Balancing public pressure to keep the bulk of new gas reserves at home with foreign investor pressure to set a high cap on exports, the Israeli government has put a 40% cap on exports, and now faces a major strategic decision on how to get that gas to market.
It’s less than foreign companies had hoped, and 13% lower than the original export cap plan, but it gets the ball rolling and makes it game time for an even bigger decision: a pipeline to Turkey or liquefied natural gas (LNG) project to East Asia.
The export cap decision was based on 2012 data that showed domestic consumption of about 7 billion cubic meters of gas plus forecasts of a significant increase in consumption. With a 40% export cap, current gas reserves could supply Israel for an estimated 25 years.
On a geopolitical level, the question is primarily HOW Israel will export its gas, and secondarily HOW MUCH gas it will export.
What everyone’s watching here—especially Russia--is whether Israel will build a pipeline to Turkey, which will be a game-changing geopolitical move on the energy scene. The ground work for this is already being laid, with a flurry of high-level meetings between the Israelis and the Turks. Recent progress on this, however, has been dented by mass anti-government protests in Turkey.
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The 40% cap on exports means that Israel will only be able to supply one major project. So it’s either a pipeline to Turkey, which would render Israel a major player on the international scene with exceptional access to international markets through Turkey; or, a land-based liquefied natural gas (LNG) facility for export to eastern markets—first and foremost, China.
Quite simply, the LNG project is economically a better strategic move, but the pipeline to Turkey is a politically strategic move without comparison—and this is the debate that is going on at the highest levels in Israel right now.
Gas prices in East Asia are twice as high as in the European/Middle East markets where Israel gas would be sold via pipeline to Turkey. These prices would easily justify the up to $15 billion it would cost to build this massive LNG facility.
This debate is also what is dividing the partners in Israel’s supergiant Leviathan gas field. The biggest partner in the field, US-based Noble Energy Inc., appears to support the LNG export option, but it’s Israeli partners--Delek Group Ltd. (TASE: DLEKG) and Ratio Oil Exploration LP (TASE:RATI.L)—now seem to be torn between the LNG and Turkish pipeline options, perhaps leaning more towards the latter.
The Turkish pipeline seems to have a bit of an advantage right now. Not only have talks between Turkey and Israel picked up momentum recently, but Israeli’s Antitrust Authority has given the Leviathan partners the green light to launch negotiations with Turkish companies.
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The Turkish pipeline project will also be a regulatory cakewalk compared to the massive LNG project, which will have a hard time jumping over permitting hurdles, not the least of which will be finding an appropriate coastal location that isn’t too close to population centers. The pipeline would also take much less time to complete, and much less money. The payback would also be a lot faster, even with lower revenues as compared to selling it on the Asian market.
The pipeline would also be a boon for Turkey, which consumes about 50 billion cubic meters of gas a year, and rising fast. Right now it’s dependent predominately on Russian gas, but also on Iranian and Azeri gas. And that gas comes at a much higher price that would Israeli gas.
That said, the LNG to China project comes without the complicated geopolitical baggage, so on this level, it’s easier—a fact the Russians are key to point out to the Israelis, among other efforts to keep Israel from getting its gas to Europe, where Gazprom has a stranglehold.
By. Charles Kennedy of Oilprice.com