Abstract
Israel has had an eventful journey in the two decades that it discovered natural gas in the waters of the eastern Mediterranean abutting its coastline. For a country that was almost entirely dependent on imports for meeting its energy requirements, the discoveries at the beginning of the new century led to the accrual of enormous economic benefits domestically. It has also opened up spaces for the pursuit of economic well-being with regional countries.
In Israel’s Mediterranean Gas, Sujata Ashwarya brings into attention the Jewish nation navigating the complex pathways to achieve energy independence. The author meticulously shows how Israel built a legal and regulatory framework from scratch to optimize the exploitation of the precious resource. Ashwarya notes the exclusive role of the private sector in Israel’s gas development, in contrast to the dominant role of the public sector in most other countries. Even as the private sector has spearheaded Israel’s gas forays, critical public scrutiny and inputs led to the formulation of the regulatory frameworks governing the resource.
After it began to flow into the Israeli economy beginning in 2004, the author notes that natural gas accounted for more than 80 per cent of electricity being generated in the country. Natural gas consumption during the period 2006–2016 grew at more than 15 per cent, compared to the global average of around 2 per cent.
Israel benefited significantly from the infusion of the energy resource into its economy, with the country registering a current account surplus for every year since 2004. The transition into the use of natural gas helped Israel earn nearly $3 billion during 2004–2013. Given the reduced expenditures on energy imports, the personal savings rate of its citizens also increased.
Israel began exporting gas to Egypt for the first time in January 2020, from the Leviathan field, marking the beginning of commercial operations for the giant field. The trajectory of Israel’s gas journey, henceforth, is closely tied to the fortunes of the Leviathan field and the ability to fulfil export contracts related to the field. In February 2018, Israel entered into a 10-year contract with Egypt worth $15 billion for the export of gas from Leviathan. A 15-year contract with Jordan, worth $10 billion, was entered into in 2016.
Israel has had eventful interactions with Egypt and Jordan, its southern and eastern neighbours, the only two Arab nations with which it has a peace treaty till the Abraham Accords of September 2020 with the UAE. Egypt in 2012, for instance, terminated the 2005 agreement to supply gas to Israel. This was on account of a combination of factors, including commercial reasons relating to gas prices and arbitration issues, domestic political opposition to supplying gas to the Jewish state—especially prominent after the Mubarak regime was overthrown in 2011, as also issues relating to the physical security of pipelines in the Sinai peninsula. After the coming into power of General Abdel Fatta el-Sissi in 2013, Egypt and Israel have again found common cause to pursue energy cooperation for mutual benefit. Even as Egypt has discovered its own massive gas fields in recent times, Ashwarya notes that the country’s growing economy can absorb Israeli gas. Israel is also helping maintain security in the Sinai peninsula.
Cairo meanwhile is also anxious to take the place of Ankara as the regional energy hub. Turkey is an ideal trans-shipment hub for Mediterranean gas exports onward to Europe, which is dependent on costly imports from Russia. Turkey under Erdogan, however, has followed adversarial policies with a host of regional countries, making redundant cooperation in the gas sector.
Israel and Egypt meanwhile have pursued robust bi-lateral, tri-lateral and multi-lateral cooperation with Greece and Cyprus in the gas sector, not surprisingly co-terminus with the vitiation of their individual relationships with Turkey. These four countries, along with Italy, Jordan and the Palestinian Authority (PA), got together to form the East Mediterranean Gas Forum (EMGF) in January 2020, headquartered in Cairo. These countries intend to develop the ambitious 2,000 km East Med pipeline and hope to become significant players in the European energy eco-system. France and the United States have also expressed an interest to join the EMGF.
Israel meanwhile is going ahead with its efforts to find new reserves of gas with foreign collaboration within its EEZ, even as it continues to face opposition from Lebanon, due to an un-demarcated EEZ. Three rounds of bids were called by the Israeli Ministry of Energy so far, with the first bidding round ending in November 2016, the second in October 2019 and the third round announced in June 2020.
The first call for bids in 2016 received a lukewarm response, with only two companies—a Greek energy company Energean (already developing Tanin and Karish fields) and an Indian conglomerate (led by ONGC Videsh)—being successful in their bids. ONGC Videsh’s project in Israel is among the 39 oil and gas projects that the Indian giant is currently involved in, across 19 countries. In the second round, British and Israeli companies were granted exploration licences. Successful bids for the third round will be announced in October 2020.
Some of the challenges that Ashwarya lists for the Israeli gas industry to fulfil its potential have been further exacerbated by the COVID-19 pandemic which has not left Israel’s gas saga untouched. The inexorable march of renewable energy coupled with low oil prices continues to pose questions to the long-term viability of natural gas as an energy resource. The output from Leviathan was reduced in mid-2020 as demand declined for its gas from its consumers, including Egypt, Jordan and a number of Israeli utilities like the Israel Electric Corporation (IEC).
The reduced output from Leviathan also implies that the operationalization of the Israeli Citizens’ Fund, the Sovereign Wealth Fund (SWF), intended to start operation once at least NIS 1 billion was deposited into it, gets further delayed. Tax revenues from exports of Israel’s Tamar reservoir were also lower than expected. Tanin and Karish fields are expected to go on-stream in 2022, further adding to the tax revenues, a part of which would be deposited into the fund. Israel’s National Economic Council had earlier predicted that the fund would become operational in 2018 itself. Political uncertainty in Israel also meant that the creation of mechanisms to oversee the management of the fund, as mandated by legislation, was not put into place.
Noble Energy Inc, which has significant stakes in the Tamar and Leviathan fields, was acquired by Chevron in July 2020. The entry of the US energy giant is being seen as a sign of confidence in the Israeli gas industry buffeted by negative economic headwinds. Even as Israel ramps up its domestic gas use, stable overseas markets are critical to fully reap the benefits of the enormous investments in its gas fields.
The oft touted promise of the ‘peace/economic dividend’ flowing out of cooperative gas trade to mitigate antagonistic regional political relations has not yet fructified. While the newly created EMGF is a welcome development, it brings together countries most of whom are regional rivals of Turkey. Ashwarya’s book is an important intervention that helps us better understand the complexities involved in the pursuit of common economic benefit by countries in a conflict-ridden region.