Israeli gas fuels energetic diplomacy
Mar 2, 2022 | Amotz Asa-El
Eager to prevent a renewal of global war, six European countries decided in 1951 to jointly regulate the production and distribution of coal and steel. War, said then French Foreign Minister Robert Schuman, would thus become “not merely unthinkable, but materially impossible.”
The European Coal and Steel Community later morphed into the Common Market which eventually became the European Union, whose founders’ journey eventually progressed from economic harmony to the brink of political fusion.
In the Middle East, any such evolution remains a distant dream. However, Israel’s newfound Mediterranean gas fields are generating not only billions in cash, but also unpredicted diplomatic gains.
Israeli energy prospectors first found gas in 1999 off the shore of Ashkelon, north of Gaza. The modest finds in those waters were soon followed by vast discoveries further north, some 100 kilometres west of Haifa, where a cluster of fields collectively constituted the world’s largest gas discovery in more than a decade.
The deposits were so large that they could fully supply Israel’s energy needs for 150 years, and inject an annual US$2 billion (~A$2.77 billion) into its national coffers. Moreover, geologists said Israeli waters had much more gas in store, and possibly also oil.
Israel thus faced regulatory dilemmas for which it was not prepared.
The most urgent challenge was taxation. The original law had energy producers paying the government a mere 12.5% tax for every shekel they earned. After a heated public debate, it was decided to add to the royalties a 20-50% tax on profits that would rise progressively after a company pumped gas worth 1.5 times its original investments.
A second dilemma was the danger of so-called “Dutch Disease”, in which large and sudden income from natural resource exports first spikes local wages and then sparks an exodus away from other local production lines, which in turn fans unemployment.
To pre-empt such a scenario, Israel created a sovereign wealth fund that would syphon off the royalties, invest them abroad, and trickle the earnings from these investments back into the state budget, where they would be used only for social purposes, such as education and health.
A third dilemma concerned the extent to which the gas would be exported, with social activists demanding a ratio that would leave most of the gas at home, and thus cut energy costs for Israeli households. The government ultimately decided to cap exports at 53% of the gas produced.
There were also environmental concerns raised by some Israeli groups that had to be addressed by the government.
Hovering above all these discussions was the ownership dilemma, with activists warning of the danger of political favouritism and economic dominance by the companies that were given licences to exploit the new gas fields. The government therefore left the biggest field to the consortium that found it, while diluting that company’s stake in another field and tendering out other fields to competing firms.
Israel’s gas industry was thus regulated, and revenues began rolling in. In the first half of last year, the Israeli government gained NIS 561 million (~A$244 million) in royalties, 17% more than for the comparable period the previous year.
This new fixture of the Israeli economy obviously entails major strategic consequences.
Militarily, the Israeli Navy, previously tasked mostly with challenging Iran, containing Hamas in Gaza, and patrolling Israel’s shores, is now also tasked with securing gas rigs. As a result of this latest assignment, Israel purchased a flotilla of tailor-made corvettes from Germany for €430 million (~A$678 million).
Diplomatically, however, the gas fields have generated priceless gains.
The most obvious foreign beneficiaries of Israel’s gas discoveries were its two veteran peace partners, Egypt and Jordan.
A deal signed in 2015 to supply US$1.2 billion (A$1.66 billion) worth of Israeli gas to Egypt was expanded in 2019 to an agreement for the supply of US$15 billion (A$20.8 billion) worth of gas over 15 years. A similar deal was signed with Jordan in 2016, for the sale of US$10 billion (A$13.9 billion) worth of gas over ten years.
The gas is transported to both destinations through pipelines, one running east from the Jezreel Valley across the northern Jordan Valley, the other undersea from Ashkelon to El Arish in the Sinai.
The other major international connections Israel sought in the wake of the gas findings were with Europe.
A deal signed in 2020 in Athens between the leaders of Israel, Greece and Cyprus laid the groundwork for the construction of a 2,000-kilometre pipeline from Israeli and Cypriot waters through Crete to the Greek mainland, proceeding to Italy across the Adriatic Sea.
Known as the East-Med Project, the venture was backed by the US and EU, and was presented by its signatories as a vehicle for regional stability that “is not aimed against any other country” – as then Prime Minister Binyamin Netanyahu said.
That statement is, of course, debatable despite Cypriot President Nicos Anastasiades’ insistence that “any state is welcome to join [the venture] provided it respects our territorial sovereignty and rights.” This was a thinly veiled reference to Turkey, which in 2018 claimed drilling rights in what others regard as Cypriot and Greek waters.
Currently, the East-Med project appears to be suspended, after the Biden Administration privately communicated to Israel, Greece and Cyprus in January that it had withdrawn its support for East-Med, citing economic viability and environmental issues. The Israeli Government has not commented on the American stance, and is believed to be continuing to pursue the project, realising the Ukraine crisis underscores western Europe’s need for non-Russian gas.
At any rate, the economic and political ties the plan helped spark – in terms of unprecedentedly strong Israeli relations with Greece and Cyprus – are very much alive and well.
Lurking beyond these ties are Turkey’s broader relations with the parties to the East-Med project.
Turkey has been occupying a slice of Cyprus since 1974, and has been Greece’s strategic nemesis since the downfall of the Ottoman Empire a century ago. Israel, meanwhile, has increasingly found itself at loggerheads with Turkey since the rise to power of its President Recep Tayyip Erdogan 19 years ago.
The emergence of the East-Med alliance was a setback for Ankara, which found itself left out of a multilateral economic banquet being prepared at its doorstep by three countries it had antagonised for years.
Moreover, as if to add insult to injury, Turkey’s industrialised economy is thirsting for oil and gas – which exists in abundance among the East-Med’s threesome and across the Arab world that Turkey once ruled, but is largely absent from Turkey itself.
Worse yet, Turkey’s economy has been sliding in recent years into a major crisis, underscored by 48% inflation and 13% unemployment, accompanied by the Turkish lira’s loss of more than half its value over the past year alone.
This is the backdrop against which Erdogan is now trying to retreat from his hostility toward Israel, which culminated in the withdrawal of his ambassador from Tel Aviv in 2010, after ten Turks were killed aboard a ship that tried to break Israel’s naval blockade of Gaza.
Relations between the two countries later improved after Israel granted the casualties’ families a US$21 million (A$29.1 million) compensation deal, but the countries remained strategically estranged, especially in comparison with the pre-Erdogan era when Ankara and Jerusalem were close military allies.
Now Erdogan is changing his tune.
What began with a phone call to Israel’s President Isaac Herzog after his election last year was followed by several more calls, including a condolence call after the death of Herzog’s mother, Aura, in January.
Another took place late last year, when Israeli Prime Minister Naftali Bennett called Erdogan to thank him for the unconditional release of two Israelis arrested after innocently photographing an Ottoman palace used by Erdogan in Istanbul that tourists are forbidden to photograph.
This telephone diplomacy produced an invitation for a formal visit to Turkey by Herzog, now scheduled to take place in March.
Clearly, there is new thinking in Ankara concerning Israel’s place in Turkish geopolitical strategy, and equally clearly this thinking is largely driven by Israel’s new energy clout – and Ankara’s stated hope that Israeli gas will flow to Europe via Turkey.
Lastly, and even more improbably, Israel’s gas is impacting its relations with Lebanon.
What began with a Lebanese attempt to claim ownership of Israeli offshore gas fields near the Israel-Lebanon maritime border in the Mediterranean, generated indirect talks between Beirut and Jerusalem through American mediation. The talks are now reportedly likely to produce a maritime demarcation agreement soon.
Israeli defence sources reportedly believe that Hezbollah leader Hassan Nasrallah, realising he is being blamed for Lebanon’s worsening energy crisis, has given the Lebanese Government a green light to proceed with the deal, despite Nasrallah’s history of rejecting all relations with Israel.
Earlier this year, reports claimed that gas supplies destined for Lebanon via Jordan and Syria will actually be, at least in part, Israeli. Lebanon denied the reports, but many Lebanese don’t believe the denials.
And even before this latest commotion, in September 2020, Egypt, Israel, Greece, Cyprus, Italy, Jordan and the Palestinian Authority launched a new framework, the East Mediterranean Gas Forum, which seeks to coordinate maritime gas prospecting, exploitation and marketing in the region.
Turkey, which is conspicuously missing from this group, may now be seeking a place within it through a rapprochement with Israel.
Like the coal and steel that helped end western European wars, and unlike oil, which helped fuel Middle Eastern wars, gas may now be sowing seeds of, if not peace, at least normalised relations between former adversaries.