Eastern friend, Israel, turns away from its embrace and
towards the strong, strategic arms of Vladimir Putin.
It's a real possibility – Russia has already
wooed Israel into several waltzes. In fact, the two nations have been growing
closer for several years despite Russia's support for Iran, Syria, and even
Hamas. Bilateral trade is approaching $3 billion annually; Russian immigrants
make up 20% of Israel's population; Israel sold military drones and other
high-tech weapons to Russia after Russia's poor military performance in
Georgia in 2008; and following the Arab Spring, Israel and Russia share an
interest in preventing the spread of radical Islam in the Middle East. If
Israel can help stem the rising tide of radical Islam and provide Russia with
another steady supply of natural gas, Putin must be thinking that perhaps
this new friendship is worth the turmoil it will cause.
And cause turmoil it will, because even though
alliances in the Middle East are forged over decades, they can also change
overnight, especially when the new global currency of energy is at work.
Russia is walking a tightrope in its efforts to woo Israel while still
supporting Iran and Syria, and Putin may soon have to make a choice between
old friends and new. If Russia abandons Iran and Syria, the Sunni-Shiite
balance in the region will destabilize just as Islamists are taking power in
several countries for the first time.
The old camps of the Middle East are changing.
Transitions are rarely smooth, and these transitions in who holds power in
the volatile Middle East will almost certainly provide some very rough
patches.
Israel clearly sees the potential for trouble as it
develops its newfound energy riches. The Israeli Defense Forces recently
approved a navy request for four new warships, at a cost of about $750
million. The navy is concerned that the gas rigs being built in Israeli waters
will be an attractive target for terrorist attacks, especially if Israel were
to find itself in another war.
Israel knows Hezbollah has the capability to fire
missiles from land to the gas fields. And Hezbollah may not be the only
terrorist group with such lethal capacity – in February, the Israeli
navy found an Iranian ship carrying six Nasr-1 radar-guided anti-ship
missiles to Gaza; the navy believes the weapons were destined for al-Jihad.
In addition, Syria also has its hands on an anti-ship missile that could
reach the gas fields. Just imagine what a missile attack by an Islamist foe
on an Israeli gas rig would mean for global politics (not to mention the
environmental health of the Mediterranean Sea).
Of course, Israel's new warships will only add to a
region that is packed with military capacity. Continued tensions over Iran's
nuclear program have recently prompted the Islamic Republic and the United
States to beef up their already impressive presence in the region. Just
yesterday, those tensions led a gunnery team aboard a refueling tanker in the
Persian Gulf to fire 0.50-cal rounds at a small, fast-moving boat, killing
one person. It now seems the boat was a fishing vessel whose crew did not
understand warnings to change course, but the navy personnel who decided to
shoot were concerned it could have been an explosives-laden suicide skiff
heading for an American warship.
While that altercation was seemingly unrelated to
Israeli natural gas, in reality everything that happens in the Middle East is
about energy. After all, the United States is drawn to the Middle East to
protect its oil interests, and the reason it can act there with such force is
because it buys billions of barrels of oil from Saudi Arabia and others in
the region.
In a region that revolves around energy resources,
Israel has long been at a major disadvantage, scrambling to secure supplies
of the oil and gas it needed. Today, all that is changing, and Israel's
newfound natural gas wealth will generate a sea change not only for the
Jewish state but for the entire region and everyone involved in it. Israel is
gaining clout, Russia might be changing sides, Iran is feeling vulnerable,
Egypt is losing a major customer, regional and global allegiances are
shifting, and we are being reminded that energy resources hold the real power
in the world's most volatile region.
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