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ModernDiplomacy.eu: Israel’s Gas Game: Changing Strategies in the East Mediterranean

Posted by: Berhane.Habtemariam59@web.de

Date: Wednesday, 30 May 2018

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Τhe East Mediterranean’s gas resources can promote cooperation, resolve conflicts and deliver financial benefits that contribute to the economic development of littoral countries, primarily Israel.

A renewed Israeli gas regulation framework portends a competitive market in the East Mediterranean, given that new companies acquire offshore exploration licenses as result of Israel’s first international licensing round. The first Israeli international round concluded with the award of licenses to Greek energy company Energean Oil & Gas and a consortium of Indian companies comprised of ONGC Videsh, Bharat PetroResources, Indian Oil Corp and Oil India. Due to limited response by prospective investors, the second licensing round is scheduled for 2018 so that utilization of gas and oil fields occurs within Israel’s Exclusive Economic Zone (EEZ).

The attraction of international energy companies however depends on the commercial viability of existing and future reserves that is linked to energy market prices, the cost of constructing export infrastructure, and the securing of customers. Concurrently, existing and prospective supply options and regional stability or instability are factors determining investment decisions by international energy majors.

The lack of oil and gas transportation infrastructure is a reality in Israel. Leviathan gas field partners namely Noble Energy, Avner Oil Exploration, Ratio Oil Exploration and Delek Drilling are likely to develop infrastructure used exclusively by Leviathan, blocking out competitors and endangering prospects for future gas discoveries in Israel. Without Leviathan’s economies of scale, competitors will have to finance their own transportation infrastructure, thus raising the costs of developing smaller fields at prohibitive levels.

Regarding prospective supply options, the overall outlook is quite promising. Israel’s capacity as a gas exporter is significant in regional terms, as evidenced by the signing of a $15 billion agreement to export approximately 64 bcm of gas over a ten-year period from Israel to Egypt. Notably, the new Egyptian legislation, called Resolution No. 196 of 2017, foresees the establishment of a gas regulatory authority and permits private companies to import gas from third countries like Israel.The transfer of Israeli gas to Egypt will be carried out via Jordan, which is expected to gain revenues in the form of royalties paid by oil companies. Jordan’s National Electric Power Company (NEPCO) finalized the Gas Transport Agreement (GTA) with the Jordanian-Egyptian Fajr Company for Natural Gas Transmission and Supply Co Ltd in December 2017; Jordan’s council of ministers authorized the GTA on February 4, 2018, and NEPCO and Fajr Company signed the GTA contract on February 20, 2018. The agreement foresees the construction of a 50 km pipeline expected to be fully operational in the second half of 2019. The benefits of the project are two-fold as not only it guarantees the flow of economic resources that open the way for the speed development of the Leviathan gas field, but it is also a milestone in regional gas cooperation as it supports real Jordan-Israel-Egypt normalization.

Political tensions that can negatively impact regional energy cooperation are connected to competing Exclusive Economic Zone (EEZ) claims between littoral countries in the East Mediterranean. For example, overlapping maritime claims between Israel and Lebanon over Block 9, an 854-square kilometer maritime boundary, carry the risk of escalation if exploration in this disrupted area were to proceed. The January 2018 signing of Lebanon’s first exploration and production agreement (EPA) with a consortium of companies led by French Total as the operator, Italian Eni and Russian Novatek as partners, signals competition that could evolve into confrontation over energy resources. To dodge tension, a 2012 American proposal that involved division of the disputed area, granting Lebanon a larger share, could serve as basis of bilateral discussions and could be carried out by a third party. The reason is that in the absence of mutual diplomatic recognition between Lebanon and Israel, no trans-boundary natural resource sharing initiative could be taken. In fact, the block-9 consortium’s announcement that no operation within 25 km of the disputed area will happen leaves room for a third party mediation; this party could minimize the risk of armed conflict, and work on reciprocal acceptance of the 2012 American proposal so that consensual and authorized economic activity becomes feasible.

The development of energy resources is a demanding process thus Israel should swiftly proceed with the construction of the pipeline that will carry gas from Israel to Egypt through Jordan to capitalize Egyptian Resolution 196 and circumvent Egyptian government regulation, which dictates that gas agreements with Israel can proceed only after arbitration cases against Egyptian firms are resolved. Israel’s focus on multiple gas export options is deemed as critic also that Israeli gas is not tied to a single market where changing bilateral relations or geopolitical conditions can affect the sustainability of exports, and thus negatively impact the country’s energy wealth.

Additionally the joint use of Israeli Leviathan field’s transportation infrastructure or alternatively the development of joint national infrastructure to overcome prohibitively high costs associated with developing smaller fields in Israel like Dalit gas field and the Shimshon field is important to attract international energy majors for future licensing rounds. The Israeli government should specifically address risks that worry investors like force majeure and export sustainability by guaranteeing a certain amount of financial recovery through the existing compensation mechanism.

Last but not least, the convening of an East Mediterranean Conference that will focus on the delineation of regional countries’ maritime borders encouraging perhaps the EU to intervene as arbitrator for the disputed Block 9 that lies across the common Israel-Lebanon maritime border can prove catalytic for regional energy cooperation.

No doubt that Israel has a competitive edge in gas exploration and development in the East Mediterranean; it is a deserving pioneer that has overcome past regulatory wilderness and is profoundly committed to solve adversities so that regional energy and economic integration becomes of substance. Because as it is aptly highlighted by American winner of the 2004 Nobel Memorial Prize in Economics Edward Prescott “Economic integration is the path to riches and peace”.

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