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Israel heads for pipelines instead of LNG hub

Investment plans scrapped and domestic opposition to a land based hub means Israel will focus on a regional pipeline network

The prospects for a new liquefied natural gas (LNG) hub in the eastern Mediterranean are now dim. Instead, Israel looks likely to emerge at the centre of a regional pipeline network, using its abundant offshore gas reserves to build strategic and economic ties with its neighbours that were unthinkable just three years ago.

Woodside Petroleum's decision in May to scrap plans to buy a stake in the Noble Energy-led consortium developing the 540 billion cubic metres (cm) Leviathan field has killed -- for now -- the idea of an Israeli LNG export business.

Opposition within the country to a land-based plant meant a floating facility was the only viable option. Woodside's LNG capital and expertise, especially its experience marketing the product in Asia, would have been crucial to the project. 

Bitter arguments with its would-be partners -- not least what is thought to have been personal friction between Yitzhak Tshuva, boss of Delek Group, one of the Leviathan shareholders, and Woodside chief executive Peter Coleman -- and a tax dispute with Israel's government triggered the Australian firm's decision not to proceed with the deal.

But the shifting plans for developing Leviathan, where first gas flows are expected in 2017, also deterred Woodside. Instead of LNG, exports of Israeli gas will now go through pipelines to Jordan, the West Bank and, it seems, Egypt and Turkey. Shifting economics and politics are behind the change in strategy.

Start with Egypt. Until 2011, Israel was a buyer of cheap Egyptian gas shipped through a spur connected to the Arab Gas Pipeline (AGP), which crosses the Sinai. The deal was deeply unpopular in Egypt. In the aftermath of the Arab uprisings and the ascent of the Muslim Brotherhood in Egypt, Israel could no longer count on either continued supplies or Cairo's ability to guard the pipeline in Sinai. The infrastructure was repeatedly attacked, cutting the flows both to Israel and to Jordan, another recipient of Egyptian supplies through the main part of the AGP. 

The Egyptian army's coup against the Muslim Brotherhood government in 2013 and election of General Fatah El-Sisi in May has changed this. So has the depletion of Egyptian gas reserves. A deepening energy crisis in Egypt has seen gas supplies intended for LNG exports diverted to the domestic market, effectively shutting down the country's gas-export business -- and leaving the country heavily in debt to the LNG plant operators.

Egyptian domestic needs for energy, meanwhile, continue to rise steeply. The shortfall between supply and demand is estimated at around 20%, and blackouts are now common. Heavy subsidies, costing the government $15bn a year, remain in place, and the government is loath to remove them.

Israeli supplies offer a lifeline -- both to the LNG plants and to Sisi, who needs a quick fix to show Egyptians he can manage the economy where the Muslim Brotherhood failed, says Gerald Butt, a private Middle East analyst. Al Monitor, a Middle East-focused publication, said recently that plans were already afoot to import up to 8 bn cm a year (cm/y) of Israeli gas into Egypt.

For now, planned shipments are much smaller. In early May, Noble and its Israeli partners signed a preliminary deal with Union Fenosa Gas, the Spanish venture operating one of Egypt's LNG plants. The deal, still in its early stages, would see 70 bn cm of gas shipped from Tamar, another smaller Israeli field being developed by Noble and partners, to the Damietta-based facility over a 15-year period. BG, which operates a separate LNG plant at Idku, is also thought to be in the market for Israeli gas. Egypt's government will have to agree. According to local media reports, it may approve the deal in exchange for Union Fenosa dropping an arbitration suit against the government.

But for both sides, Israeli supplies to Egypt make sense. New feedstock for the plants would free up molecules for the local Egyptian market. At the same time, Israel can foster its relationship with the Sisi regime, restoring long-standing ties with the Egyptian army that were disrupted after the uprisings.

The overland route through the reversed Sinai pipeline is likely to be used in the interim, though security is still a worry, even with the army back in control of Cairo. "If Sisi can't do it, you have to wonder who could," says one analyst of the region. A subsea pipeline, connecting Tamar with the LNG developers' offshore infrastructure in Egypt, could be the better alternative and is thought to be the exporters' preferred option.

Israeli supplies, though, are still likely to generate some controversy in Egypt. Although the agreements are some way off, local reports suggest the price of gas could be around $8 per million British thermal units (Btu) - well beneath prevailing international prices and cheaper than alternatives, but almost three times the level charged by Egypt when it was selling gas to Israel.

Turkey, meanwhile, gives Israel a similarly strategic opportunity -- and Leviathan's developers another lucrative export option. A subsea pipeline connecting the two countries, probably through Cypriot waters (and avoiding Lebanese and Syrian territory) could ship 10bn cm/y. 

Jerusalem sees the diplomatic potential in this deal. The government has sent its own envoy to negotiate with Turkish officials. The two governments have been trying to patch up their relationship, which has been strained since 2010, when Israeli special forces killed some crewmen aboard a Turkish boat sailing to the Gaza Strip.

A Turkey pipeline route makes sense for Leviathan's developers, too. Priced at up to $9/m Btu, the exports will earn close to European border prices, meaning they won't garner the same netbacks that could have been achieved with LNG supplies to Asia. But construction costs of $2bn-3bn are much lower than the $10bn-$15bn that may have been sunk into floating LNG infrastructure. 

The connection, which could be on line in time for Leviathan's start up, would draw the two economies closer together, too. Some analysts remain cautious, given Turkish prime minister Recep Tayyip Erdogan's unpredictability. "At the moment, relations are being patched up with Israel," says Butt. "But a lot depends on Erdogan's mood on a given day." Israeli officials have previously been worried about relying on foreign partners to monetise their gas reserves: it has been one concern about shipping gas to Cyprus for liquefaction at plants to be built on the island. That plan, pushed by Cyprus, has grown less likely as the Egyptian and Turkish pipeline proposals have gathered steam; and while Cyprus's own upstream progress has been disappointing.

For Israel, closer to home are two other supply routes, to the West Bank and Jordan. In January, Noble and its Tamar partners signed a $1.2bn supply deal with the Palestine Authority, which will use the gas to fuel a power station in Jenin. A month later, they agreed a $500m deal to supply two Jordanian plants, Arab Potash and Jordan Bromine, whose facilities are near the Dead Sea. That agreement will see exports of 1.9bn cm of gas over 15 years, starting in 2016. The floor price for the gas is $6.50/m Btu. A pipeline in Israel already supplies a plant belonging to Israel Chemicals in the Dead Sea and onward shipments to the Jordanian facilities would be relatively simple extension of this infrastructure. 

The rest of Jordan, as much as Egypt, also badly needs energy supplies. Annual primary energy and power generation demand is rising quickly. Plans to find and develop domestic sources have foundered, while hopes to secure supplies from others in the region are yet to bear fruit. Qatari LNG, to be imported through a terminal being built in Aqaba, will be expensive; Iraqi oil and gas supplies via proposed pipelines are years away and hampered by political dysfunction there. 

And more even than Israel, Jordan was left exposed to the repeated attacks on the AGP's infrastructure in Sinai pipeline, which met most of the country's demand. Imports collapsed from the contracted 2.5bn cm/y; and the US' Energy Information Agency's most recent data put Jordan's natural gas consumption now at less than 700m cm/y, thanks to the dearth of supplies.

Local projects to develop domestic supplies haven't always gone well. Enefit's on-off oil shale project seems to be going ahead, and should offer a future supply of electricity. But BP withdrew earlier this year from the Risha gasfield project. The UK firm spent about $240m and drilled two wells. Output only reached 200,000 cm/y last year. The government had originally hoped production would reach 3.4bn cm/y, even allowing eventually for exports.  

Jordan has replaced the lost Egyptian gas supplies with expensive diesel and fuel oil imports - a loss of $2m a day -- and now spends about $5.6bn a year on getting cheap energy to consumers. Most of the losses are absorbed by the state-run National Electric Power Company, which still sells power at subsidised prices. But the situation is exacerbating Jordan's dire finances. Public debt last year was expected to reach $27.2bn. This year's budget of $11.5bn contained an operating deficit of $1.57bn.  

Risha's failure and the collapse of the AGP leaves Israeli gas as the most viable fix. The supplies to the plants near the Dead Sea may be the start. There have also been talks about supplying a Jordanian industrial zone near the Sea of Galilee. Ultimately, supplies of up to 4bn cm/y could be agreed -- more than matching the amount of gas Jordan once bought from Egypt. At a reported price of $4.50/m Btu, however, Jordan will pay Israeli more than twice the rate it had agreed with Egypt. "A year ago, the idea of importing from Israel was very much not acceptable," says Butt. "But needs must."

For Israel, the logic of all these new supply deals is more strategic. The country can now use gas to 'tighten' relations with Turkey, Egypt, Jordan and the Palestinian Authority, wrote Isaac Herzog, leader of the opposition Labor Party, in an op-ed for Globes newspaper last year. Its gas wealth would "improve Israel's bargaining position in negotiations", he said, even helping to promote a diplomatic solution with the Palestinians and Arab world.

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