The Geopolitics of Israel’s Offshore Gas Reserves

The Geopolitics of Israel’s Offshore Gas Reserves



David Wurmser

The flow of natural gas from Israel’s Tamar reservoir in the Mediterranean to the

Ashdod reception facility was inaugurated on March 30, 2013, ushering in a new era in

Israel’s energy sector. Israel will not only become independent in being able to supply its

own energy needs, but it is likely to become an energy exporter as its maritime gas

fields are further developed.

On January 17, 2009, Israel’s economy and even its strategic stature changed when a

team led by the Texan firm Noble Energy discovered gas in the Tamar field in the

eastern Mediterranean, which is estimated to contain 9.7 trillion cubic feet (TCF) of

natural gas. The Tamar well-heads which contain methane gas are rated at a high level

of purity, with an energy value of production per well-head over four-fold higher than

Saudi oil well-heads. Two years later, the same team drilling a few dozen kilometers

further west discovered a monstrous gas field, appropriately called Leviathan, which is

now estimated to contain 18 TCF and could begin supplying gas in 2016.

Tamar was only the beginning. The amount of gas subsequently discovered offshore

now dwarfs any feasible, projected Israeli demand for at least half a century. The Tamar

field alone represents two decades of consumption. As such, Israel will become a net

exporter of gas. The Israeli gas discoveries in the eastern Mediterranean are only part of

new gas fields in what is called the Levant Basin, which includes the maritime areas of

Israel, Cyprus, Lebanon, and even parts of Syria’s waters. The Levant Basin could hold

125 TCF.



The most likely short-term destination for Israel’s natural gas is Jordan. Connecting

Israel’s emerging gas grid to Jordan is a relatively inexpensive and simple endeavor. Yet

Israel will almost certainly have much larger amounts to export.



Given its geographic proximity, Europe would seem to be the natural export market for

Israeli gas. Moreover, Europe is facing a major gas supply crisis because of the spread of

instability in Algeria and the rest of North Africa. Yet Asia may emerge as Israel’s

preferred export destination. The Australian firm, Woodside, which acquired about a

third of the rights to the Leviathan field, is oriented toward marketing gas in Asia, and

envisions building a liquefaction plant to service that trade.



.

Israel’s recent experience with Egypt, where half of its natural gas supply was

permanently severed following the collapse of the Mubarak regime, suggests that Israel

will view with apprehension any scheme to anchor its critical infrastructure in countries

beyond its own borders, such as Jordan, Cyprus, or Turkey. Thus, it is likely that



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ultimately the gas will be liquefied on Israeli territory and exported directly via sea to

the consuming market.



.

Israeli officials view a cross-Israel natural gas pipeline connecting the Mediterranean

and Red Seas as an alternative to the Suez Canal. But an export structure operating

directly from Eilat to markets in Asia would face a rising strategic problem: Iran’s

increasing naval presence in the Red Sea. This will require Israel to establish and expand

a Red Sea fleet as well as a significant expansion in the size and capability of its

Mediterranean fleet.





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On January 17, 2009, Israel’s economy and even its strategic stature changed. A team led by the

Texan firm Noble Energy Inc., drilled under 5,600 feet (1,700 meters) of water and 16,000 feet

(5,600 meters) of rock and salt off Israel’s shores in the Matan license to explore a prospect

called Tamar. On that day, they struck and flared methane, discovering a field which now is

estimated to contain a probable 275 billion cubic meters (9.7 trillion cubic feet, or TCF) of

natural gas. To compare the size of the field to consumption measures, the field represents

over half of what the European Union’s 27 (EU-27) nations consume annually, which in 2010

peaked at about 522 BCM before declining in 2011 and 2012, of which now about 463 BCM is

imported per annum. Moreover, the Tamar well-heads which contain methane gas are rated at

a high level of purity, with an energy value of production per well-head over four-fold higher

than Saudi oil well-heads.



While the economic and resource effects of this and subsequent finds are becoming clearer by

the day, the complex geo-strategic context and significant implications of the finds remain

largely under-examined. And that complexity and impact will dramatically increase if – as we

will learn late in 2013 – oil is discovered under the gas or if the touted new technologies to

extract Israeli shale oil prove real.



What Was Found and How to Understand It



Discoveries Off-Shore of Israel and Cyprus



Almost two years after the large Tamar field was found, the same team drilling a few dozen

kilometers further west announced yet another discovery, this time of a monstrous gas field,

coincidentally but still appropriately called Leviathan, straddling the Rachel and Amit licenses.

Leviathan alone is now estimated to contain 18 TCF, namely about as much gas as Europe

consumes annually. Ever since, there have been several other finds of smaller, but nevertheless

substantial fields, such as the Karish (Shark) field, which contains possibly about half as much

gas (3 TCF) as Tamar, and the Dophin 1 field in the Hanna license announced in November

2011, which may add another TCF to Israel’s tally – a small amount, but nevertheless still

enough alone to fuel Israel’s domestic gas needs for several years. At least another TCF appears



to have been found as well in the Tanin (Crocodile) field in the Alon license. There are also

several other unexamined natural prospects in various stages of exploration.



In neighboring Cyprus, another field (Aphrodite) comparable to the Tamar find was discovered



– also by Noble Energy. It abuts and even slightly spills into Israel’s waters into a series of

prospects known as the “Pelagic licenses.” And the growing Israeli-Cypriot relationship, as well

as the overlap of some of the consortia involved in exploration and production activities,

suggests that the two nation’s hydrocarbon assets and activities can reasonably be seen as a



potentially integrated whole.



In short, Israel and its Greek island neighbor now sit atop of at least 35-40 billion cubic meters

of gas – roughly two-years’ worth of European consumption – and still have broad areas of



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exploration ahead of them. Indeed, Israel’s Oil Commission at the Ministry of Energy and Water

Resources has closed further offshore licensing until the 40 current exploration licenses, which

cover 65 percent of Israel’s economic waters, are completed. Israel has not granted any new

licenses since March 2010. Moreover, Cyprus’ waters remain largely unexplored. In fact, only

one block (block 12) has been systematically examined. Only since the end of 2012 were

tenders awarded for exploration in several more blocks, with international majors, such as

Total, leading the pack.



What May Still Lie Beneath



In 2010, the United States Geological Survey (USGS) issued a resource estimate report. Based

on information now likely outdated since it was issued even before the Leviathan discovery, it

estimated even then that the Levant basin could potentially hold as much 125 TCF of

recoverable gas – an amount representing about one-tenth of Russia’s known reserves. The

Levant basin is a geological delineation that includes the maritime areas of Israel, Cyprus,



Lebanon and even parts of Syria’s waters. Egypt’s natural gas (which includes several dozen



TCFs of natural gas) is considered a different basin, as are any potential discoveries in Greek

waters or areas north of Cyprus. Moreover, in 2011 a team of geologists from MIT examined

data from the Levant basin and concluded that Israel “can expect at least 6 more ‘Leviathans’ in

its territorial waters” (at the time Leviathan was thought to hold 16 TCF; today it is estimated to

hold 18 TCF).1



But there is a caveat. While still important, geological reports such as the ones issued by USGS



and MIT are primarily indications of the basin’s considerable potential beyond discoveries thus



far announced. They are scientific guesses based not on discovered, nor even reliably likely to

be discovered, amounts, and may not even be based on the latest and most sophisticated data

from 3-D seismic studies and actual exploratory drilling, all of which is superior information

which exploration and production (E&P) companies themselves gather and hold. As such, E&P

companies do take notice when such reports are issued – it grabs attention and warrants

dedicating resources to examine more thoroughly – but actual investment and acquisition

decisions are made on the basis of known discoveries and data, not USGS or MIT estimates.



Exploration remains the domain of people with a gambling soul, not those averse to risk,

because even the most promising estimated prospect can turn out to be a dry hole, and

exploration estimates based even on 3-D seismic studies which are set above 30 percent

likelihood are considered very high. Indeed, the story of two prospective fields in Israel shows

just how risky it is to bet even on high likelihoods in gas. The Ishai license of the “Pelagic” group

turned out to lack substantial gas even though 3-D seismic studies showed much promise and it

abutted the large Aphrodite field across the EEZ line in Cyprus. The Myra and Sarah licenses

were also at first thought to hold as much as 6 TCF on the basis of 3-D seismic studies. In short,

to take concrete action – whether it is a firm making an investment decision or a nation making

a strategic decision – based on these studies is high-risk.



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As such, while not belittling the potential of further finds, not only of gas, but oil as well – many

of which can be cataclysmic, game-changing events for Israel (and could potentially propel

Israel into becoming a hydrocarbon-producing super-power) – current analyses of the

economic, strategic and political impact of gas in the basin should still be anchored to

announced discoveries and ongoing exploration activities and data collected by companies, and

not on governmental or non-oil industry estimates.



History and Background



Up until the middle of the last decade, British Gas owned most of the licenses in Israel. But in

2005 and 2006, it sold its rights and swore off ever returning to Israel, despite the fact that

there were geological indications of hydrocarbons deep below.2 It sold the Matan license in

2005, which then became known as the Tamar Reserve, to Avner Oil and Gas for only $1. Avner

Oil and Gas eventually transferred part of its stakes to Delek Energy (both Avner and Delek are

part of the larger Delek conglomerate under Yitzhak Tshuva) and sold more to Noble Energy,

Inc. in 2006.3



Gas had already been found a decade earlier than the Tamar discovery of 2009 in smaller

offshore fields, but the amount of gas in those wells represented a momentary – and even then

partial – relief to the complete dependence Israel faced in its energy sector. The main field –

known as Mari-B – contained about 1 TCF of gas (about as much as the Dolphin 1 field

announced in late 2011). Despite its limited size, it did, however, play an important role in

helping Israel transit from exclusively using heavy fuel oils and coal for electricity production to

become a more clean-burning and gas-reliant nation in terms of electricity production. Mari-B,

which was the first source for Israel’s gas-fired power plants (starting in 2004), was soon joined

by the import of Egyptian gas, which had been planned first, but was delayed in arriving by

several years.



By the end of the decade (2009-2010), gas supply from Egypt accounted for about half of

Israel’s gas consumption (40 percent), and gas from Mari-B supplied roughly the other half (60

percent).4 The two together transformed Israel into a country relying on gas for about 40-45

percent of its total electricity production by 2010, up from none only half a decade earlier.

Israel is now on its way to become one of the most gas-reliant nations for electricity production

in the industrialized world, with estimates ranging well over 60 percent reliance within a few

years.



This trend toward reliance on gas predated the discovery of Tamar, largely because of the

assumption that gas from Egypt – which sold for less than 25 percent of the price of the

equivalent heavy fuel oil used for energy production – would greatly relieve Israel’s eternally

tenuous and expensive quest for such fuel, and would provide a long-term solution for Israel’s

energy needs. Even then, it was recognized that the Mari-B field, which only contained about 1

TCF, could supply Israel until 2013-14 – or a bit over half a decade – before it would be fully

depleted.



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As such, before the discovery of Tamar, Israel had already been moving to cheaper and cleaner

energy production with the transition to natural gas, but it was not really gaining energy

independence in the medium-and long-run. Israel was slated to become fully dependent on

Egyptian gas by 2014 to fuel about half of its electricity production.



Gas as Peace



While aware of the danger associated with such dependence on its neighbor, Israel hoped that

this dependence could be rendered safe by anchoring it to the vital national interests of the

Egyptian economy and to the personal interests of its elites. By helping the fortunes of Egypt’s

business and ruling elite and providing a source of revenue to the Egyptian state – thus locking

it in to a fiscal dependence – the gas trade could bring meaningful substance to the idea of

“normalization”– the idea that daily interactions between the people and economies of Israel

and Egypt would transform the peace treaty signed in 1979 from a formal but detached treaty

between governments into a daily reality, co-dependence and a source of familiarity among the

two nations’ peoples. Indeed, the Egyptian-Israeli natural gas trade was the culminating, and

only now understood to be final, act in the attempt to solidify Egyptian-Israeli relations (and

financially shore up the Egyptian government and its elites) through trade.



It was in this context that the discovery of gas off of Gaza should also be understood. In 2000,

gas was found offshore in the Gaza Marine prospect. The field was roughly comparable to Mari-

B, which lies offshore from Ashdod. The Gaza Marine field held the potential for helping the



Gazan economy develop, fund the Palestinian Authority, and tie Israel’s and Gaza’s economy



together, and had the potential of becoming a supporting column in the edifice of peace. The

discovery, and hopes for its expeditious development, thus paralleled the attempt to lock the

Egyptian-oriented Palestinian pan-Arab nationalist leadership into a peace process through

economic interdependence and revenue incentives to elites.



At the time, the British Gas Group (BG) owned the Gaza Marine field (as it still does) as well as

all the known Israeli fields (all of which it sold). To help the development of the Palestinian

economy – which was seen as key by Israeli and American leaders to politically moderating the

Palestinian population and solidifying peace – and lay to rest any potential arguments in the

future over the resource, Israel carved from within the demarcation of its proposed Exclusive

Economic Zone (EEZ) between itself and Gaza an indentation rather than run the demarcation

line straight from the coast as is done in every other EEZ demarcation across the globe. Israel



agreed to allow the line to be indented to Israel’s disadvantage so that the entirety of Gaza



Marine will be included in the Palestinian Authority area. The gas, which was to be used both

inside Gaza for electricity production and exported to Israel, was to help the Palestinian

Authority fund itself, have resources to build up its stature among Palestinians, and by

stimulating development, to encourage political stability and moderation.



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In 2013, talks reportedly resumed between Israel and the British Gas Group (which owns 60



percent) and its partners: Consolidated Contractors Company (CCC), owned by Lebanon’s Houri



family, which owns 30 percent, and the Palestinian Investment Fund (PIF), which owns 10

percent), to develop the reservoir for the Palestinian population in the West Bank and Gaza.5

Apparently, the talks centered on having the gas service the Palestinian Authority areas, which

currently have only one 240-megawatt plant powered by diesel, though there are plans to build

four natural gas power stations in the West Bank.



In the past, Israel had discussed developing the Gaza Marine reservoir to supply Israel as it

entered its own natural gas shortage following the cessation of gas deliveries from Egypt. Going

back further – and the most probable scenario if it ever comes to pass (which is unlikely) – BG

has unsuccessfully tried to sell gas to the Israel Electric Corporation (IEC). The amount of money

the IEC loses annually – since the Palestinian Authority is connected to Israeli power but is not

paid by the Palestinians – roughly equals the value of the gas which could be extracted per

annum from Gaza Marine. There could be a swap – Israeli electricity for gas – without actual

money being exchanged, which would go some way toward addressing Israel’s concern that



revenue collected from Gaza Marine gas sales to others would eventually wind up funding

Palestinian terrorism against Israel.



Gas Trade from Israel’s Neighbors



These attempts to anchor Israel’s relationships to economic interests became a casualty first of

the Palestinian elections of 2006, in which Hamas prevailed and which facilitated Hamas’



assertion of control over Gaza, and then five years later with the Arab Spring (Sunni

Awakening), starting in 2011.



Despite hopes for its role in encouraging peace between Israelis and Palestinians, Gaza Marine

was never developed. Few really wanted the gas to come to market. Egypt saw it potentially as

competition to its own gas agreement with Israel (unless the whole affair would have been

transferred under their structure), nor did it genuinely ever pursue policies which would make

the Gaza Strip a truly viable economic player independent of Cairo’s continued largesse. Israel

by and large feared that absent any controlling mechanism, the revenue from the gas sales

accruing to the Palestinians would flow to terrorist entities in Palestinian areas.



Iran – which developed operational control over the most powerful and violent elements of

Hamas – opposed the deal, as it did the development of Lebanese gas, since it competed with

its own gas. Moreover, Tehran generally pursued a policy of enfeebling the Palestinians in order

to exploit their misery for their own strategic purposes. Russia as well was lukewarm to any

effort not under their control, and even made efforts to buy Gaza Marine, at first outright and

then in hidden fashion through a Norwegian firm. Great Britain blocked both paths to a sale,

likely under encouragement from the United States. To this day, British Gas continues to seek a

buyer for the moribund Gaza Marine project.



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Finally, perhaps portending the difficulties which await Lebanon’s communities as they grapple

with their possible natural gas discoveries, the internal divisions among Palestinians and their

fractured political community all but guarantee that Gaza Marine will remain stranded under

the Mediterranean for quite a while. When Hamas assumed control over Gaza, it insisted that

the agreements between the PLO and British Gas were null and void. Hamas claimed that the

agreements had been corrupt arrangements between the West and the local elite attempting

to enrich itself, and that the intermediary company, CCC, was a Christian entity which could not

represent the interests of the Islamic community over their inherited resource. The Palestinians

never managed to overcome these profound differences, and the gas remains undeveloped.



Many of the arguments arising in Gaza by 2008-9 began to appear in the public debate in Egypt

as the gas trade with Israel commenced. The main line of public criticism of the Mubarak

regime on this issue was that it was a corrupt agreement which was designed to enrich the

elites and sell out the interests of the Egyptian people to advantage the Jews and the West. Gas

shortages in Egypt – which were for a different type of natural gas for cooking rather than

power production, and which were the result of poor distribution networks – were also

immediately attributed to the gas trade with Israel. The main figure behind the Egypt-Israel gas

deal, Hussein Salem, was allegedly receiving enormous kickbacks from the trade, and was

strongly associated with Gamal Mubarak, the president’s son. Indeed, since Egypt’s political

class opposed not only gas export in general – particularly to Israel – but any element of normal

relations between the two countries, the fact that the Egyptian-Israel peace was devoid of

interaction beyond formal diplomatic relations made the gas trade stand out. Precisely because

it had become a meaningful element of normalization between the two countries, opponents

of the Egyptian-Israeli peace agreement saw its termination as a vehicle to gut the treaty.



In late 2009, Egypt’s government was defending the gas trade with Israel. Egypt’s Petroleum

Minister, Sameh Fahmi, tried to justify the trade as required under the 1979 agreement, but

quickly realized that appeal to the requirements of the peace treaty only intensified opposition



– since trying to sabotage normalization with Israel was precisely the point of much of the

opposition – and confirmed the trade’s non-economic moorings. In the last days of the

Mubarak regime, Fahmi tried to justify selling Egyptian gas to Israel for numerous national

economic, legal and strategic reasons, but ultimately suggested the decisive reason is that

Egypt is expropriating Israeli wealth by charging Israel more than it charges other buyers.6 In

other words, the only reason the Mubarak government could raise at the end for continuing the

gas trade with Israel was that it helped relieve Jews of their wealth.

It was not surprising, then, that within weeks of Mubarak’s fall, the Egyptian-Israeli gas trade –

upon which Israel had become dependent – was interrupted almost continually throughout

2011, and then came to a formal end by the end of the year, even though Israeli officials to the

end dismissed the likelihood of such a termination, citing the fact that the Egyptian state could

ill afford to lose such a significant source of hard cash and foreign currency. In the mid-1990s,

Israel misjudged how eager the PLO would be to come to an acceptable arrangement to bring

Gaza gas on line because its finances depended on it. A few years later, Israel misjudged as well

how strongly antipathy toward Israel would also trump the fiscal interests of the Egyptian state.



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The discouraging precedents of potential Egyptian and Gazan gas trade with Israel, or lack

thereof, suggest the danger of hoping that leveraging Israel’s gas trade with other neighbors

could alter the direction of their relations with Israel, whether it be with Amman or Ankara.



This also highlights the importance of the discovery at the Tamar field – which was found just as

the Egyptian gas trade entered turbulence before plummeting to zero, and just as the Mari-B

field entered its last stages of production. Tamar averted what would have been a major

breakdown in Israel’s energy sector. And Tamar, and the finds which have followed, now

represent Israeli natural gas independence for the next two decades, just as Israel found itself

unable to continue the energy dependence which it had built and upon which it had counted

from its neighbors in the anticipated but now fading age of peacemaking.



Economic and Resource Impact



The most immediate and potentially greatest strategic impact of Israel’s new energy reality is

the effect it will have on the ultimate foundation of the nation’s long-term strength: its

economy. The Tamar find and those following it opened a new chapter which will



fundamentally change Israel’s resource circumstances and economy. Israel had labored since its



creation under resource scarcity. The gas discoveries now position it to become a significant

exporter of energy rather than a scrambling purchaser of it. Moreover, not only will this save

Israel tens of billions of dollars in external payments annually to buy its energy, but Israel can

now turn the abundance of cheap and relatively clean energy to launch large-scale desalination

and leverage its fortune to end another resource scarcity – water. Indeed, Israel may now

become a net exporter of water, not only energy, as it frees up the Sea of Galilee to possible

export to neighboring Jordan rather than continue to use large amounts of energy in an

expensive effort to pump its water to Israeli cities. Ending its resource dependence in its two

most critical sectors answers strategic challenges which had placed Israel in a dangerously

vulnerable position since birth. At the same time, it will contribute to Israel’s growing strategic

confidence.



Economically, Israeli industries will see a dramatic decrease in production costs as they switch

from use of heavy fuel oil, or expensive electricity generated from fuel oil, to gas. A cursory

glance backwards at the last two decades of Western industrial activity teaches us that even a

marginal change in energy costs can cause wild swings in productivity and competitiveness

across a developed economy. So one can only begin to imagine what the dramatic shift in



energy costs might cause in Israel’s economy, which is already emerging as one of the world’s

healthiest and promising. Yet that may not even represent the biggest impact on Israel’s

economy. While Israel will continue to be known for its high-tech industry and start-up firms –

some of which are energy-intensive industries that might benefit most from lower energy costs



– Israel will see a dramatic increase as a result – indirectly or directly – of the emerging gas

sector in many tens of billions of dollars’ worth of direct foreign investment and infrastructure

projects in the coming decade. When Israel moves from ranking high in small-scale industries,



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research and development, and start-ups, to mastering large-scale infrastructure as well, it will



assume a position in the elite inner circle of the world’s handful of the most advanced



economies.



Still, the sudden entry of such a new and important reality into Israel’s economy will also



present Israel with considerable economic challenges for which some foresight and strategic

planning is in order. Indeed, the Bank of Israel – which was one of the earliest Israeli institutions

to grasp the momentousness for Israel of the discoveries – is already engaged in such planning,

and its most recent annual report (released April 2013) should be understood in this context.

The most important of these long-term dangers is the potential distorting effect of this sector

on both Israel’s natural economic advantage of innovation and export, as well as the danger

that industries which will enjoy competitively low energy costs may grow to far beyond their

sustainable size in Israel, and thus threaten an economic collapse when the gas runs out or

increases in price.



The former is generally understood as the “Dutch disease,” namely, that the fortune of great

mineral wealth and export eclipses other industries and, even more importantly, drives up the

value of the nation’s currency to the point where the nation’s export sector beyond the

exported mineral or hydrocarbon resource is no longer internationally competitive. It is for this

reason that the Bank of Israel advises against having much of the money gleaned from exports

ever enter Israel’s shekel system – and instead prefers to have revenue invested abroad in a

sovereign wealth fund. By never entering Israel, never being converted to shekels, nor

becoming part of the national budget, the revenue from the resource distorts neither the

currency, the economy, nor the nation’s budget process, and thus leaves Israel independent of

the eventual downturn when the resource dries up, protects a competitive currency, and leaves

its export sector healthy and vibrant.



Still, there is no escaping that cheap gas sold domestically will both deplete the reservoirs

rapidly and create entire sectors of the economy whose viability will remain dependent on

cheap energy costs. To avoid a situation in a few decades as the resource depletes, when to

sustain gas-guzzling industries whose only path to avoid bankruptcy would be massive

government subsidies, the Bank of Israel has raised the possibility of imposing consumption

taxes on the industrial use of gas to discourage such industries from even emerging.



In short, in terms of economics, with the good will come some challenges, and Israel will need

to anticipate and plan carefully to leverage the asset in a way that leaves its economy strong,

without allowing vulnerabilities to emerge which in the long run can become devastating

strategic vulnerabilities. The bottom line: Israel’s greatest resource is, and must remain, its

human capital and industries which tap into it. The nation’s long-term strength depends on the

gas’ being leveraged to encourage that, and not to replace or stifle it.



How Gas Affects Geostrategic Conditions



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The impact that Israel’s new-found energy abundance will have on its economy and resource

scarcity represents a major and positive strategic change in and of itself. If the Tamar field had

turned out to be all that was ever discovered, it would have aided Israel through decades of

uncertainty until new technologies and means for energy production emerged. It was a bridge



to an alternative energy future, but one which represented the first time in Israel’s history that



it had energy security.



Yet Tamar was only the beginning. The amount of gas subsequently discovered offshore now

dwarfs any feasible, projected Israeli demand for at least half a century. Israel currently

consumes about 7 BCM (billion cubic meters) of gas, and is expected to more than double that



amount to 15.5 BCM by 2030. But even with these increasing rates of use, the Tamar field’s 275



BCM of gas alone represents two decades of consumption. As such, Israel will become a net

exporter of gas, and possibly oil if the latter is discovered later this year.



While the currently known amount of discovered, commercially-producible hydrocarbons do

not in themselves make Israel an energy super-major or strategic powerhouse, it is equally true

that Israel may have strategic opportunities to leverage the supply of marginally critical

amounts of gas to either Europe or Asia. Moreover, precisely because even those marginal

additions can have a major impact in key regions, such as Europe, or on the viability of several

gas transmission systems, such as those passing through Turkey, Israel’s gas export will carry

with it high-stakes geo-strategic plays and competitions, despite its modest size. For example,

Israeli gas, while amounting to a small amount if exported to Europe, could represent the

marginal difference between tight supply and oversupply, which could cause gas prices to



decline, even sharply at times. The decline in gas prices might trample on other nations’ vital



interests (not to mention the personal financial interests of their reigning elites) even more

profoundly than would losing a few percents of market share. In short, Israel need not export



large volumes to attract other nations’ unwanted attention.



Export Destinations in the Region



To Jordan



The easiest, cheapest, and most likely short-term destination for Israel’s natural gas is across

the Jordan River to the Hashemite Kingdom of Jordan. When the pipeline from Egypt to Israel

was sabotaged twelve times in 2012, each time the gas supply from Egypt to Jordan was also

cut, since it went through the same pipeline system. While this pipeline system may not be



useful in transmitting Israeli gas to Jordan since it runs through Egypt, connecting Israel’s

emerging gas grid to Jordan – especially in the south – is a relatively inexpensive and simple

endeavor.



Until Egypt’s gas was cut off, Jordan relied on 2.7 BCM from Egypt for energy production.

Jordan had been as much, or even more, dependent on Egypt’s natural gas supply than Israel,



having little or no other supply available to compensate. Overall, Jordan imports 97 percent of



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its fuel needs at a cost of 20 percent of its gross domestic product, and 88 percent of the energy

it consumes comes in the form of natural gas. When Egypt’s gas was cut off, Jordan was saddled

with extra costs amounting to $5.6 billion for electricity production, forcing the government to

increase subsidies by $1.6 billion to avoid doubling the price of electricity



Jordan is moving to build a major LNG regasification facility in Aqaba on the Red Sea to import



gas, but this is still years away and will prove to be very expensive. Moreover, Jordan’s energy



despair is a strategic opportunity for others in the neighborhood, especially Iran. Since Jordan

represents a critical strategic vortex for wider regional strategic competitions (Syria, Iraq,

Palestine-Israel, and even Saudi Arabia in the Hejaz), reinforcing and then addressing Jordan’s

dependence in this critical sector becomes a major strategic end in itself for any regional player.

Iran, in particular, would want Jordan to become dependent on energy coming from Iraqi areas

over which it holds sway – in essence thus exposing Jordan to Tehran’s strategic influence. For

Iran, given that Jordan became the home of a mass of Syrian refugees in 2012-13 and is

emerging as the gateway for Saudi intrusion into Syria, developing some form of Jordanian

dependence on Iran is vital. Controlling the flow of Iraqi gas to Jordan could be the means.



Yet the potential supply of Israeli gas at a rate of 2-3 BCM per annum would completely negate



Amman’s vulnerability and stymie Iran’s potential inroad. It appears that talks have already

been underway to have Israel’s gas exported to Jordan. Two Israeli papers, Ha’aretz

and

Globes,7 reported in February 2013 that partners in the Tamar gas field conducted secret talks

to deliver gas through the Israeli gas pipeline which supplies gas from Yam Tethys (Mari-B) to



Israel Chemicals’ Dead Sea Works plant in Sodom, and then extend the pipeline to reach potash



works in Jordan.8 On February 17, 2013, the Jordanian Ministry of Energy and Mineral

Resources issued a statement confirming that contacts are currently underway between the

Arab Potash Company and its counterpart in Israel through a U.S. company on the possibility of

importing natural gas from the Dead Sea area, but denied that there have been direct talks on

the issue between the kingdom and Israel on importing natural gas.9



While Jordan will likely become Israel’s first export destination, the amounts will represent only

a portion of the total amount Israel will likely export. Israel will almost certainly have much

larger amounts to export, and that implies other export destinations in addition to Jordan.



To Europe



The Arab Spring is manifesting itself in subversive acts against major national infrastructure,

which in the Arab world is first and foremost the oil and gas pipeline structure. International

gas pipelines appear especially vulnerable, as Arab (and even Iranian and Turkish) militaries

seem unable to adequately protect them, or perhaps are unwilling to do so.



This upheaval appears foremost to threaten Europe’s energy security. There are five existing or



proposed pipelines supplying gas to Europe from North Africa: the Trans-Med pipeline (which

carries 30.2 BCM per year via Tunisia and Sicily), the Maghreb-Europe gas pipeline (which



WURMSER-Special Report 7-APR-13 -12







carries 12 BCM per year via Gibraltar), the Medgaz pipeline (which flows from Algeria to

Almeria in Spain and carries 8 BCM, but is only now about to come on-line), Greenstream

(which flows through Western Libya to Sicily and which had carried 11 BCM and is now cut off),

and the GALSI pipeline (which is still being planned and will run from eastern Algeria to Europe).



All these pipeline structures originate in the Hassi al-Riml field in Algeria. Thus, three pipelines

carry almost 50 BCM to Europe each year, but all originate at one point. Moreover, while the

EU sought to diversify its supply of gas by building the Trans-Saharan gas pipeline, which would

carry Nigerian gas north, even that pipeline passes through to Hassi al-Riml in Algeria, where it

hooks up with the other three currently operating pipelines. Europe’s gas supply – about 18

percent coming through this one point alone (13 percent originating in Algeria and 4.5 percent

from Nigeria)10 – is, thus, extremely vulnerable.



This vulnerability has reached near crisis proportions after the “Arab Spring.” As the French

intervention in Mali highlighted, the rising tide of Islamist sentiments in North Africa and the

Saharan regions threaten the stability of North African states. Centrifugal tendencies have

arisen from the breakdown of central authorities in many Arab states and have reinforced the

importance of tribe, sect, and families. At the same time, the devastation left in the aftermath

of the collapse of the reigning pan-Arab nationalist ideology has driven many to seek the

authenticity of Islam. Even without the overlay of ideology, the breakdown of the central state

leaves tribes and other local leaders to seek new arrangements with the residual central

authority or neighboring tribes or leaders. The presence of an oil or gas pipeline or installation

within reach of the tribe – with a choice of either sabotage or protection offered – lends

tremendous negotiating leverage. For example, in the first two weeks of March 2013:



.

Protestors at the Jalu oil field belonging to Waha Oil in Libya shut down production for

over a week, until the Waha Oil company hired local drivers and guards at the field – a

demand to which Libya and Waha Oil had to accede.11



.

Egypt’s natural gas production continued to decline due to political unrest and tensions.



Many drillings in the Nile Delta were stopped due to blocked roads, and several gas and

oil fields have been closed under the pressure of local residents. Additionally, Bedouin



gunmen in Egypt’s Sinai Peninsula seized and briefly held the country boss of U.S. oil



major ExxonMobil and his wife.12



.

In Algeria, a movement calling itself “The Committee for the Defense of the Rights of the

Unemployed” escalated protests in most southern provinces and prevented by force a

meeting of members of parliament in Ghardaia Province. These provinces abut Mali and

lawlessness there will likely give a foothold to Malian Tuareg Islamist rebels fleeing

French actions to threaten the vital pipeline system.



Even in states which survive, gas transit is not to be taken for granted. For example, to mollify

populist sentiment in Morocco, the king has begun speaking about Spanish “occupation” of

three slivers of land along the Moroccan coast, including one adjacent to Gibraltar through



WURMSER-Special Report 7-APR-13 -13







which the Magreb-Europe gas pipeline passes, which had been under Spanish sovereignty for

half a millennium. In early March 2013, Morocco reacted bitterly and lectured the Spanish

ambassador to Morocco on a film in Spain about a high-seas collision between a Spanish coastal

patrol vessel and a Moroccan refugee ship.13 Behind Morocco’s sudden focus on Spain may lie

domestic problems as Morocco faces a rising tide of anti-government protests.



Moreover, we already see in both Algeria and Libya how the energy sectors there are rapidly

becoming the victims of labor unrest and stoppages,14 and how tensions in Mauritania can

affect transmission systems to Morocco, as various groups begin to understand how to leverage

the sensitivity of that sector for their uses. While labor unrest or stoppages are not new, the

climate in North Africa is so explosive that unrest in such places as Algeria, Morocco, or Libya

could escalate from a seemingly contained local issue to a national breakdown of order in just

days.



Thus, countries along Europe’s southern littoral are rethinking their dependence and



diversification strategy, at the same time that they also seek to reduce dependence on Russia,

block shale-gas development, and cut back on nuclear power.



In short, anchoring more than a sixth of Europe’s entire gas supply to an area being torn apart

by collapsing states and tempted by Islamic ideology is the new reality which European energy

planners must face. Europe’s grim reality could represent a unique window of opportunity for

Israel to nail down long-term agreements and align export policy with a broader effort to reset

Israeli-European relations.



At the same time, as noted, any Israeli gas trade with Europe is not without complications and



risks. It will inherently cross Russia’s domination of Europe’s gas supply. Israel’s gas offers a

backstop against Russian threats to cut off supply as blackmail – much as Moscow has done in

the past with gas pipelines to Ukraine – but that is not the primary strategic challenge to Russia

which Israeli gas could pose. A marginal addition of gas supply to Europe, such as what Israeli

imports could represent, can create mild oversupply. But even mild oversupply can cause prices

to drop sharply in the European region – which whittles down the bottom line of Russian gas

companies integrally linked to Russia’s ruling elite.



Only too aware of the threat of eastern Mediterranean supply if Europe is able to diversify

away from Russian gas dependency, Moscow is constantly attempting to buy long-term into the

Israeli gas and oil energy bonanza. On February 26, 2013, Russia's Gazprom clinched a key deal

to market Israeli liquefied natural gas (LNG) from the Tamar offshore field for 20 years.

Gazprom is also eyeing a role in the development of Israel's gigantic Leviathan gas field.15 Still,

the Minister of Energy and Water Resources moved quickly to remind the Tamar partners that

such a deal requires approval of his ministry, and that the Tamar field is largely to be

designated for domestic consumption. In essence, he nixed the deal. Thus, Russia’s attempt to

enter remains unsatisfied, though closer than ever.



WURMSER-Special Report 7-APR-13 -14







It is possible that selling gas to Europe may not offer the leverage for which Israel would hope.

Europe already is increasingly dependent on Israeli high-tech in critical sectors of its economy.

Yet such dependence has done little to alter what Israel views a continued European drift

toward greater antagonism toward Israel. Perhaps this might fundamentally shift were the

amount of hydrocarbon resources to emerge in Israel so large as to begin to replace, and not

only compete with, Russian gas and Arab oil. But that potential has still to be realized. As things

now stand, there are some economic opportunities to sell gas to Europe, but there are also

great advantages to having Israel sow more fertile ground and use the export of natural gas to

enhance its relations with friendly Asian powers, and possibly even with China.



To Asia



Asia may emerge as Israel’s preferred export destination. While the prices that the Leviathan



partners could govern by trading with Asia are higher, the price is only partially the reason why

Asia will likely emerge as an export destination. The partnership currently owning Leviathan is

generally assumed to lack the means to bring this complex, challenging, and very expensive

project from ground to market. As such, the partners have already signed an initial agreement

with the Australian firm, Woodside, to acquire about a third of the rights to the field in order to

tap into its liquefaction experience, marketing structure, and capital. But Woodside is oriented

toward marketing gas in Asia, and has structured the initial agreement to a schedule for

building a liquefaction plant generally assumed to service trade to Asia. In short, the shape of

the partnership will have a significant impact on whether the gas flows east or west.



While the export destination of Israel’s gas – namely east to Asia or west to Europe – is

strategically important, the context and geostrategic circumstances of how and through what

the gas will be transmitted to either Europe or Asia must first be examined, since these latter

factors may dictate the shape of the former.



Export Transmission Structures



Selling natural gas to either the European or Far Eastern markets presents both geo-strategic

opportunities and challenges. But getting the gas from Israel and Cyprus to those markets will

also necessitate complex transmission infrastructures, which themselves affect and are affected

by geo-strategic conditions.



Uniqueness and Rigidity of Gas Infrastructure



Unlike oil, gas neither flows to spot markets nor is sold en route to a consumer. There is no

global market price, like Brent Sweet Crude for oil. Gas is priced uniquely to each deal and

priced more by nation or region. It is not globally traded as a commodity. The infrastructure to

transmit gas – either via pipelines or liquefaction – is so complex, demanding, and expensive



WURMSER-Special Report 7-APR-13 -15







that marketing agreements and supply patterns are locked in for the long term, indeed years

before the gas even flows. Even liquefied gas shipped from port to port is essentially a “locked”

structure much like train lines.



The country supplying and the country receiving the gas, therefore, tether their critical energy

policies on the expectation of a particular supply chain, and are thus tied to a particular

diplomatic relationship for years. The severing of a particular source of gas supply is not easily

replaced in ad hoc fashion by oversupply from elsewhere; it is strategically important for a

nation even when it only represents a relatively small portion of its overall supply. Thus, even

modest amounts of Israeli gas exports can carry significant strategic leverage. Yet the inverse is

also true: a consumer also cannot be easily replaced. Thus, the gas trade carries strategic

importance and leverage for both the supplier and consumer, especially when the provider is

exporting to only a few consumers. The greater the amount of gas Israel discovers, therefore,

the greater it inoculates itself from dependence on the consumer.



The short-term inflexibility of the gas trade, and the difficulty of replacing disrupted supply,

implies as well that prices for energy for consumers and revenues for suppliers can be easily

manipulated by marginal increases or decreases in supply. This price sensitivity, which can

translate to substantially fluctuating costs for consumers or revenues for suppliers, therefore

makes the question of gas supply strategically vulnerable to the geopolitical interests and

machinations of third parties. As such, two factors – the strategic context of gas transmission

structures and third-party strategic ambitions – are often as important to understanding the

overall strategic significance of a specific gas-supply relationship as the two-dimensional



question of supply and consumption for the two nations’ involved in the trade themselves.



Via Jordan



There are voices in the Israeli government, and more across Israel’s political spectrum, who

view the anchoring of an export structure to a liquefaction terminal in Aqaba, Jordan, on the

Red Sea – as an important strategic objective. Moreover, there is a powerful constituency,

reinforced by international diplomatic preferences, to advance the option of lashing Israel and

Jordan tightly together through natural gas structures as a way to advance the peace process.



Still, it is highly unlikely that this option will ultimately prevail. Israel’s recent experience with

Egypt, where half of Israel’s natural gas supply was permanently severed because of the



destruction of the Egyptian-Israeli gas pipeline following the collapse of the Mubarak regime,

suggests that Israel will view with apprehension any scheme to anchor its critical infrastructure

and an emerging major portion of its GDP to a potentially unstable Jordanian regime.



Even assuming the Jordanian government does survive, political conflict in the Middle East in

the age of the Arab Spring is increasingly expressing itself through attacks on energy

infrastructure, particularly pipelines. Since Iran, Syria, and Hizbullah already have defined



Israel’s gas industry as a strategic target, Israel’s government expects them to attempt to strike



WURMSER-Special Report 7-APR-13 -16







Israel’s export structure at any point of vulnerability. Moreover, Iran and Turkey, which have

had some role in the attacks on each others’ pipelines in Iraq, Syria, and Turkey, both view the



successful emergence of Aqaba, Jordan, as a major energy transfer hub with tremendous

strategic apprehension. In order to vie for control and undermine the viability of an emerging

Kurdish state, both want all northern Iraqi gas and oil – such as what is in the area around

Taktuk, near Chamchamal in the Buvanoz region – to either remain undeveloped or flow

through their respective territories, and will thus seek to sabotage any alternative, such as

Aqaba:



.

Iran wants to control the trade of Iraqi gas. First, it needs gas for its Azeri provinces.

Currently, there is no national gas net transporting Iran’s enormous gas reserves in

South Pars in the Gulf to its populations along the Caspian Sea who suffer almost

chronic natural gas shortages. Inasmuch as gas flows to Europe from Iraq, Iran wants it

to flow via the pipeline system it is planning through northern Iraq to Syria, bypassing

Turkey which it cannot trust. For Asia, Iran wants the gas to reach the sea via its planned

pipeline system to the Persian Gulf and Indian Ocean.



.

Turkey has an almost parallel outlook. First, it wants Iraqi gas in order to address its own

gas shortages, which are increasing to critical levels. Second, Turkey is moving to

become the exclusive conduit for all oil and gas from the Kurdish areas to Europe. It

wants Iraqi gas flowing to Europe to be dependent on its emerging pipeline system, such

as the Kirkuk-Yormortluk pipeline, which has three parallel pipes carrying gas (1) and oil

(2), and ultimately connecting to the EGE Gaz LNG plant in Aliaga (about 35 miles north

of Izmir along the Aegean seacoast). This pipeline is already hooked up to the Turkish

system and sits at the Turkish head of the Trans-Aegean Pipeline (TAP). Turkey views the

TAP as a bottleneck structure: both Nabucco and the planned EGL gas pipelines will run

through the TAP, and thus would want to have Iraqi gas flow through it rather than

bypass it. Third, Turkey would want gas flowing to Asia from Iraq to pass through its

pipelines, be liquefied at the EGE Gaz plant in Aliaga, and loaded onto ships going to

Asia via the Suez Canal.



As such, Jordan’s participation in any gas transmission structure other than a limited one to



import Israeli gas will only load onto Amman an even greater strategic headache atop one

already reaching unmanageable proportions.



Via Cyprus



Early discussions after the Leviathan field was discovered focused on building a pipeline from

Israeli fields, through Cyprus, to Greece. Notably, from the time Leviathan was announced to

early fall 2011, there was almost no discussion about placing an LNG terminal in Israel. Most

inside the Israeli government focused on placing it either in Cyprus or Jordan, largely under the

assumption that any LNG project outside Israel would encounter fewer geopolitical problems

and enjoy a vastly simpler zoning/permitting process.



WURMSER-Special Report 7-APR-13 -17







Significant voices within Israel’s foreign policy establishment, most notably in the Foreign



Ministry (which includes some diplomats on assignment in key positions to other ministries

such as the Ministry of National Infrastructures), also signaled that they want to align Israel’s

export structure with its emerging relationship with Cyprus and Greece.



But the tide later shifted. While Israel’s Foreign Ministry, as well as apparently some companies



involved,16 still entertain the idea of placing the LNG infrastructure in Cyprus, tensions over

Cyprus, the growing role that Gazprom and Russia appear to be playing there, and the overall

instability and potential corruption which appear to be plaguing Cypriot politics and business

appear to have reminded many in Israel’s government that, from Israel’s geostrategic

perspective, placing critical infrastructure in Cyprus is problematic.



Moreover, the attractiveness of Cyprus diminished within the context of change in Egypt and

the entry of the Australian firm, Woodside, as an equal partner in the Leviathan field. Any

eastward-directed export infrastructure anchored to Cyprus would tend to rely strongly on free

and safe passage for Israeli gas shipments through the Suez Canal. In essence, this locks what



will emerge as Israel’s most vital industry into a trade route that passes through an Egypt



politically dominated by the Muslim Brotherhood, which remains ideologically opposed to

provisions in the 1979 peace treaty allowing Israeli passage through the Canal.



Finally, although since the mid-1970s Cyprus has enjoyed a record of stability, several key

trends indicate instability likely will rise in Cyprus in the coming decade.



Turkish Prime Minister Erdogan’s convictions and desire to reestablish a neo-Ottoman imperial

empire under a rehabilitated “Caliphate” has driven Turkey to regard the Greek islands, the

Balkans and Cyprus, as well as Syria, Iraq, Lebanon and Israel-Palestine, as “lost territories.”

After a year of increasing tensions between Turkey, Greece and Cyprus, in May 2012, the

Turkish Foreign Ministry issued a press release, in response to Cyprus’ issuing of international

tenders for off-shore hydrocarbon licenses, saying that Turkey will give every support to the

Turkish part of north Cyprus (TRNC) by “acting upon its responsibilities as a motherland and a

guarantor power.”17 The term “guarantor power” refers to the “Treaty of Guarantee” which

was signed in 1960 by the Republic of Cyprus, Greece, Turkey and the UK, and following which

Cyprus became independent. That treaty made Greece, Turkey and the UK guarantors of the

independence, territorial integrity and security of Cyprus. Article 4 of the treaty permits the

guarantors to take action, even unilaterally, in order to reestablish the state of affairs created

by the treaty, and Turkey used it when it invaded Cyprus in July 1974 in reaction to the coup



d’etat which the Greek junta carried out in Cyprus in order to unite it with Greece. Turkey thus



signaled that in reaction to what can be construed as a change of the status quo, it might take

action, and this could include the use of force.



The symbolism of how Turkey names its gas and oil exploration ships reinforces the alarm these

statements should cause. Turkey’s 3D seismic study vessel Polarcus Samur was renamed the

Barbarossa Hayreddin Pasha. Barbarossa Hayreddin Pasha was the Ottoman admiral whose



WURMSER-Special Report 7-APR-13 -18







naval victories secured Ottoman dominance over the Mediterranean during the mid-sixteenth

century. In 2011, Turkey renamed the first of its exploration ships the Piri Reis after a famous

Ottoman geographer and cartographer who was also the commander of the Ottoman fleets in

the Indian Ocean and in Egypt. Among his feats were the recapture of Aden and Muscat (in

1548 and 1552, respectively) from the Portuguese and the subsequent capture of the strategic

island of Hormuz, of Qatar and of Bahrain. The naming of these two ships symbolically connects



Turkey’s present push in the eastern Mediterranean with Ottoman imperial exploits in the



Middle East.



The shift in Turkish rhetoric and symbolism on Cyprus should be seen in the context of a deeper

strategic movement which makes it unlikely that Cyprus will continue to enjoy the same

strategic stability it has had for the last four decades.



.

While never having surrendered its claims in Cyprus, the island’s apparent stability since

the mid-1970s has been linked to Turkey’s attempt to enter the European state system.

The more Turkey reorients and aspires to assert its Middle Eastern and Islamic aspects,

the more its claims in Cyprus assume importance and intensity.



.

Turkey’s Islamist government under the AKP believes the military anchors the Turkish



state to the West. Rending the relationship between Turkey and the West weakens the

stature of the military internally. As such, the AKP seeks wedge issues to force the

military to choose between its relationship with the West and its need to embody

nationalist sentiments. Cyprus is such an issue. Thus, Turkey’s continued presence in

NATO no longer deters Ankara from acting, since it may be precisely that relationship

which Erdogan may want to sever by provoking a confrontation.



There are also signs that Cyprus’ strategic challenges may grow in the future as Egypt and



Turkey draw nearer, bound by a common Islamist sentiment. Indeed, the Legislative Committee



of Egypt’s upper house approved a draft law in March 2013 canceling the agreement on



maritime borders between Egypt and Cyprus and calling for the creation of new borders

surrounding the economic zone in the presence of Turkey as a third party.18 The proposed law

was submitted by MP Khaled Abdel Qader Ouda, who said that the agreement signed by Cyprus

and Israel last year invalidated the Egyptian-Cypriot deal of 2003, since Egypt had the right to

be present at the signing. Cyprus played down these reports since Egypt’s executive branch has

not questioned the agreement between two signatories of the Convention on the Law of the

Sea, which has been submitted to the UN, and said: “Cooperation in the field of hydrocarbons’

development in the areas adjacent to the Median Line of the EEZs of the two countries, as well

as cooperation in other related fields, ranks high in relations and dialogue between

governments.”19



That said, it is a warning shot across the bow – the Islamization of Egypt is likely to unsettle

Cyprus’ relations over the long term to the south, and encourage its northern nemesis to be



more aggressive in cooperation with Cairo. Indeed, Cypriot papers have reported that Turkey



WURMSER-Special Report 7-APR-13 -19







has been leaning on both Lebanon and Egypt to reject the EEZ agreements signed with

Cyprus.20



Even beyond the Turkish and Egyptian questions, there are worrisome security aspects to



Cyprus. Hizbullah, Syria and Iran in no way want to see the Levant basin’s assets be developed.



But their ability to stop Israel from developing its natural gas discoveries is very limited. Indeed,

Israel has successfully protected its vital infrastructure even in periods of all-out war. But

Cyprus is not secure from international terror, and Hizbullah, Iran, Syria, and secular Palestinian

groups under Syrian control all have a strong operational presence in Cyprus, and could

potentially find ways to strike at a joint Cypriot-Israeli LNG facility. Cyprus is simply not as able

as Israel to develop the means to protect it.



Finally, there is the complex role of Russia regarding Cyprus. A review of Russian offers to

“help” Cyprus over the last two years suggests less altruism and more strategic interests.



.

Cyprus, which is already a leading offshore center for Russian capital and finance, on

October 5, 2011, announced it would get a 2.5 billion euro loan from Russia at an

interest rate of 4.5 percent.21



.

Russia was the first and strongest supporter of Cyprus’ position in the gas exploration



escalation with Turkey in summer 2011,22 and moved its fleet into the eastern

Mediterranean23 (specifically, the Russian aircraft carrier Admiral Kuznetsov and a

submarine for “patrol purposes”) to deter Turkey from acting.24



.

In January 2013, Russia’s state-run gas monopoly Gazprom offered just under 2 billion

euros for DEPA, Greece’s state owned gas company. DEPA supplies gas to major



consumers in the country, and 65 percent of its shares belong to the Greek government.

Despite the fact that this sum is much higher than DEPA’s real value, this deal helps

Gazprom strengthen its monopoly on the Greek energy market and its position in

Europe. Indeed, Russian analysts have noted that after buying DEPA and after the

launching of the South Stream gas pipeline in the future, Greece, Bulgaria, Serbia, and

Croatia will all come under the control of Gazprom as a supplier of gas.25



.

On March 17, 2013, in reaction to Cyprus’ plan to tax bank deposits to address its



financial crisis, Gazprom submitted a proposal to the office of Cypriot President Nicos



Anastasiades to undertake the restructuring of the country’s banks in exchange for

exploration rights for natural gas in Cyprus’ exclusive economic zone and substantial

control over the country’s gas resources.26



.

Cypriot President Anstasiades was unwilling to discuss Russia’s offer, but Russian

officials (responding via the Association of Regional Banks of Russia) said: “Now the faith

in Cyprus as a place where it is convenient to keep one’s money will be undermined”

and that Cyprus’ banking system is “not trustworthy” and advised Russian citizens “to

withdraw their deposits from Cyprus.”27



WURMSER-Special Report 7-APR-13 -20







Given the strategic centrality of gas to Israel’s emerging strategic position, and the strong

interests of Turkey, Iran, and others to challenge it, it is important that Israel’s key

infrastructure fall under the umbrella of Israeli power. Since Israel cannot project its military

capabilities to “own” the strategic defense of Cyprus – or even to guarantee security on the

ground for key Israeli interests – it would make sense for Israel to keep its vital natural gas

infrastructure in Israel itself and not anchor it to a Cypriot LNG structure.



Indeed, it might even make sense to anchor the emerging Cypriot gas industry on an Israeli

distribution structure, rather than vice versa, since it would anchor the strategic interests of

both Greece and Cyprus, and even the EU, to the defense of Israel to ensure that the Levant

basin production is protected. It may be a stretch to convince Europe that its vital interests and

the safety of natural gas coming from the eastern Mediterranean are better guaranteed by

building a key piece of its gas infrastructure in Israel, but when the overall direction of the

region is taken into account, and the very real possibility that the equilibrium in Cyprus can

unravel is considered, it becomes far less of a stretch.



Via Turkey



Most recently, the idea surfaced that Israel could build an export pipeline from the Leviathan

field to Turkey.28 At the end of January 2013, the director-general of Israel’s Ministry of Energy

and Water Resources, Shaul Tzemach, indicated that Turkey could be an anchor customer for

Israeli gas, and that the option of gas exports to Turkey was practical, despite political tensions.

Talking about cooperating with Turkey, he said, “This isn’t out of the question. There are quite a

few geopolitical barriers, but if we know how to create the right conditions, it is possible. Gas

should be used as a stabilizing factor which leads to cooperation between countries and

includes multinationals and international parties with an interest in regional stability.”29

Tzemach added that there is room to include foreign powers and multinationals in a project

which would export Israeli gas to Turkey. According to another Israeli financial paper, Turkish

conglomerate Zorlu Endustriyal ve Enerji Tesisleri Insaat Tie AT would be the Turkish partner in

an Israel-Turkey gas pipeline.



While officials from Turkey appear less eager, their actions and warnings continue to suggest

the Turkish option is at best questionable. Almost the same day Tzemach was quoted, Turkey’s

deputy energy minister, Murat Mercan, was berating an Israeli diplomat in a public forum and

laid out an extremely tough position, saying that even if Israel fulfilled Turkish demands for 1)

an open apology for the Mavi Marmara incident, 2) compensation for families of the victims,

and 3) ended the blockade on Gaza, Israel’s resource cooperation with Greek Cyprus would

preclude any energy cooperation with Turkey.30 While the first of these seems to have been

satisfied, it is not yet clear at this writing whether the other conditions will be resolved to

Ankara’s satisfaction.



WURMSER-Special Report 7-APR-13 -21







Turkey may not be prepared to compromise on energy cooperation with Cyprus, which it views

as a red line. Turkey announced on March 27 that the government wants to suspend some of

Turkey's projects with Eni, the Italian oil and natural gas giant. Turkey’s Energy Minister Taner

Yildiz said, “We decided not to work with Eni in Turkey, including shelving their projects,”

because of Eni's plans to explore offshore of Cyprus, which Turkey claims are in violation of

international law. Yildiz also said the Turkish government would prefer that Istanbul-based Calik

Holding did not work with Eni on a project to build a 550-kilometer crude oil pipeline to connect



the Black Sea port of Samsun with the Mediterranean port of Ceyhan. Turkey’s move also

conveys high-stakes strategic signaling. Eni was working with Russia’s Gazprom to build the

South Stream pipeline to carry Russian gas through Turkey. Turkey was signaling Russia, and not

only Italy and Eni, that if they develop their ties with Cyprus, they will lose their role in the

strategically important South Stream project, which could then compete with Russian gas firms

rather than service them.



Moreover, despite apologies and an air of détente, the long-term trends indicate that broader

tensions between Israel and Turkey will continue to grow rather than recede because of the

ideological outlook governing Ankara as it seeks to rehabilitate its bygone Ottoman glory.



From the standpoint of Turkish-Israeli relations, even if such a pipeline were built, it would be

subject to:



.

Geopolitical blackmail on Ankara’s part: In the era before Israel’s gas discoveries,

Turkey’s government nixed the idea of building a water pipeline to Israel until Israel



gave in on all issues with respect to the Palestinians.



.

Vulnerability to sabotage: Pipelines to Turkey are bombed regularly. Pro-Turkish

saboteurs have regularly been blowing up pipelines carrying oil from northern Iraq to

Syria in an effort to destabilize the Syrian government – a nearly monthly occurrence. In

response, pipelines supplying gas to Turkey from northern Iraq and even Iran have been

bombed regularly. Indeed, it is the tenuousness of pipeline supply to Turkey which has

led to the Turkish government’s interest in the Israeli pipeline, which it will be no more

able to secure than its other pipelines.



.

Geostrategic opposition from Moscow: Israeli gas poses a competitive pressure on



Russia’s supply to Turkish and European gas markets. It may be possible to address this



concern by bringing Gazprom into the deal in a controlling position, but bringing in

Gazprom would only multiply the geopolitical vulnerability to blackmail and expose the

pipeline system to Turkish-Russian and Russian-Israeli issues in addition to Turkish-

Israeli ones.



But even more important is that Russia now sees itself threatened by the rise of a resurgent



Ottoman Sunni empire to its south and is seeking every way possible to cut Ankara’s ambitions



down to size. It would be a risky endeavor to be on the wrong side of Russia and Iran on the

issue of a facility in Turkey which cannot be effectively protected from terror.



WURMSER-Special Report 7-APR-13 -22







Export Direct from Israel to Markets



Thus, it is likely that ultimately the gas will be liquefied on Israeli territory and exported directly

via sea to the consuming market. Indeed, the Tzemach Committee – the Israeli governmental

committee tasked with setting Israel’s overall natural gas policy – expressed a “strong

preference” that any export facility be located on Israeli territory. In addition, officials from

Israel’s Ministry of Energy and Water Resources have told the Israeli press that the terminal

should be built in Israel, despite the bureaucratic difficulties, since “no sensible government is

prepared to have its gas export installations in another country, however friendly it may be.”31



Israel’s government may also seek to leverage and align gas export policy to broader foreign

policy objectives by favoring a flexible export strategy that exploits the country’s geographic



position to service both Asia and Europe. Israel and Egypt have the geographic advantage of

relatively ready access to both Asia and Europe, therein allowing both to contemplate a dual-

continent approach to export. Adopting such a plan potentially could involve the construction

of LNG terminals anchored at either end of the Eilat-Ashkelon Pipeline Corp. (EAPC) structure –

with terminals in Ashkelon on the Mediterranean facing Europe and in Ramat Yotam near Eilat

facing Asia – depending on the volume of resources discovered in the Levant Basin.



Indeed, many Israeli officials view the importance of gas export in the context of Egypt’s

deterioration – not only in terms of hostility to Israel, but in terms of anti-Western tendencies

and chaos, all of which raise questions about the viability of the Suez canal as a major

European-Asian transit route. These officials see a cross-Israel natural gas pipeline as an

additional anchor for transforming Israel into a major trans-ocean passage way connecting the

Mediterranean and Red Seas and reasserting the Land of Israel as a major trade and transport

route as an alternative to Suez. They view the development of the Eilat area, and Israel by

extension, as Europe’s portal to Asia, thus enhancing the strategic value of Israel to the West.



Rising Iranian Naval Threats to the Red Sea



But even an export structure operating directly from Eilat (Ramat Yotam) to markets in Asia



would face a rising strategic problem which could drive a fundamental shift in Israel’s naval

posture and doctrine: Iran’s increasing naval presence in the Red Sea.



.

On January 28, 2013, Iran’s foreign minister noted that Iran attaches “grave

importance” to the security of the Red Sea, and that its naval presence in the Red Sea is

a significant step towards building good relations with the regional states.



.

On January 16, 2013, Iran Navy Commander Rear Admiral Habibollah Sayyari said that



the Islamic Republic’s 24th fleet of warships will be deployed to the Mediterranean Sea.

“The Navy’s 24th fleet of warships will patrol the north of the Indian Ocean, the Gulf of



WURMSER-Special Report 7-APR-13 -23







Aden, Bab-el-Mandeb, the Red Sea, Suez Canal and the Mediterranean Sea for three

months and will even sail as far as southeastern Asian countries,” as part of the Velayat

91 exercises.32



.

On December 28, 2012, Iran announced that its 23rd fleet, with two warships, docked in

Port Sudan on December 8, after patrolling the strategic Bab el-Mandeb Strait and the

Red Sea. The Navy said that the 23rd fleet comprised the Jamaran destroyer and the

Bushehr logistical vessel. Sudan’s top navy commander Abddulla al-Matri at the time

called for the further expansion of military ties between Iran and Sudan.33



.

The two naval visits by Iran prompted a Sudanese opposition news website to report on

December 9 that the Iranian Revolutionary Guards and Sudan agreed to establish an

Iranian military base on the Sudanese Red Sea shore and the repeated visits to Sudan by

Iranian naval units are intended to prepare international and Sudanese public opinion

and gauge reactions toward the establishment of the military base.34



.

An Iranian state-owned media network reported that the 22nd fleet, comprising a

helicopter carrier and a warship, which were deployed to the coasts of Djibouti and Bab

el-Mandeb Strait in late September, visited Sudan on October 29 as part of a 75-day

mission.35



Israel’s Navy Will Come of Age



Israel will likely send the bulk of any gas it exports eastward. The new gas trade, however, will



echo the shift already underway in Israel’s export patterns more broadly as Israel’s economy



increases trade with Asia, while decreasing trade with Europe. This new energy trade and

expanding non-hydrocarbon exports to Asia will coincide with and reinforce Israel’s broader

plan to offer a strategic alternative to Suez Canal transit.



This expanding role of positioning Israel as the gateway to Asia from Europe will involve

strategic challenges that will encourage Israel not only to reinforce its naval cooperation with

the U.S. (and perhaps some European navies as well). It will also require Israel to establish and

expand a Red Sea fleet with a blue water capability and significant convoy capabilities. This will

become all the more important as U.S. naval power recedes globally over the next decade.



At the same time, the significant destabilizing forces at work in the eastern Mediterranean –

where the production fields are actually located – and the decreasing role of the U.S. navy in

securing the area will create a void and danger to Israel’s offshore assets there. This, too, will

demand a significant expansion in the size and capability of Israel’s Mediterranean fleet.



In short, Israel’s navy will become one of the Israel Defense Force’s most important arms to



secure the natural gas and potentially oil trade which will change Israel in the coming decades.



WURMSER-Special Report 7-APR-13 -24







Considerations for the Future



While self-sufficiency in energy – and by extension in water resources and in economic vitality –

which Israel's discoveries allow will represent a substantial improvement in its strategic

strength, eventual export of its hydrocarbon resources will involve far more weighty and

complex considerations. Yet, even at this early date, several key themes emerge.



Attempts to employ these resources for the sake of advancing peace between Israel and its

Muslim neighbors will be the greatest temptation at the policy level. Yet the historical record

suggests that increasing co-dependency between Israel and its neighbors and using

development efforts to anchor rapprochement among populations are quixotic cul-de-sacs.

Such efforts in the past only increased Islamic resentment against Israel and played into their

ideologues' anti-Semitic imagery of Jewish control of their economies. Furthermore, they have

left Israel more strategically vulnerable. While some in Israel hope that anchoring Israel's export

system to Turkey and becoming an answer to Turkey's energy gap will help reverse the strategic

foundering of the bilateral relationship, Israel’s experience with Egypt and the Palestinians

suggests that such hopes, while well-intended, will meet with great disappointment.



The introduction of any additional party to Israel's export system will add – likely geometrically



– to the strategic complexity and difficulty of realizing and maintaining that structure. While at

first glance Cyprus and Jordan may appear to be elegant solutions to the difficulties and

dangers of emplacing major facilities in Israel, the emerging instability of these two countries,

as well as their indigenous military weakness and darkening strategic positions, will be far more

threatening than the situation in Israel in the coming decades. They are both far more

vulnerable and far less capable of managing the shifting strategic realities of the Middle East

and eastern Mediterranean than Israel. In short, Israel's export structure should be as direct,

bilateral, and independent as possible. The temptation to encumber it with regional hopes and

diplomatic missions should be resisted, no matter how promising they appear.

The strategic challenges posed by the near-and medium-term decline of U.S. power, the

changing regional order, and Israel's rising resource importance will further combine to demand

of Israel a significant doctrinal shift in its military posture and a substantial increase in its

military spending.



* **



1. The Marker, Ha’aretz, January 9, 2011.

2. Sharon Kidmi, “BG: No chance we will ever do business again in Israel,” The Marker, May 21, 2006.

3. Amiram Barkat, "Where are the oil majors?: Unlike neighbor Cyprus, Israel has failed to attract top

league companies to its burgeoning energy industry. Why?” Globes, June 4, 2012.

4. According to Israel’s Natural Gas Authority of the Ministry of Energy and Water Resources.

5. http://www.globes.co.il/serveen/globes/docview.asp?did=1000829662&fid=1725, March 13, 2013;

http://www.themarker.com/dynamo/1.1963777, March 13, 2013.

6. Remarks (Altman) in interview conducted May 17, 2010, in Washington, D.C.

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7. http://www.globes.co.il/news/article.aspx?did=1000823101#fromelement=hp_firstarticle, February 18, 2013.



8. http://www.haaretz.com/business/jordan-in-secret-talks-to-import-natural-gas-from-israel-s-tamarfield.

premium-1.503672, February 15, 2013.



9. http://jordantimes.com/arab-potash-company-looks-to-import-natural-gas-from-israel, February 17, 2013.



10. European Commission, EuroStats,

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Natural_gas_consumption_statistics#Supply_str

ucture



11. Al-Jazeera, March 17, 2013.



12. Regarding declining production rates, see

http://www1.youm7.com/News.asp?NewsID=975119&SecID=24&IssueID=0, March 11, 2013. About Bedouin

kidnapping of Exxon executive, see http://www.reuters.com/article/2013/03/07/us-egypt-kidnappingidUSBRE9260YW20130307,

March 7, 2013.

13. “Tension mounts between Morocco, Spain over boats collision,” Moroccan MAP News Agency, March 13, 2013.



14. Tout sur l'Algerie website, March 30, 2013.



15. Peter C. Glover and Michael J. Economides, “Russia's New Middle East Energy Game,” Commentator, March

2013, http://www.thecommentator.com/article/3048/russia_s_new_middle_east_energy_game



16. http://www.cyprusnewsreport.com/?q=node/4842, November 2, 2011 and http://famagustagazette.

com/noble-energy-manager-expresses-hopes-for-giant-gas-fields-in-cyprus-p13390-69.htm, November 2,

2011.



17. http://www.mfa.gov.tr/no_-140_-18-may-2012_-press-release-regarding-the-international-tender-foroff_

shore-hydrocarbon-exploration-and-exploitation-opened-by-the-greek-cypriot-administration.en.mfa, May 18,

2012.



18. Quoted by http://www.egyptindependent.com/news/shura-council-approves-draft-law-cancelling-egyptcyprus-

economic-zone, March 6, 2013.



19. http://famagusta-gazette.com/egypt-has-never-questioned-the-eez-agreement-with-cyprus-fm-stressesp18446-

69.htm, March 7, 2013; http://www.cyprus-mail.com/cyprus/minister-plays-down-egypt-pulling-out-eezreports/

20130308, March 8, 2013.



20. http://www.cyprus-mail.com/cyprus/minister-plays-down-egypt-pulling-out-eez-reports/20130308, March 8,

2013.



21. http://www.financialmirror.com/news-details.php?nid=24628, October 6, 2011.



22. http://www.cyprus-mail.com/cyprus/greece-and-russia-rally-behind-cyprus/20111002, October 2, 2011.



23. http://famagusta-gazette.com/minister-violations-of-cyprus-air-space-by-the-turks-is-an-everyday-phenop13115-

69.htm, October 4, 2011.



24. http://www.asianews.it/news-en/Turkey,-Israel,-Greece-and-Russia-mobilising-over-Cyprus-gas-22820.html,

October 5, 2011.



25. http://english.ruvr.ru/2013_01_21/Gazprom-offers-2-billion-euros-to-Greek-market/, January 21, 2013.



26. http://greece.greekreporter.com/2013/03/18/gazprom-offers-cyprus-restructuring-deal-to-avoid-eu-bailout/,

March 18, 2013.



27. http://news.yahoo.com/cyprus-parliament-delays-vote-bank-deposits-tax-085504140--finance.html, March 17,

2013.



28. Levant Basin Energy Report, Volume 4, Number 5 (January 29, 2013).



29. http://www.globes.co.il/serveen/globes/docview.asp?did=1000818049&fid=1725, January 29, 2013.



30. http://www.hurriyetdailynews.com/apology-cyprus-hinder-israels-turkey-gasbid.

aspx?pageID=238&nID=39802&NewsCatID=348, January 25, 2013.



31. http://www.globes.co.il/serveen/globes/docview.asp?did=1000697565&fid=1724, November 13, 2011.



32. http://www.presstv.com/detail/2013/01/16/283890/iran-deploys-24th-fleet-to-mediterranean/, January 16,

2013.



33. http://www.presstv.ir/detail/2012/12/08/276856/iran-naval-fleet-docks-at-sudan-port/, December 8, 2012.



34. http://www.hurriyatsudan.com/?p=88758, December 9, 2012; http://www.alrakoba.net/news-action-show-id80015.

htm, December 9, 2012.



35. http://www.presstv.ir/detail/2012/12/03/275947/iran-navy-fleet-en-route-to-sudan/, December 3, 2012.



WURMSER-Special Report 7-APR-13 -26







* **





David Wurmser, Ph.D., is founder and executive member of the Delphi Global Analysis Group,

LLC in Washington. He has served as a consultant to Noble Energy. Earlier, he served as senior

advisor on Proliferation and the Middle East to former U.S. Vice President Dick Cheney, as

senior advisor to John R. Bolton at the State Department, and as a research fellow on

the Middle East at the American Enterprise Institute.



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