The recent discovery of the Leviathan natural gas field off the coast of Israel, though not a game changer like shale in terms of global gas supplies, promises to have major implications for the country’s energy security and even the energy balance of the region at large, while setting off competition over other finds in the Mediterranean basin. With political unrest spreading in the region following the ouster of Tunisia’s Ben Ali, the discovery could subtly shift the regional balance of power in Israel’s favor. The discovery of Leviathan has received significant attention from gas traders, economists, security analysts, and politicians alike, constituting the largest deepwater detection in a decade, and will be enough to supply Israel for the next 100 years. In addition, the potential to tap up to 4.2 billion barrels of oil means that the interest in Leviathan is high, with growing interest from neighboring countries in the Mediterranean basin. Today’s GR Energy and Climate Brief assesses the impact of the significant oil find off Israel’s coast, both on global energy markets as well as regional political dynamics.
The Regional Dynamics
On 29 December 2010, Noble Energy, as part of a syndicate including Delek Drilling, Avner Oil, and Ratio Oil, hailed the Leviathan gas field off the Israeli coast as a ‘significant natural gas discovery’ with a potential of 16 tcf (trillion cubic feet). The gas field is located roughly 130 kilometers (81 mi) west of Haifa in waters 1,500 meters (4,900 ft) deep in the Levantine basin, a rich hydrocarbon area. The find is actually closer to Cyprus than to Israel, and straddles a disputed Lebanon / Israeli maritime border. The particular find is just one of many in the basin of the Eastern Mediterranean. This year, the United States Geological Survey estimated that more than 120 trillion cubic feet of recoverable gas reserves, equivalent to 20 billion barrels of oil, lay beneath the waters of the Eastern Mediterranean. That would put it in the same league as the Alaskan North Slope (about 22 billion
barrels) but far short of Saudi Arabia, which has proven reserves of 262 billion barrels. The find could impel neighboring countries, including Cyprus, Lebanon and Syria, to explore and possibly develop their potential gas fields, and warned that Israel needed to move quickly to be the first to export its gas. If Israel moves aggressively to develop the area, it could begin producing gas from Leviathan in five to six years.
Israel’s opportunity to reduce its reliance on foreign energy suppliers, while at the same time increasing its security, has already proven an exciting prospect for energy contractors and politicians. The ‘unwritten rule’ of Israeli energy policy has been that the state imports from many countries with which it does not hold political ties, from Iran to Russia. The Leviathan development, therefore, holds the potential for Israel to diversify away from unstable energy transactions and toward an inherently more stable domestic source of energy. In light of Netanyahu’s recent assertion that both the Tamar and Leviathan projects will likely be targeted by Israel’s enemies, Israeli politicians have argued that the country’s energy security is best served by taking steps towards some degree of self dependence in a region plagued with instability and conflict.
Nonetheless, the right to develop Leviathan is currently subject to significant dispute between Israel and Lebanon with the latter claiming that Israel is in breach of its maritime rights. In terms of regional security, therefore, the fact that Lebanon and Israel are still technically at war and do not currently have diplomatic relations has made the demarcation lines into the Mediterranean even less clear. Israel has extended the ‘UN Line’ from the border of south Lebanon / northern Israel (by physically placing a row of buoys out to sea); however, Lebanon continues to dispute this breakdown of the claims. Robbie Sable, a professor of international law at Jerusalem’s Hebrew University, has argued that the claim may be complex due to Lebanon’s border with Israel being indented, making it harder to establish where Israel’s sea boundary ends and Lebanese waters begin.
Last year, Lebanon passed a hurried law through Parliament to survey and explore the Mediterranean for energy resources, suggesting that they are serious about contesting ownership rights within Leviathan. However, given Lebanon’s current political plight, further pressure from within the country is unlikely, particularly considering the failed attempt to get Secretary General Ban Ki Moon to use UN troops to stop Israel drilling in the disputed sections of the Levant basin. An interesting development may be if Hezbollah strengthen their grip on Lebanese politics, given that Iran has publicly stated its perspective that Leviathan is 75% Lebanese. Such a development could well alter Israel’s plans to develop the Leviathan field, and even act as a flash point for a military confrontation between Iran and Israel.
Across the Mediterranean, Cyprus is in the process of agreeing to border demarcations with both Lebanon and Israel, a move which will support Israeli claims to the gas field, as Cyprus is set to allow Noble to explore part of their controlled waters on Israel’s behalf. Two points of contention in the area may arise between Cyprus and Turkey, which objects to the deal that the Cypriots have negotiated with Israel. Turkey has called Cyprus’ deal with Israel ‘null and void’, due to Turkey’s claims to northern Cyprus; and Egypt, which has yet to confirm that the Cyprus-Israel deal does not affect their maritime jurisdictions.
Domestic Fallout in Israel
The future of the Leviathan project will also be shaped by two domestic issues in Israel. Following the recommendations of the Sheshinski Committee (charged with making recommendations on fiscal and tax policy), the Knesset is set to meet in the coming weeks to vote on whether to raise the tax level for energy companies to between 52 and 60%, from the current 33%, following the Noble discovery. This would bring Israel roughly in line with other resource-rich nations. Originally, the Tamar project was excluded from the decision, yet rumblings from Finance Minister Yuval Steinitz suggest that the exclusion is not a foregone conclusion. In terms of Leviathan, if the field proves that reserves are plentiful and access is unproblematic, then investment levels should not be severely affected by the planned tax increase. However, if reforms are introduced at a high level retroactively, it could impact the interest of investors.
A second domestic issue related to the expansion of Israel’s energy resources may be the added attention drawn to the gap between Palestinian conditions in contrast with their Israeli citizens, particularly with Palestinians making claims on the energy derived from the Noble find. The Israelis recognize a clear risk that the Palestinian people will make a claim on the gas, adding further complication to an already intractable-seeming conflict.
The Market Implication
The impact that Leviathan will have on the politics of the East-Mediterranean region and Israel’s energy security will be considerable. However, the discovery’s impact will have far less of an impact on global energy markets. In global percentage terms, the discovery amounts to less than
0.4 percent of the world’s proven resources and what is more, given the effects of the global economic crisis and the increase of both LNG and unconventional production, there is currently a glut of supply within the global gas market. Despite the potential of additional capacity, it is a long way off and global demand promises to shoot up even more during this same period due to Asian growth. Added to this reality, Israel has a dearth of transporting infrastructure in place, as of now, which would make exporting to Europe, for example, costly, time consuming and difficult, particularly via pipeline. But with Egypt’s position as the dominant East-Mediterranean gas exporter perhaps in doubt pending the outcome of the political instability, events could validate Israel’s focus on domestic development in terms of high technology and innovation as opposed to pursuing the aim of becoming a serious net exporter of gas. Overall, the markets have reacted quite positively over the past year, with energy shares in the Tel Aviv Stock Exchange increasing by 1700% proving that Leviathan has a pull as an attractive investment opportunity.
Regional Impacts with Potentially Broader Implications
On the whole, the impact of the massive Leviathan find will play out regionally, in connection to dependence and security, rather than in terms of world energy supply. Hezbollah’s newfound political dominance in Lebanon will work to simmer tensions with Israel over ownership of the resources. And, Israel could end up even more isolated in the region as a result of events in Egypt. If political change in Egypt leads to dramatic changes in Egyptian-Israeli relations, consequences could be profound. So, despite all the positive benefits to Israel of the recent find and consequent enthusiasm, there is also the potential for it to ratchet up tensions between, Lebanon, the Palestinians, Iran, or some combination of the three, at a moment when the situation in the region is already tense, and the range of spillover effects from the Egyptian crisis is uncertain at best.