Two Sides of the Same Flag: How Israel's Natural Gas Will Change the World

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 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 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 0 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.

Additional Links and Reads

Oil Near Seven-Week High on Iran Tensions, Stimulus Speculation (Financial Post)

Oil is trading near its highest level in seven weeks because of estimates that US supplies declined last week, concern that tensions with Iran will worsen, and signs that the Federal Reserve may boost stimulus measures. US crude stockpiles fell for the fourth straight week, helping to slowly erode the biggest glut since 1990. Meanwhile, Secretary of State Hillary Clinton said from Jerusalem that the US will use "all elements" of American power to prevent Iran from obtaining nuclear weapons. But in his semi-annual report to Congress, Ben Bernanke stopped short of providing stimulus, instead telling lawmakers the central bank was considering a range of tools to help the economy, but for now would continue to wait and assess. Nevertheless, the spot price of WTI crude for August delivery rose to US.92 a barrel.

Rich Nations Losing Control of Oil Markets (Winnipeg Free Press)

Next year, for the first time on record, the wealthy nations of Europe, North America, and Japan will account for less than half of the world's oil usage, according to the latest projection from the International Energy Agency. The shift reflects both growing efficiency in wealthy nations and growing prosperity in poor countries, but a world in which the majority of oil consumption is happening in China, India, and Latin America is a world in which America's energy fate is driven by forces beyond its control.

LNG: US Weighs the Cost of Gas Exports to Economy (Financial Times)

With the price of gas in the US now a third of that in Western Europe and a fifth of that in Asia, interest in developing liquefied natural gas (LNG) export capacity is growing rapidly. Proponents argue that exports will help drain a glutted market; detractors argue that competition from exporters will drive domestic prices up. And since a chunk of those exports would go to countries with which the US does not have free-trade agreements, the government can only approve LNG projects if they do not harm the public interest, which increased fuel costs would. The Department of Energy is now studying whether the harms of exports outweigh the benefits, and no new liquefaction projects will be approved until they come to a conclusion.

Thermal Coal Weakens Further (Calgary Herald)

After falling significantly in recent weeks, thermal coal prices are now down 30% year-over-year, weighed down by slowing Chinese growth, a shift to cheap natural gas, and tough environmental regulations. The US thermal coal market has now moved into surplus, and miners that do not respond by cutting production and delaying spending plans could well meet the same fate as Patriot Coal, which filed for bankruptcy last week.

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