israel’s mediterranean gas governance: evolution of...

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Asian Journal of Middle Eastern and Islamic Studies Vol. 11, No. 4, 2017Asian Journal of Middle Eastern and Islamic Studies Vol. 11, No. 4, 2017

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Israel’s Mediterranean Gas Governance:

Evolution of Domestic Regulations and Emerging Regional Issues

Sujata ASHWARYA

(Centre for West Asian Studies, Jamia Millia Islamia, India)

Abstract: In recent years, Israel has discovered commercially viable natural gas deposits in what the state considers its exclusive economic zone (EEZ) in the Eastern Mediterranean. While these gas discoveries constitute less than 2% of the world’s proven gas reserves, they have the potential to not only meet Israel’s energy needs for several years to come but also enable Israel to export some amount of gas to neighboring countries as well as transregionally, to Europe. While these maritime gas fields have transformed Israel – from energy deficient to energy surplus country – Israeli policymakers are confronted with three main challenges – the revamping of taxation rules, allocation of an export quota for export, and the introduction of competition in the energy sector. The potential for export of gas presents Israel with both opportunities and challenges. While the possibilities include export to Egypt, Turkey and Europe, earning a significant monetary dividend for Israel, problems include territorial disputes and contesting claims over resources among regional countries. The gas supply to Jordanian companies is the only favorable trade deal yet for Israeli field developers. In the absence of differentiation of the exclusive economic zones in the Eastern Mediterranean region, given the political disputes between Turkey and Cyprus and Israel and Lebanon, Israeli gas export ideas may not materialize anytime soon. Key Words: Israel’s Gas Regulatory Framework; Gas Export; Pipeline Options; Risk of Conflict; Demarcation of EEZs

I. Introduction

Economic requirements and political environment bound Israel’s energy and national security consideration in a tight embrace, motivating the country to continuously engage in engage in onshore and offshore exploration for fossil fuels, since its establishment. Small quantities of onshore oil and natural reserves discovered in the early years of the creation of

Dr. Sujata ASHWARYA, Assistant Professor, Center for West Asian Studies, Jamia Millia Islamia, New

Delhi, India. The earlier version of this paper was presented at the 5th International Forum on Asia and the Middle East, which was organized by the Shanghai International Studies University, Shanghai, China, on September 24-25, 2016.

Israel’s Mediterranean Gas Governance: Evolution of Domestic Regulations and Emerging Regional Issues

77

the state could alleviate Israel’s complete import dependency in any way. The country has no known coal reserve. During the Sinai occupation (1967-1979), Israel exploited the oil and gas reserves of the peninsula to fulfil about a quarter of its energy requirement, but that was a temporary respite. The real breakthrough for a country with minimal domestic energy resources, however, came in the years 1999-2000, when Israel discovered two small but commercially viable natural gas reserves in what the Jewish state considers its exclusive economic zone (EEZ) in the Eastern Mediterranean. With significantly larger discoveries during 2009 and 2010, Israel is not only moving forward on the path of energy self-sufficiency but has also acquired the capacity to become a potential energy exporter.

The natural gas discoveries necessitated changes in the regulatory environment, characterized by five fundamental features. First and foremost, Israel took the ideological decision to explore for oil and gas through the private sector. Israel deregulated its petroleum sector in the 1990s – an indicator of the neoliberal reforms of the day – to encourage foreign and domestic investment and enhance efficiency. All the state holdings in oil exploration companies were privatized, including that of the Israel National Oil Company, which threw the sector open to competition. The government also introduced reforms in the midstream and downstream sectors of the economy. While broad rules and regulations established in state policy measures would take care of the public stakes in the oil and gas sector, having a national oil company to tackle that task was not considered necessary. With the significant natural gas discoveries in the Eastern Mediterranean, Israel passed the Natural Gas Sector Law, 2002 (henceforth, ‘gas law’), Israel decided to have a competitive private sector composition in all midstream and downstream phases. The Amendment number 4, 2007, to the gas law clarified that all aspects of the natural gas sector, including transmission, storage, marketing, sale, and the setting up and operation of a liquefied natural gas (LNG) installation would be part of the licensing obligation. A Natural Gas Authority to be set up in the Ministry of National Infrastructures (now the Ministry of National Infrastructures, Energy and Water Resources) would supervise these measures

Iran and Qatar, Israel’s near-neighbors and holders of the second and third largest gas reserves in the world, have state-owned companies that control the majority stakes in consortiums, often constituted of international oil companies (IOCs) to operate in the upstream, midstream and downstream sectors of the petroleum industry. In a political domain similar to that of Israel, Norway, the world’s third-largest natural gas exporter, has a state-owned company that manages the commercial aspects of the government’s financial interests in petroleum operations. The Norwegian government is also the largest shareholder of Statoil ASA, one of the most significant energy companies operating in the international market, holding 67% of the stakes. The scheme of having private players to develop the entire value chain of the gas industry competitively is unique to Israel.

Secondly the policy formation process through public hearings of interests in the gas sector, ranging from the field developers, environmentalist, health activists, opposition in the Knesset, to those attentive of the commercial aspects of the gas industry. Such a practice introduced transparency in the functioning of the expert committees established to recommend policy measures to the government. It ensured the delineation of rule and regulations concerning the industry were long-term and enduring.

The Middle East and North Africa 2004, Europa Publication, London and New York: Taylor and Francis

Group, 2013, p.578.

77

Israel’s Mediterranean Gas Governance: Evolution of Domestic Regulations and Emerging Regional IssuesAsian Journal of Middle Eastern and Islamic Studies Vol. 11, No. 4, 2017

76

Israel’s Mediterranean Gas Governance:

Evolution of Domestic Regulations and Emerging Regional Issues

Sujata ASHWARYA

(Centre for West Asian Studies, Jamia Millia Islamia, India)

Abstract: In recent years, Israel has discovered commercially viable natural gas deposits in what the state considers its exclusive economic zone (EEZ) in the Eastern Mediterranean. While these gas discoveries constitute less than 2% of the world’s proven gas reserves, they have the potential to not only meet Israel’s energy needs for several years to come but also enable Israel to export some amount of gas to neighboring countries as well as transregionally, to Europe. While these maritime gas fields have transformed Israel – from energy deficient to energy surplus country – Israeli policymakers are confronted with three main challenges – the revamping of taxation rules, allocation of an export quota for export, and the introduction of competition in the energy sector. The potential for export of gas presents Israel with both opportunities and challenges. While the possibilities include export to Egypt, Turkey and Europe, earning a significant monetary dividend for Israel, problems include territorial disputes and contesting claims over resources among regional countries. The gas supply to Jordanian companies is the only favorable trade deal yet for Israeli field developers. In the absence of differentiation of the exclusive economic zones in the Eastern Mediterranean region, given the political disputes between Turkey and Cyprus and Israel and Lebanon, Israeli gas export ideas may not materialize anytime soon. Key Words: Israel’s Gas Regulatory Framework; Gas Export; Pipeline Options; Risk of Conflict; Demarcation of EEZs

I. Introduction

Economic requirements and political environment bound Israel’s energy and national security consideration in a tight embrace, motivating the country to continuously engage in engage in onshore and offshore exploration for fossil fuels, since its establishment. Small quantities of onshore oil and natural reserves discovered in the early years of the creation of

Dr. Sujata ASHWARYA, Assistant Professor, Center for West Asian Studies, Jamia Millia Islamia, New

Delhi, India. The earlier version of this paper was presented at the 5th International Forum on Asia and the Middle East, which was organized by the Shanghai International Studies University, Shanghai, China, on September 24-25, 2016.


77

the state could alleviate Israel’s complete import dependency in any way. The country has no known coal reserve. During the Sinai occupation (1967-1979), Israel exploited the oil and gas reserves of the peninsula to fulfil about a quarter of its energy requirement, but that was a temporary respite. The real breakthrough for a country with minimal domestic energy resources, however, came in the years 1999-2000, when Israel discovered two small but commercially viable natural gas reserves in what the Jewish state considers its exclusive economic zone (EEZ) in the Eastern Mediterranean. With significantly larger discoveries during 2009 and 2010, Israel is not only moving forward on the path of energy self-sufficiency but has also acquired the capacity to become a potential energy exporter.

The natural gas discoveries necessitated changes in the regulatory environment, characterized by five fundamental features. First and foremost, Israel took the ideological decision to explore for oil and gas through the private sector. Israel deregulated its petroleum sector in the 1990s – an indicator of the neoliberal reforms of the day – to encourage foreign and domestic investment and enhance efficiency. All the state holdings in oil exploration companies were privatized, including that of the Israel National Oil Company, which threw the sector open to competition. The government also introduced reforms in the midstream and downstream sectors of the economy. While broad rules and regulations established in state policy measures would take care of the public stakes in the oil and gas sector, having a national oil company to tackle that task was not considered necessary. With the significant natural gas discoveries in the Eastern Mediterranean, Israel passed the Natural Gas Sector Law, 2002 (henceforth, ‘gas law’), Israel decided to have a competitive private sector composition in all midstream and downstream phases. The Amendment number 4, 2007, to the gas law clarified that all aspects of the natural gas sector, including transmission, storage, marketing, sale, and the setting up and operation of a liquefied natural gas (LNG) installation would be part of the licensing obligation. A Natural Gas Authority to be set up in the Ministry of National Infrastructures (now the Ministry of National Infrastructures, Energy and Water Resources) would supervise these measures

Iran and Qatar, Israel’s near-neighbors and holders of the second and third largest gas reserves in the world, have state-owned companies that control the majority stakes in consortiums, often constituted of international oil companies (IOCs) to operate in the upstream, midstream and downstream sectors of the petroleum industry. In a political domain similar to that of Israel, Norway, the world’s third-largest natural gas exporter, has a state-owned company that manages the commercial aspects of the government’s financial interests in petroleum operations. The Norwegian government is also the largest shareholder of Statoil ASA, one of the most significant energy companies operating in the international market, holding 67% of the stakes. The scheme of having private players to develop the entire value chain of the gas industry competitively is unique to Israel.

Secondly the policy formation process through public hearings of interests in the gas sector, ranging from the field developers, environmentalist, health activists, opposition in the Knesset, to those attentive of the commercial aspects of the gas industry. Such a practice introduced transparency in the functioning of the expert committees established to recommend policy measures to the government. It ensured the delineation of rule and regulations concerning the industry were long-term and enduring.

The Middle East and North Africa 2004, Europa Publication, London and New York: Taylor and Francis

Group, 2013, p.578.

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78

Thirdly, this article understands that through changes in taxation rules, the government explicitly told the private gas developers that the mineral resource belonged to the State of Israel and they cannot claim “field degradation subsidy” in the calculation of profits to which the government was entitled to have a share. Unlike the US and Canada, which have a privatized ownership of petroleum resources, the rights-holders to the Israeli gas fields are not the owners of those fields. The developers did not buy the gas fields from the state and, therefore, the mineral in the fields did not belong to them, but to the state and by the token to the Israeli people. However, to incentivize the developers, the government sought to ensure through the law that they can recover at least 150 of the cost before a system of progressive taxation in the form of “levy” would take effect.

Fourthly, this article asserts that the democratic decision-making in Israeli polity ensured that the state took into account the multiplicity of public opinion while formulating the policy on domestic utilization of gas and export possibilities. Without public scrutiny and debate, the prioritization of internal usage over export option thought to be a crucial incentivize for the gas developers, would not have seen the light of the day. The dominant voice in the debate advanced the idea that gas is a public resource and must be made available to satisfy current and future domestic demands first, in addition to contributing to environmental betterment through a reduction in the use of more polluting fossil fuels. In effect, the debates emphasized that gas was a trans-generational resource, requiring careful utilization strategies so that it does not run out earlier than the development of alternatives and put Israel once again in a precarious position of energy dependency. Similarly, the government was compelled to ensure a competitive market in the gas sector when the issue of cross-holdings in gas fields was the subject of criticism in public discussions.

Fifthly, this article claims that gas could serve as a strategic foreign policy tool for Israel to transform antagonistic relations in the region into interdependent ones through energy trade. Gas contracts are typically long-term tethered to transmission structures that are difficult to replace. Gas demand and supply relationships function with an understanding of the strategic context and, therefore, even modest exports or imports carry leverage regarding availability for the consumers and revenue for the suppliers.

II. Commercially Viable Gas Discoveries

In the early 1990s, the Israeli government introduced structural changes to expedite exploration and production (E&P) of oil and gas, including deregulation of the market and privatization of the government-owned energy companies. Intending to attract foreign players in E&P, the government eased the terms of the exploration licenses and promised extensive tax benefits. However, few internationally known oil and gas companies evinced interest owing to concerns that business with Israel would damage their prospects in the Arab world. Texas-based Samedan, now Noble Energy, was a notable exception. With no exposure to the Arab markets, it entered Israeli E&P in 1998 in partnership with private Israeli energy companies.

The Petroleum Law of 1952 that regulated exploration and production in the initial years of the establishment of the state, and offered extremely favorable term for E&P, was substantially amended in 1965 to encourage international investment in the oil and gas sector.

Since the early 1990s, some small Israeli publicly traded limited corporations conducted the bulk of exploration activities without significant outside assistance. “Zion Oil and Gas,” http://www.sec.gov/Archi


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In June 1999, Yam Tethys – a consortium comprised of Noble Energy and the Delek Group – discovered the first significant commercially extractable natural gas at the Noa lease, containing about 1.2 billion cubic meters (BCM) of gas. A few months later in February 2000, the Noble-Delek consortium found an estimated 25 BCM of gas in the Mary-B drilling site. Located 25-kilometre (km) from the coastal towns of Ashdod and Ashkelon, the Yam Tethys fields marked the beginning of a new era in the Israeli energy supply. Simultaneously, a British Gas (BG)-led consortium constitutive of Consolidated Contractors Company and the Palestine Investment Fund (PIF), which acquired a 25-year license from the Palestinian National Authority, discovered the Gaza Marine natural gas field, 30 km off the coast of the Gaza Strip in the year 2000. Estimated to contain 28 BCM of gas, Gaza Marine is mired in the Palestinian-Israeli conflict and still awaits development.

Following the Yam Tethys breakthrough, Israel’s gas fortunes rose once again a decade later. Beginning 2009, a series of additional discoveries in the Eastern Mediterranean – this time off the northern coast – sharply increased Israel’s natural gas reserves. Noble Energy with the limited partnerships Isramco Negev 2, Delek Partnership, and Dor Gas Exploration (“Tamar Partnership”) discovered the Tamar field in January 2009 west of the Haifa port. With a recoverable reserve of 281 BCM of gas and about 13 million barrels of condensate, Tamar was the biggest gas find in the Levant Basin at the time of its discovery. In 2013, another 26 BCM of gas and 2 million barrels of condensate were discovered at Tamar South West (SW), bringing the total combined resources available from Tamar and Tamar SW to 307 BCM. A July 2017 reserves report indicates that Tamar and Tamar SW natural gas field has proved and probable reserves of 318 billion cubic meters of gas and 14.6 million barrels of condensate, up 3.6% of what was initially estimated.

Noble-Delek consortium’s discovery of a natural gas reservoir at the Dalit drill site off the coast of Hadera in March 2009 added an estimated 8BCM to the total gas reserve. The partnership’s string of success continued as it announced the discovery of Leviathan in June 2010 – west of Tamar and located at comparable depth – containing an estimated 606 BCM of gas. An appropriate name for a humongous reservoir, Leviathan is one of the world's most significant deep-water natural gas discoveries. In February 2012, Noble-Delek announced its sixth offshore discovery at the deep-sea Tanin field located about 20 km north of Tamar, which may hold up to 35 BCM of gas. The Karish discovery in May 2013, north of Tanin and approximately 30 km northeast of the Tamar with an estimated resource size over 50 BCM was also the seventh consecutive field discovery for Noble Energy and its partners.

The exploring companies also found a small amount of gas in Dolphin, Shimson and Ishai licenses. Shimson and Ishai have AGR-Isramco and AGR-Nammax as their chief ves/edgar/data/1131312/000113131206000077/exploration.htm. The right holders in the Yam Thetis partnership were Noble Energy (47%), Delek Drilling (25.5%), Avner

Oil and Gas Exploration (23%) and Delek Investments and Properties (4.4%). Delek Drilling, Avner Oil Exploration, and Delek Investments constitute the Delek Partnership. See The Natural Gas Sector in Israel,Ministry of National Infrastructures, Energy and Water Resources, Government of Israel, http://energy.go v.il/English/Subjects/Natural%20Gas/Pages/GxmsMniNGEconomy.aspx.

“Gaza Marine Gas Field, Palestine,” http://www.offshore-technology.com/projects/gaza-marine-gas-fiel d/; “The Gaza Marine Field: Left Behind,” Natural Gas Europe, May 11, 2015, http://www.naturalgaseur ope.com/the-gaza-marine-field-left-behind-23564. “Partners in Israel’s Tamar Raise Gas Reserves Estimate by 13 pct,” Reuters, July 2, 2017.

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Thirdly, this article understands that through changes in taxation rules, the government explicitly told the private gas developers that the mineral resource belonged to the State of Israel and they cannot claim “field degradation subsidy” in the calculation of profits to which the government was entitled to have a share. Unlike the US and Canada, which have a privatized ownership of petroleum resources, the rights-holders to the Israeli gas fields are not the owners of those fields. The developers did not buy the gas fields from the state and, therefore, the mineral in the fields did not belong to them, but to the state and by the token to the Israeli people. However, to incentivize the developers, the government sought to ensure through the law that they can recover at least 150 of the cost before a system of progressive taxation in the form of “levy” would take effect.

Fourthly, this article asserts that the democratic decision-making in Israeli polity ensured that the state took into account the multiplicity of public opinion while formulating the policy on domestic utilization of gas and export possibilities. Without public scrutiny and debate, the prioritization of internal usage over export option thought to be a crucial incentivize for the gas developers, would not have seen the light of the day. The dominant voice in the debate advanced the idea that gas is a public resource and must be made available to satisfy current and future domestic demands first, in addition to contributing to environmental betterment through a reduction in the use of more polluting fossil fuels. In effect, the debates emphasized that gas was a trans-generational resource, requiring careful utilization strategies so that it does not run out earlier than the development of alternatives and put Israel once again in a precarious position of energy dependency. Similarly, the government was compelled to ensure a competitive market in the gas sector when the issue of cross-holdings in gas fields was the subject of criticism in public discussions.

Fifthly, this article claims that gas could serve as a strategic foreign policy tool for Israel to transform antagonistic relations in the region into interdependent ones through energy trade. Gas contracts are typically long-term tethered to transmission structures that are difficult to replace. Gas demand and supply relationships function with an understanding of the strategic context and, therefore, even modest exports or imports carry leverage regarding availability for the consumers and revenue for the suppliers.

II. Commercially Viable Gas Discoveries

In the early 1990s, the Israeli government introduced structural changes to expedite exploration and production (E&P) of oil and gas, including deregulation of the market and privatization of the government-owned energy companies. Intending to attract foreign players in E&P, the government eased the terms of the exploration licenses and promised extensive tax benefits. However, few internationally known oil and gas companies evinced interest owing to concerns that business with Israel would damage their prospects in the Arab world. Texas-based Samedan, now Noble Energy, was a notable exception. With no exposure to the Arab markets, it entered Israeli E&P in 1998 in partnership with private Israeli energy companies.

The Petroleum Law of 1952 that regulated exploration and production in the initial years of the establishment of the state, and offered extremely favorable term for E&P, was substantially amended in 1965 to encourage international investment in the oil and gas sector. Since the early 1990s, some small Israeli publicly traded limited corporations conducted the bulk of

exploration activities without significant outside assistance. “Zion Oil and Gas,” http://www.sec.gov/Archi


79

In June 1999, Yam Tethys – a consortium comprised of Noble Energy and the Delek Group – discovered the first significant commercially extractable natural gas at the Noa lease, containing about 1.2 billion cubic meters (BCM) of gas. A few months later in February 2000, the Noble-Delek consortium found an estimated 25 BCM of gas in the Mary-B drilling site. Located 25-kilometre (km) from the coastal towns of Ashdod and Ashkelon, the Yam Tethys fields marked the beginning of a new era in the Israeli energy supply. Simultaneously, a British Gas (BG)-led consortium constitutive of Consolidated Contractors Company and the Palestine Investment Fund (PIF), which acquired a 25-year license from the Palestinian National Authority, discovered the Gaza Marine natural gas field, 30 km off the coast of the Gaza Strip in the year 2000. Estimated to contain 28 BCM of gas, Gaza Marine is mired in the Palestinian-Israeli conflict and still awaits development.

Following the Yam Tethys breakthrough, Israel’s gas fortunes rose once again a decade later. Beginning 2009, a series of additional discoveries in the Eastern Mediterranean – this time off the northern coast – sharply increased Israel’s natural gas reserves. Noble Energy with the limited partnerships Isramco Negev 2, Delek Partnership, and Dor Gas Exploration (“Tamar Partnership”) discovered the Tamar field in January 2009 west of the Haifa port. With a recoverable reserve of 281 BCM of gas and about 13 million barrels of condensate, Tamar was the biggest gas find in the Levant Basin at the time of its discovery. In 2013, another 26 BCM of gas and 2 million barrels of condensate were discovered at Tamar South West (SW), bringing the total combined resources available from Tamar and Tamar SW to 307 BCM. A July 2017 reserves report indicates that Tamar and Tamar SW natural gas field has proved and probable reserves of 318 billion cubic meters of gas and 14.6 million barrels of condensate, up 3.6% of what was initially estimated.

Noble-Delek consortium’s discovery of a natural gas reservoir at the Dalit drill site off the coast of Hadera in March 2009 added an estimated 8BCM to the total gas reserve. The partnership’s string of success continued as it announced the discovery of Leviathan in June 2010 – west of Tamar and located at comparable depth – containing an estimated 606 BCM of gas. An appropriate name for a humongous reservoir, Leviathan is one of the world's most significant deep-water natural gas discoveries. In February 2012, Noble-Delek announced its sixth offshore discovery at the deep-sea Tanin field located about 20 km north of Tamar, which may hold up to 35 BCM of gas. The Karish discovery in May 2013, north of Tanin and approximately 30 km northeast of the Tamar with an estimated resource size over 50 BCM was also the seventh consecutive field discovery for Noble Energy and its partners.

The exploring companies also found a small amount of gas in Dolphin, Shimson and Ishai licenses. Shimson and Ishai have AGR-Isramco and AGR-Nammax as their chief ves/edgar/data/1131312/000113131206000077/exploration.htm. The right holders in the Yam Thetis partnership were Noble Energy (47%), Delek Drilling (25.5%), Avner

Oil and Gas Exploration (23%) and Delek Investments and Properties (4.4%). Delek Drilling, Avner Oil Exploration, and Delek Investments constitute the Delek Partnership. See The Natural Gas Sector in Israel,Ministry of National Infrastructures, Energy and Water Resources, Government of Israel, http://energy.go v.il/English/Subjects/Natural%20Gas/Pages/GxmsMniNGEconomy.aspx.

“Gaza Marine Gas Field, Palestine,” http://www.offshore-technology.com/projects/gaza-marine-gas-fiel d/; “The Gaza Marine Field: Left Behind,” Natural Gas Europe, May 11, 2015, http://www.naturalgaseur ope.com/the-gaza-marine-field-left-behind-23564. “Partners in Israel’s Tamar Raise Gas Reserves Estimate by 13 pct,” Reuters, July 2, 2017.

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operators respectively. Data from Israel’s Ministry of Energy show that Israel’s natural gas supply including reserves, contingent and prospective, could be as high as 1,480 BCM

(For discovered gas fields and their reserves, see Table 1).

Table 1: Israel’s Gas Fields Field Year

DiscoveryReserves (in BCM)

Status

Noa 1999 1.3 Mari-B 2000 25

Produced

Tamar 2009 Producing Tamar Southwest

2013 318 Not developed

Dalit 2009 8 Not developed Leviathan 2010 606 Under Development Tanin 2011 35.1 Not developed Karish 2013 50.3 Not developed Shimshon 2012 5 Under Development Dolphin 2011 2.3 (Israeli Government does not

recognize it as a discovery)

Ishai 2012 7-10 Not developed

Source: “East Med E&P: our Assets,” 2017, https://www.delek-group.com/our-operations/east-med/;“Delek Drilling and Avner Agree to Sell Karish and Tanin Fields to Energean Oil & Gas,” Energean Oil & Gas Press Release, August 17, 2016, http://investors.nobleenergyinc.com/releasedetail.cfm?ReleaseID=76 6498; Ministry of National Infrastructures, Energy and Water Resources, Government of Israel, “Israeli Gas Opportunities”.

III. The Evolution of National Gas Regulations in Israel

Israel has established the institutional and legal framework for the natural gas sector and revised the fiscal regime for exploration and production. The Natural Gas Sector Law of 2002 governing the midstream and downstream activities in the petroleum sector includes a licensing system aimed at encouraging competition in natural gas infrastructure, including distribution, transmission, storage and LNG facilities. It also established a regulatory body, the Natural Gas Authority (NGA), and confined the state ownership to the network operator, Israel Natural Gas Lines, set up in 2004. The responsibilities of the NGA are reasonably typical of the sector. In particular, it is involved in “licensing and supervision of natural gas licensees, establishing tariffs and criteria for the provision of services, arbitrating disputes

Natural Resources Administration, Ministry of Energy and Water Resources, cited in The

Recommendations of the Inter-Ministerial Committee to Examine the Government’s Policy Regarding Natural Gas in Israel, Executive Summary, September 2012, p.8.

On July 21, 2016, the Petroleum Commissioner announced his decision not to recognise the Dolphin natural gas reservoir, as a discovery under the Oil Law, 1952. The partners in the license on August 18, 2016, filed an appeal with the Minister of National Infrastructures, Energy and Water Resources. Delek Group Financial Statements, June 30, 2016, p.27, A2.


81

and defining arrangements between the players in the market, and investigating consumer complaints against licensees.” Although endowed with a separate budget, the Director of the NGA retains his position at the pleasure of the Minister of National Infrastructure, which, many believe, compromises the independence of the Authority about regulation and supervision.

In the 1990s, when Noble Energy, Delek Group, and other domestic players acquired licenses for E&P, Israel did not have a set of rules suitable for the vast discoveries. Hence the rules on government “take” from the profits of the investors low, the laws for export of gas were non-existent, and monopolies rapidly formed in the absence any interest of the IOCs in Israeli fields. In light of the public debate that ensued on the distribution of profits, allocation of gas quota for domestic use and export, and lack of competition in the sector, the Government of Israel decided that the conditions were ripe for the review of existing laws and formulation of new rules following the best international practices.

1. Sheshinski Committee: The New Tax Regime Israel did not have a set of regulations suitable for the level of the discoveries in

2009-10. The enormous size of natural gas discovery in Tamar and Leviathan mandated changes in rules on taxation set in the 1952 Petroleum Law. In the face of an increasing public demand to check the swelling profits of the gas companies in the absence of a public share, the government stepped in to take suitable measures. On April 12, 2010, the Minister of Finance (Yuval Steinitz, who is currently the Minister of National Infrastructure, Energy and Water Resources) appointed a committee to examine the fiscal policy for the oil and gas resources and recommend a new tax regime given the significant natural gas discoveries in 2009-2010.

The committee headed by Professor Eytan Sheshinski of the Hebrew University of Jerusalem has since come to be known as the Sheshinski Committee. Before delivering its conclusions, the panel grappled with two fundamental questions. First, what should be the mechanism for distribution of profits from gas sales? Secondly, how can the gas industry, run by private companies, have enough incentive to develop the known reserves and invest in the exploration of additional deposits?

To resolve these questions, the Sheshinski Committee took into account the best practices in oil and gas E&P market in countries with similar macroeconomic and democratic characteristics to that of Israel, particularly the natural gas market. Besides, the committee members thoroughly examined the fiscal system in Israel for this industry, along with corresponding financial tools and methods around the world. The committee considered the public opinion in the form of economic and legal views provided by the organisations that presented their positions in the committee hearings.

1.1 Key aspects of the reforms 1) First, the committee proposed to leave the 12.5% rate of the royalty established in the

1952 Petroleum law unchanged because it was like that of other countries around the world.

The National Gas Authority, The Ministry of National Infrastructure, Energy and Water Resources,

Government of Israel, http://energy.gov.il/English/Subjects/Natural%20Gas/Pages/GxmsMniNGAuthorit y.aspx. The critical elements of the reforms discussed in this article are from the Sheshinski Committee Report,

Conclusions of the Committee for the Examination of the Fiscal Policy with Respect to Oil and Gas Resources in Israel, State of Israel (Sheshinski Committee), January 2011, http://www.financeisrael.mof.go v.il/financeisrael/Docs/En/publications/02_Full_Report_Nonincluding_Appendixes.pdf.

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operators respectively. Data from Israel’s Ministry of Energy show that Israel’s natural gas supply including reserves, contingent and prospective, could be as high as 1,480 BCM

(For discovered gas fields and their reserves, see Table 1).

Table 1: Israel’s Gas Fields Field Year

DiscoveryReserves (in BCM)

Status

Noa 1999 1.3 Mari-B 2000 25

Produced

Tamar 2009 Producing Tamar Southwest

2013 318 Not developed

Dalit 2009 8 Not developed Leviathan 2010 606 Under Development Tanin 2011 35.1 Not developed Karish 2013 50.3 Not developed Shimshon 2012 5 Under Development Dolphin 2011 2.3 (Israeli Government does not

recognize it as a discovery)

Ishai 2012 7-10 Not developed

Source: “East Med E&P: our Assets,” 2017, https://www.delek-group.com/our-operations/east-med/;“Delek Drilling and Avner Agree to Sell Karish and Tanin Fields to Energean Oil & Gas,” Energean Oil & Gas Press Release, August 17, 2016, http://investors.nobleenergyinc.com/releasedetail.cfm?ReleaseID=76 6498; Ministry of National Infrastructures, Energy and Water Resources, Government of Israel, “Israeli Gas Opportunities”.

III. The Evolution of National Gas Regulations in Israel

Israel has established the institutional and legal framework for the natural gas sector and revised the fiscal regime for exploration and production. The Natural Gas Sector Law of 2002 governing the midstream and downstream activities in the petroleum sector includes a licensing system aimed at encouraging competition in natural gas infrastructure, including distribution, transmission, storage and LNG facilities. It also established a regulatory body, the Natural Gas Authority (NGA), and confined the state ownership to the network operator, Israel Natural Gas Lines, set up in 2004. The responsibilities of the NGA are reasonably typical of the sector. In particular, it is involved in “licensing and supervision of natural gas licensees, establishing tariffs and criteria for the provision of services, arbitrating disputes

Natural Resources Administration, Ministry of Energy and Water Resources, cited in The

Recommendations of the Inter-Ministerial Committee to Examine the Government’s Policy Regarding Natural Gas in Israel, Executive Summary, September 2012, p.8.

On July 21, 2016, the Petroleum Commissioner announced his decision not to recognise the Dolphin natural gas reservoir, as a discovery under the Oil Law, 1952. The partners in the license on August 18, 2016, filed an appeal with the Minister of National Infrastructures, Energy and Water Resources. Delek Group Financial Statements, June 30, 2016, p.27, A2.


81

and defining arrangements between the players in the market, and investigating consumer complaints against licensees.” Although endowed with a separate budget, the Director of the NGA retains his position at the pleasure of the Minister of National Infrastructure, which, many believe, compromises the independence of the Authority about regulation and supervision.

In the 1990s, when Noble Energy, Delek Group, and other domestic players acquired licenses for E&P, Israel did not have a set of rules suitable for the vast discoveries. Hence the rules on government “take” from the profits of the investors low, the laws for export of gas were non-existent, and monopolies rapidly formed in the absence any interest of the IOCs in Israeli fields. In light of the public debate that ensued on the distribution of profits, allocation of gas quota for domestic use and export, and lack of competition in the sector, the Government of Israel decided that the conditions were ripe for the review of existing laws and formulation of new rules following the best international practices.

1. Sheshinski Committee: The New Tax Regime Israel did not have a set of regulations suitable for the level of the discoveries in

2009-10. The enormous size of natural gas discovery in Tamar and Leviathan mandated changes in rules on taxation set in the 1952 Petroleum Law. In the face of an increasing public demand to check the swelling profits of the gas companies in the absence of a public share, the government stepped in to take suitable measures. On April 12, 2010, the Minister of Finance (Yuval Steinitz, who is currently the Minister of National Infrastructure, Energy and Water Resources) appointed a committee to examine the fiscal policy for the oil and gas resources and recommend a new tax regime given the significant natural gas discoveries in 2009-2010.

The committee headed by Professor Eytan Sheshinski of the Hebrew University of Jerusalem has since come to be known as the Sheshinski Committee. Before delivering its conclusions, the panel grappled with two fundamental questions. First, what should be the mechanism for distribution of profits from gas sales? Secondly, how can the gas industry, run by private companies, have enough incentive to develop the known reserves and invest in the exploration of additional deposits?

To resolve these questions, the Sheshinski Committee took into account the best practices in oil and gas E&P market in countries with similar macroeconomic and democratic characteristics to that of Israel, particularly the natural gas market. Besides, the committee members thoroughly examined the fiscal system in Israel for this industry, along with corresponding financial tools and methods around the world. The committee considered the public opinion in the form of economic and legal views provided by the organisations that presented their positions in the committee hearings.

1.1 Key aspects of the reforms 1) First, the committee proposed to leave the 12.5% rate of the royalty established in the

1952 Petroleum law unchanged because it was like that of other countries around the world.

The National Gas Authority, The Ministry of National Infrastructure, Energy and Water Resources,

Government of Israel, http://energy.gov.il/English/Subjects/Natural%20Gas/Pages/GxmsMniNGAuthorit y.aspx. The critical elements of the reforms discussed in this article are from the Sheshinski Committee Report,

Conclusions of the Committee for the Examination of the Fiscal Policy with Respect to Oil and Gas Resources in Israel, State of Israel (Sheshinski Committee), January 2011, http://www.financeisrael.mof.go v.il/financeisrael/Docs/En/publications/02_Full_Report_Nonincluding_Appendixes.pdf.

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2) Secondly, it cancelled the “depletion deduction”, a tax break given to the private developers intended to reflect the exhaustion of the resource and thus a decrease in the value of the asset. The committee correctly argued that the subsidy had no economic justification because there had been no payment for the resource in the deposit in the first place and the state-owned the depleting asset. Finding few parallels in international practice on the oil and gas taxation regime under the circumstances like that of Israel, the committee proposed to abolish the depletion deduction.

3) Introduction of “accelerated depreciation mechanism” to costs accumulated during the lease stage in the development of the petroleum asset at the rate of 10%. A separate mechanism would apply to the exploration and production phases

4) The committee introduced the idea of progressive taxation. It recommended the imposition of a special tax or “levy” ranging from 20% to 50% that would enlarge the government takes from the oil and gas profits (revenues minus current expenses) from about one-third to two-thirds during the life of a profitable project. However, this levy would kick in only after the recovery of 150% of the amount invested in exploration and development of a project, denoted as a recovery factor (R-Factor) of 1.5. The rate of the levy would start at 20% if the R-Factor is 1.5 (recovery of 150% of the amount invested) and range progressively up to 50% of the R-Factor reaches 2.3 (recovery of 230% of the amount invested). The levy would be calculated separately for each field, a method called as ring-fencing, and redirecting revenues or expenses among the deposits will not be allowed.

5) In recognition of the fact that the transition from the existing financial system to the proposed fiscal policy would be difficult, the committee established what is called a gradual track. For example, the minimum R-factor for the imposition of the levy is higher for production commencing before January 2014. This provision was supposed to lighten the fiscal burden for existing and the immediately upcoming production (i.e. the Yam Tethys and Tamar fields).

1.2 Sheshinski Report and Investors When the Sheshinski Committee submitted its final recommendations to the Minister

of Finance on January 3, 2011, it had worked to reconcile two opposing points of view. While some argued the government ought to collect more revenues on behalf of Israel’s citizens, as gas was a public resource, others contended that oil and gas exploration to be an expensive and risky, and it should not be liable to a “retroactive penalty” when it succeeds. The Government officially adopted of the recommendations of the committee by the Knesset’s passage of the Israel Tax on Petroleum Profits Law on March 30, 2011, which filled the legal vacuum that existed in the financial regulations on oil and gas in the face of massive oil discoveries.

In retort, the gas companies responded by petitioning the Supreme Court against what they believed was the retroactive nature of the law. They argued that it damaged their assets and appealed against the cancellation of the depletion allowance or, at least, their holdings should be exempt from this aspect of the reforms. The court, however, rejected their appeal and upheld the legality of the Sheshinski Committee recommendations. That the complaint

Leon Harris, “Your Taxes: What the Sheshinski Committee’s Report Means,” Jerusalem Post,

November 16, 2010. Hila Raz, “Rejected Petitions Against Sheshinski Law; ‘There Is No Retroactive Taxation’,” The Marker,

August 15, 2012, [in Hebrew].


83

of the investors/companies was disingenuous can be perceived from the fact that under the Sheshinski fiscal outline only profits are taxed, not revenues, adding to the benefits of the gas companies, since it apportioned the risk on the government. If the companies turned substantial profits, the government would get its tax; if they didn’t, the government would suffer just the same.

It is also erroneous to presume that exploration of gas and oil is enormously risky and therefore companies need high returns to remain sufficiently invested in the industry. Deep-water drilling involves sufficient risks, but most of them can be hedged or moderated and, therefore, companies need not demand compensation for risks that even out. While the odds against a single well yielding proven reserve are quite high, most of the companies down wells at multiple sites, to reduce the risk of complete failure. Moreover, advances in technology tell the best places to drill and, hence, reduce the probability of drilling into dry wells.

Another argument advanced by the companies that Israel’s specific risks – terrorism and military conflict – justify higher profits is again fallacious. Managing risks is not unique to gas companies, and they face similar conditions as any other company in the world.Moreover, the government of Israel gives sovereign guarantees to gas installations against the threat of terrorism and warfare. However, ever since the Knesset passed the “Sheshinski Bill”, the tilt of the government has been towards the gas developers, founded on the belief gas was critical to national security. Problems related to the development of the natural gas sector required quick resolution and strong policy support.

2. Zemach Committee: The Issue of Gas Export In the background of the incredible Leviathan discovery, there arose a need to formulate

a comprehensive policy for the country’s gas sector. On October 2, 2011, Prime Minister (PM) Benjamin Netanyahu and Minister of National Infrastructures Uzi Landau appointed an inter-ministerial committee to examine government policy on the natural gas industry in Israel. The members of the Zemach Committee – which get its name from its chairman, Shaul Zemach, the Director General of the Ministry of Energy and Water Resources – came from a wide range several ministries, including Foreign Affairs, Finance, Environmental Protection, and authorities, such as, the deputy head of the National Security Council, and the Antitrust Authority. The Zemach Committee protocols span more than 2,000 pages and cover 17 meetings and several public hearings that took place over nine months.

As specified in the letter of appointment, the panel examined the various models of governmental policies in the natural gas sector around the globe, which displayed similar characteristics to Israel. The goal was to learn from international experience and best practices in the industry around the world, and accordingly, recommend the most favorable policy in the light of Israel’s unique geopolitical situation. That system would ensure the security of domestic supply, facilitate competition in the local gas market, leverage the environmental benefits of natural gas, and maximize economic and political gains. Among

Amiram Barkat, “Gas Developers, Owe Sheshinski Debt of Gratitude,” Globes, May 20, 2015, http://w

ww.globes.co.il/en/article-gas-developers-owe-sheshinski-a-debt-of-gratitude-1001038366. “Deepwater Risks-1: Challenges, Risks Can be Managed in Deepwater Oil and Gas Projects,” Oil and

Gas Journal, November 27, 2006. Author’s telephonic interview with Noam Segal, January 26, 2016, Jerusalem, Israel. Robert S. Pindyck and Analysis Group, Inc., A Framework for the Taxation of Natural Resources in Israel,

Ministry of Finance, Government of Israel, September 22, 2014.

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2) Secondly, it cancelled the “depletion deduction”, a tax break given to the private developers intended to reflect the exhaustion of the resource and thus a decrease in the value of the asset. The committee correctly argued that the subsidy had no economic justification because there had been no payment for the resource in the deposit in the first place and the state-owned the depleting asset. Finding few parallels in international practice on the oil and gas taxation regime under the circumstances like that of Israel, the committee proposed to abolish the depletion deduction.

3) Introduction of “accelerated depreciation mechanism” to costs accumulated during the lease stage in the development of the petroleum asset at the rate of 10%. A separate mechanism would apply to the exploration and production phases

4) The committee introduced the idea of progressive taxation. It recommended the imposition of a special tax or “levy” ranging from 20% to 50% that would enlarge the government takes from the oil and gas profits (revenues minus current expenses) from about one-third to two-thirds during the life of a profitable project. However, this levy would kick in only after the recovery of 150% of the amount invested in exploration and development of a project, denoted as a recovery factor (R-Factor) of 1.5. The rate of the levy would start at 20% if the R-Factor is 1.5 (recovery of 150% of the amount invested) and range progressively up to 50% of the R-Factor reaches 2.3 (recovery of 230% of the amount invested). The levy would be calculated separately for each field, a method called as ring-fencing, and redirecting revenues or expenses among the deposits will not be allowed.

5) In recognition of the fact that the transition from the existing financial system to the proposed fiscal policy would be difficult, the committee established what is called a gradual track. For example, the minimum R-factor for the imposition of the levy is higher for production commencing before January 2014. This provision was supposed to lighten the fiscal burden for existing and the immediately upcoming production (i.e. the Yam Tethys and Tamar fields).

1.2 Sheshinski Report and Investors When the Sheshinski Committee submitted its final recommendations to the Minister

of Finance on January 3, 2011, it had worked to reconcile two opposing points of view. While some argued the government ought to collect more revenues on behalf of Israel’s citizens, as gas was a public resource, others contended that oil and gas exploration to be an expensive and risky, and it should not be liable to a “retroactive penalty” when it succeeds. The Government officially adopted of the recommendations of the committee by the Knesset’s passage of the Israel Tax on Petroleum Profits Law on March 30, 2011, which filled the legal vacuum that existed in the financial regulations on oil and gas in the face of massive oil discoveries.

In retort, the gas companies responded by petitioning the Supreme Court against what they believed was the retroactive nature of the law. They argued that it damaged their assets and appealed against the cancellation of the depletion allowance or, at least, their holdings should be exempt from this aspect of the reforms. The court, however, rejected their appeal and upheld the legality of the Sheshinski Committee recommendations. That the complaint

Leon Harris, “Your Taxes: What the Sheshinski Committee’s Report Means,” Jerusalem Post,

November 16, 2010. Hila Raz, “Rejected Petitions Against Sheshinski Law; ‘There Is No Retroactive Taxation’,” The Marker,

August 15, 2012, [in Hebrew].


83

of the investors/companies was disingenuous can be perceived from the fact that under the Sheshinski fiscal outline only profits are taxed, not revenues, adding to the benefits of the gas companies, since it apportioned the risk on the government. If the companies turned substantial profits, the government would get its tax; if they didn’t, the government would suffer just the same.

It is also erroneous to presume that exploration of gas and oil is enormously risky and therefore companies need high returns to remain sufficiently invested in the industry. Deep-water drilling involves sufficient risks, but most of them can be hedged or moderated and, therefore, companies need not demand compensation for risks that even out. While the odds against a single well yielding proven reserve are quite high, most of the companies down wells at multiple sites, to reduce the risk of complete failure. Moreover, advances in technology tell the best places to drill and, hence, reduce the probability of drilling into dry wells.

Another argument advanced by the companies that Israel’s specific risks – terrorism and military conflict – justify higher profits is again fallacious. Managing risks is not unique to gas companies, and they face similar conditions as any other company in the world.Moreover, the government of Israel gives sovereign guarantees to gas installations against the threat of terrorism and warfare. However, ever since the Knesset passed the “Sheshinski Bill”, the tilt of the government has been towards the gas developers, founded on the belief gas was critical to national security. Problems related to the development of the natural gas sector required quick resolution and strong policy support.

2. Zemach Committee: The Issue of Gas Export In the background of the incredible Leviathan discovery, there arose a need to formulate

a comprehensive policy for the country’s gas sector. On October 2, 2011, Prime Minister (PM) Benjamin Netanyahu and Minister of National Infrastructures Uzi Landau appointed an inter-ministerial committee to examine government policy on the natural gas industry in Israel. The members of the Zemach Committee – which get its name from its chairman, Shaul Zemach, the Director General of the Ministry of Energy and Water Resources – came from a wide range several ministries, including Foreign Affairs, Finance, Environmental Protection, and authorities, such as, the deputy head of the National Security Council, and the Antitrust Authority. The Zemach Committee protocols span more than 2,000 pages and cover 17 meetings and several public hearings that took place over nine months.

As specified in the letter of appointment, the panel examined the various models of governmental policies in the natural gas sector around the globe, which displayed similar characteristics to Israel. The goal was to learn from international experience and best practices in the industry around the world, and accordingly, recommend the most favorable policy in the light of Israel’s unique geopolitical situation. That system would ensure the security of domestic supply, facilitate competition in the local gas market, leverage the environmental benefits of natural gas, and maximize economic and political gains. Among

Amiram Barkat, “Gas Developers, Owe Sheshinski Debt of Gratitude,” Globes, May 20, 2015, http://w

ww.globes.co.il/en/article-gas-developers-owe-sheshinski-a-debt-of-gratitude-1001038366. “Deepwater Risks-1: Challenges, Risks Can be Managed in Deepwater Oil and Gas Projects,” Oil and

Gas Journal, November 27, 2006. Author’s telephonic interview with Noam Segal, January 26, 2016, Jerusalem, Israel. Robert S. Pindyck and Analysis Group, Inc., A Framework for the Taxation of Natural Resources in Israel,

Ministry of Finance, Government of Israel, September 22, 2014.

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84

other things, the committee was particularly requested to examine the mechanism that would achieve a balance between keeping reserves for domestic consumption and exports.

2.1 Recommendations for Export Tasked to explore ways to ensure long-term the energy needs of the Israeli economy,

one of the more extensive discussions of the committee revolved around the question whether the developers should be allowed to export gas and how much. In its final report published on August 29, 2012, the Zemach Committee decided to let the gas producers ship from Israel's existing and prospective gas resources, notably, over and above the quantity, they had requested in the hearings. The base assumption was that if the producers did not invest the billions of dollars needed to develop the gas fields, the resource was worth nothing. Their demand of assurance for exports to raise the money necessary to continue developing the current reservoirs and carry out exploration for new ones was reasonable.

The committee accepted the figures of the National Economic Council that total gas discoveries, including contingent and prospective, could reach as high as 1,480 BCM, but decided its policy recommendations on a smaller volume of 950 BCM (See Table 2). The committee viewed the supply to the domestic market as a top priority and included three principal elements:

No field would be counted as a producing field unless it had a physical connection to the Israeli natural gas infrastructure to provide an available supply for the local market (and thus impact the amount available for export).

The consumers in the Israeli market will have the priority for the supply of natural gas from the Israeli fields.

Tamar field, being the only source of gas to Israel, will exclusively serve the Israeli market. No export would be allowed from this deposit unless and until and the Leviathan field started producing and was connected to Israel’s supply structures.

While reserving 450 for Israel’s aggregate demand in the next 25 years, starting 2015 , the committee recommended 500 BCM of gas, for export, despite the fact that the companies in the committee’s hearings demanded 300-350 billion cubic meters of gas to fund their export facilities, The committee recommended a policy that provided the gas developers “the freedom to choose whether to sell any surplus natural gas (above and beyond local demand) for other industrial or commercial uses or to export it.” The committee believed selling gas abroad would enhance Israel political weight and strategic leverage that would ultimately benefit the Israeli public. Therefore, the natural gas policy must join the needs of the local

The Recommendations of the Inter-Ministerial Committee to Examine the Government’s Policy

Regarding Natural Gas in Israel (Zemach Committee Report), Executive Summary, State of Israel, September 2012, http://energy.gov.il/English/PublicationsLibraryE/pa3161ed-B-REV%20main%20recom mendations%20Tzemach%20report.pdf; Letter of Appointment Forming Inter-Ministerial Committee to Examine the Government’s Policy Regarding Natural Gas in Israel, http://energy.gov.il/AboutTheOffice/S peakerMessages/PublishingImages/Doc14264[1].tif.

Zemach Committee Report, September 2012. Roby Nathanson, Hadar Weisman and Amit Loewenthal, Natural Gas in the Eastern Mediterranean

Economic Impacts and Strategic Implications, Friedrich-Ebert-Stiftung and the Institute for National Security Studies Tel Aviv, November 2013, p.18; Avi Bar-Eli, “Protocols Reveal: Israel Committee Ruled to Export More Gas than Firms Requested,” Ha’aretz, June 6, 2013. Zemach Committee Report, Executive Summary, p.4.


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energy industry with political objectives of the state. It went so far as to postulate that in the unlikely event that natural gas fields are not able to supply the energy needs of the domestic economy beyond the optimal period, then “demand will ultimately adjust itself to the limited supply.”

Table 2: Zemach Committee: Natural Gas, Reserves/Resources and Projected Demand Natural Gas Supply BCM

Prospective resources are known today Approx. 680 Of these, prospective resources with over 90% probability Approx. 150 Reserves and contingent resources Approx. 800 Total natural gas supply (reserves, contingent resources and prospective resources)

Approx. 1,480

Total natural gas supply to set policy Approx. 950 Cumulative demand for natural gas for 25 years Approx. 450 Maximum quantity permitted for export 500

Source: Zemach Committee Report, Executive Summary, p.8

2.2 Criticisms of the Zemach Committee RecommendationsOnce again, a fierce public debate ensued. The members of the Opposition in the Knesset were at the forefront of this discussion, challenging the committee’s recommendations for gas export. Joined by environmental groups and professional organizations, such as the IEF, they posited arguments in support of reserving gas for the Israeli needs first and foremost and saving gas for future generations. Those opposing the Zemach recommendations believed the committee took a rather serious note of the companies’ threat that the development of the Leviathan reservoir would stop unless export is allowed and hence unduly favoured the developers at the expense of people’s interest. The environmental groups asserted that gas being a public resource should primarily benefit the domestic economy by lowering prices, reducing pollution, and strengthening the country’s growing energy independence.

The recommendations of the Zemach Committee were also subject to scrutiny on two other counts: First, the purely speculative assumption of the gas reserves and, secondly, the conservative consumption estimate or gas usage in the 25-year optimal period. The committee’s assumption of 950 BCM in the total natural gas supply for setting policy included contingent and prospective resources. If the contingent and prospective reserves do not materialize, then the reserve base is much narrower, and the gas available for domestic use shrinks. In that light, critics pointed out the error of using unavailable resources for allocating the domestic and export quota.

One of the most substantial criticisms of the committee’s recommendations came in the form of an in-depth report of March 2012 authored by Sinaia Netanyahu and Shlomo

Ibid., p.1. Ibid., p.4. Drilling at the sites of Sara, Mira, Ishai and Shimshon licences has yielded ‘dry’ or ‘almost dry’ wells.

With quantities of gas discovered in these drillings being 90% below forecasts that reportedly cut about 130 BCM from the total reserves. See Ron Steinblatt, “National Capital Markets Recommends Ratio: Improving Prospects for Exports”, Globes, May 6, 2013, http://www.globes.co.il/news/article.aspx?did=1 000841866.

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other things, the committee was particularly requested to examine the mechanism that would achieve a balance between keeping reserves for domestic consumption and exports.

2.1 Recommendations for Export Tasked to explore ways to ensure long-term the energy needs of the Israeli economy,

one of the more extensive discussions of the committee revolved around the question whether the developers should be allowed to export gas and how much. In its final report published on August 29, 2012, the Zemach Committee decided to let the gas producers ship from Israel's existing and prospective gas resources, notably, over and above the quantity, they had requested in the hearings. The base assumption was that if the producers did not invest the billions of dollars needed to develop the gas fields, the resource was worth nothing. Their demand of assurance for exports to raise the money necessary to continue developing the current reservoirs and carry out exploration for new ones was reasonable.

The committee accepted the figures of the National Economic Council that total gas discoveries, including contingent and prospective, could reach as high as 1,480 BCM, but decided its policy recommendations on a smaller volume of 950 BCM (See Table 2). The committee viewed the supply to the domestic market as a top priority and included three principal elements:

No field would be counted as a producing field unless it had a physical connection to the Israeli natural gas infrastructure to provide an available supply for the local market (and thus impact the amount available for export).

The consumers in the Israeli market will have the priority for the supply of natural gas from the Israeli fields.

Tamar field, being the only source of gas to Israel, will exclusively serve the Israeli market. No export would be allowed from this deposit unless and until and the Leviathan field started producing and was connected to Israel’s supply structures.

While reserving 450 for Israel’s aggregate demand in the next 25 years, starting 2015 , the committee recommended 500 BCM of gas, for export, despite the fact that the companies in the committee’s hearings demanded 300-350 billion cubic meters of gas to fund their export facilities, The committee recommended a policy that provided the gas developers “the freedom to choose whether to sell any surplus natural gas (above and beyond local demand) for other industrial or commercial uses or to export it.” The committee believed selling gas abroad would enhance Israel political weight and strategic leverage that would ultimately benefit the Israeli public. Therefore, the natural gas policy must join the needs of the local

The Recommendations of the Inter-Ministerial Committee to Examine the Government’s Policy

Regarding Natural Gas in Israel (Zemach Committee Report), Executive Summary, State of Israel, September 2012, http://energy.gov.il/English/PublicationsLibraryE/pa3161ed-B-REV%20main%20recom mendations%20Tzemach%20report.pdf; Letter of Appointment Forming Inter-Ministerial Committee to Examine the Government’s Policy Regarding Natural Gas in Israel, http://energy.gov.il/AboutTheOffice/S peakerMessages/PublishingImages/Doc14264[1].tif.

Zemach Committee Report, September 2012. Roby Nathanson, Hadar Weisman and Amit Loewenthal, Natural Gas in the Eastern Mediterranean

Economic Impacts and Strategic Implications, Friedrich-Ebert-Stiftung and the Institute for National Security Studies Tel Aviv, November 2013, p.18; Avi Bar-Eli, “Protocols Reveal: Israel Committee Ruled to Export More Gas than Firms Requested,” Ha’aretz, June 6, 2013. Zemach Committee Report, Executive Summary, p.4.


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energy industry with political objectives of the state. It went so far as to postulate that in the unlikely event that natural gas fields are not able to supply the energy needs of the domestic economy beyond the optimal period, then “demand will ultimately adjust itself to the limited supply.”

Table 2: Zemach Committee: Natural Gas, Reserves/Resources and Projected Demand Natural Gas Supply BCM

Prospective resources are known today Approx. 680 Of these, prospective resources with over 90% probability Approx. 150 Reserves and contingent resources Approx. 800 Total natural gas supply (reserves, contingent resources and prospective resources)

Approx. 1,480

Total natural gas supply to set policy Approx. 950 Cumulative demand for natural gas for 25 years Approx. 450 Maximum quantity permitted for export 500

Source: Zemach Committee Report, Executive Summary, p.8

2.2 Criticisms of the Zemach Committee RecommendationsOnce again, a fierce public debate ensued. The members of the Opposition in the Knesset were at the forefront of this discussion, challenging the committee’s recommendations for gas export. Joined by environmental groups and professional organizations, such as the IEF, they posited arguments in support of reserving gas for the Israeli needs first and foremost and saving gas for future generations. Those opposing the Zemach recommendations believed the committee took a rather serious note of the companies’ threat that the development of the Leviathan reservoir would stop unless export is allowed and hence unduly favoured the developers at the expense of people’s interest. The environmental groups asserted that gas being a public resource should primarily benefit the domestic economy by lowering prices, reducing pollution, and strengthening the country’s growing energy independence.

The recommendations of the Zemach Committee were also subject to scrutiny on two other counts: First, the purely speculative assumption of the gas reserves and, secondly, the conservative consumption estimate or gas usage in the 25-year optimal period. The committee’s assumption of 950 BCM in the total natural gas supply for setting policy included contingent and prospective resources. If the contingent and prospective reserves do not materialize, then the reserve base is much narrower, and the gas available for domestic use shrinks. In that light, critics pointed out the error of using unavailable resources for allocating the domestic and export quota.

One of the most substantial criticisms of the committee’s recommendations came in the form of an in-depth report of March 2012 authored by Sinaia Netanyahu and Shlomo

Ibid., p.1. Ibid., p.4. Drilling at the sites of Sara, Mira, Ishai and Shimshon licences has yielded ‘dry’ or ‘almost dry’ wells.

With quantities of gas discovered in these drillings being 90% below forecasts that reportedly cut about 130 BCM from the total reserves. See Ron Steinblatt, “National Capital Markets Recommends Ratio: Improving Prospects for Exports”, Globes, May 6, 2013, http://www.globes.co.il/news/article.aspx?did=1 000841866.

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Wald, chief scientists at the Ministry of Environmental Protection and Ministry of Energy and Water respectively. In the report, they stated that by 2040 the country would need 600 BCM , as opposed to 450 BCM envisaged by the committee. The consumption beyond this year will be in the order of about 40 BCM per year , such that Israel would exhaust all known and prospective reserves by 2055, even if there were no export. Notwithstanding the improvement in energy efficiency, demand will not go down in absolute terms and the gas reserves were expected to last even less than 40 years. The use of natural gas as a substitute for oil in transportation and the development of additional industries that would use natural gas – ammonia production, natural gas for gas-to-liquid plants, or plants using methanol as fuel substitute – will constitute the core of the demand scenario. Given the potential for the use of gas internally, the two scientists opined that “the State of Israel must improve and develop the capabilities of the Israeli economy to switch to large-scale use of natural gas by 2020, and should refrain from exporting gas.”

The two scientists also were not persuaded by the committee’s assumption that export would be necessary to give the gas companies the financial reinforcement for their operations. “If proven that financing the development of the gas sources by the entrepreneurs constitutes an economic risk for them,” the two scientists wrote that the “state should consider the possibility of purchasing gas from entrepreneurs to avoid losing this strategic resource – an informed risk premium that Israel should consider paying.” Moreover, “even if all the potential gas reserves within Israel’s exclusive waters are discovered, Israel will not be a global player in the gas arena,” because its reserves are minuscule. They write, reproving the committee thus: “A minimum level of modesty is required to realize that there are 44,000 BCM proven reserves in Russia, Iran, Algeria, Qatar and Egypt have tens of thousands [of billion cubic meters]; and the United States has massive quantities of shale gas - Israel is a marginal player.”

They also reject the argument that exporting gas would give Israel a diplomatic advantage. “Gas exports require billions of shekels of investment in the construction of an export facility that will require providing export approval on a large scale. Such exports would bring Israel back in 30 years to total dependence on the import of energy sources. Promotion of political interests by managing the gas sector can only be in the local area of Cyprus, Jordan, and the Palestinian Authority. This area deserves consideration from the fact that Israel is a minor gas player.” Neither would the export of gas bring down gas prices in the domestic market, as “gas exports will cause an increase in gas prices in Israel since producers will have another channel to market that will set the threshold.”

Sinaia Netanyahu, Shlomo Wald, The Policy of Managing Natural Gas Resources in Israel Opinion on

the Subject of Natural Gas Export Option from Israel [Hebrew], March 19, 2012, p.8. Ibid. Ibid, p.9. Sinaia Netanyahu, Shlomo Wald, The Policy of Managing Natural Gas Resources in Israel Opinion on

the Subject of Natural Gas Export Option from Israel [Hebrew], March 19, 2012, pp.5-6. Ibid, pp.5, 8; Itai Trilnick, “Israel’s Gas Reserves Insufficient for Exports,” Ha’aretz, July 18, 2012;

Amiram Barkat, “Netanyahu Presses for Higher Gas Exports,” Globes, July 25, 2012, http://www.globes. co.il/en/article-1000768846.

Sinaia Netanyahu, Shlomo Wald, The Policy of Managing Natural Gas Resources, March 19, 2012, p.20. Ibid. Ibid., p.20.


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Minister of Environmental Protection Amir Peretz opposed the proposals of the Zemach Committee contending that if an earnest consideration were given to the use of natural gas in the private transportation sector, one of the most polluting sectors in Israel, the gas allocation for domestic use would have turned out much higher. Ehud Keinan, a professor at the Technion, Haifa, and president of the Israel Chemical Society reaffirmed the conclusions of scientists Netanyahu and Wald in an affidavit to the Supreme Court. He believed that “the added value gained from building and enlarging Israel’s chemical industry based on natural gas would be far more extensive and significantly outweigh taxes proceeds received from exporting the gas.” Sinaia Netanyahu told the Economic Affairs Committee of the Knesset that the government did not have a serious report that examined the requirements of industries that use gas as raw material.

2.3 Adoption of the Recommendations and Court PetitionGiven the widespread resistance to the export of gas, the Israeli Government’s

Resolution 442 of June 23, 2013 adopted a plan that would allocate 540 BCM of gas for domestic needs, 20% more than the 450 BCM the committee recommended. It reduced the balance of export from 500 to 410 BCM or 40% of production except for reservoirs in existence before the adoption of this policy, which may export up to 50% of production(See table 3).

Table 3: Gas Export Proposed by the Zemach Committee and Government’s Decision Zemach Committee’s Recommendations, August 2012

Government’s Decision, June 2013

BCM Percentage BCM Percentage Domestic Usage 450 47.4 540 56.8 Balance for Export 500 52.6 410 43.2 Total Potential Reserve for Setting Policy

950 100 950 100

In the wake of the government decision, many Knesset members along with and environmental groups petitioned the Supreme Court (acting as the High Court of Justice) – questioning the authority of the Cabinet to decide on a matter of long-term economic importance without the involvement of the parliament. They argued for the transfer of the decision on the issue to the Knesset for legislative approval. In late October 2013, the Supreme Court rejected that the case for legislation in the Knesset and affirmed the

Ibid; See, “At a Glance: News in Brief about the Environment in Israel,” Israel Environment Bulletin,

Vol.39, July 2013, www.environment.gov.il. Ariella Berger, “Natural Gas at the Supreme Court: Far-Reaching Consequences,” August 7, 2013,

http://www.jpost.com/Opinion/Op-Ed-Contributors/When-the-wider-public-sphere-becomes-the-correct-forum-322380. See “Minister of Environment at the Economic Affairs Committee: ‘We Are Not A Gas Empire, We

Should Keep Reserves of the BCM 600 for the Israeli Market’,” Press Release [English], The Knesset, June 5, 2013. Framework for Increasing the Quantity of Natural Gas Produced from Tamar Natural Gas Field and

Rapid Development of the Leviathan, Karish and Tanin Natural Gas Fields and Others, Government Resolution 442, June 2013, Ministry of Energy, Water and Infrastructures, Government of Israel, http://media.corporate-ir.net/media_files/IROL/16/160695/press/17.08.2015-Draft%20of%20Government%20Resolution.pdf.

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Wald, chief scientists at the Ministry of Environmental Protection and Ministry of Energy and Water respectively. In the report, they stated that by 2040 the country would need 600 BCM , as opposed to 450 BCM envisaged by the committee. The consumption beyond this year will be in the order of about 40 BCM per year , such that Israel would exhaust all known and prospective reserves by 2055, even if there were no export. Notwithstanding the improvement in energy efficiency, demand will not go down in absolute terms and the gas reserves were expected to last even less than 40 years. The use of natural gas as a substitute for oil in transportation and the development of additional industries that would use natural gas – ammonia production, natural gas for gas-to-liquid plants, or plants using methanol as fuel substitute – will constitute the core of the demand scenario. Given the potential for the use of gas internally, the two scientists opined that “the State of Israel must improve and develop the capabilities of the Israeli economy to switch to large-scale use of natural gas by 2020, and should refrain from exporting gas.”

The two scientists also were not persuaded by the committee’s assumption that export would be necessary to give the gas companies the financial reinforcement for their operations. “If proven that financing the development of the gas sources by the entrepreneurs constitutes an economic risk for them,” the two scientists wrote that the “state should consider the possibility of purchasing gas from entrepreneurs to avoid losing this strategic resource – an informed risk premium that Israel should consider paying.” Moreover, “even if all the potential gas reserves within Israel’s exclusive waters are discovered, Israel will not be a global player in the gas arena,” because its reserves are minuscule. They write, reproving the committee thus: “A minimum level of modesty is required to realize that there are 44,000 BCM proven reserves in Russia, Iran, Algeria, Qatar and Egypt have tens of thousands [of billion cubic meters]; and the United States has massive quantities of shale gas - Israel is a marginal player.”

They also reject the argument that exporting gas would give Israel a diplomatic advantage. “Gas exports require billions of shekels of investment in the construction of an export facility that will require providing export approval on a large scale. Such exports would bring Israel back in 30 years to total dependence on the import of energy sources. Promotion of political interests by managing the gas sector can only be in the local area of Cyprus, Jordan, and the Palestinian Authority. This area deserves consideration from the fact that Israel is a minor gas player.” Neither would the export of gas bring down gas prices in the domestic market, as “gas exports will cause an increase in gas prices in Israel since producers will have another channel to market that will set the threshold.”

Sinaia Netanyahu, Shlomo Wald, The Policy of Managing Natural Gas Resources in Israel Opinion on

the Subject of Natural Gas Export Option from Israel [Hebrew], March 19, 2012, p.8. Ibid. Ibid, p.9. Sinaia Netanyahu, Shlomo Wald, The Policy of Managing Natural Gas Resources in Israel Opinion on

the Subject of Natural Gas Export Option from Israel [Hebrew], March 19, 2012, pp.5-6. Ibid, pp.5, 8; Itai Trilnick, “Israel’s Gas Reserves Insufficient for Exports,” Ha’aretz, July 18, 2012;

Amiram Barkat, “Netanyahu Presses for Higher Gas Exports,” Globes, July 25, 2012, http://www.globes. co.il/en/article-1000768846.

Sinaia Netanyahu, Shlomo Wald, The Policy of Managing Natural Gas Resources, March 19, 2012, p.20. Ibid. Ibid., p.20.


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Minister of Environmental Protection Amir Peretz opposed the proposals of the Zemach Committee contending that if an earnest consideration were given to the use of natural gas in the private transportation sector, one of the most polluting sectors in Israel, the gas allocation for domestic use would have turned out much higher. Ehud Keinan, a professor at the Technion, Haifa, and president of the Israel Chemical Society reaffirmed the conclusions of scientists Netanyahu and Wald in an affidavit to the Supreme Court. He believed that “the added value gained from building and enlarging Israel’s chemical industry based on natural gas would be far more extensive and significantly outweigh taxes proceeds received from exporting the gas.” Sinaia Netanyahu told the Economic Affairs Committee of the Knesset that the government did not have a serious report that examined the requirements of industries that use gas as raw material.

2.3 Adoption of the Recommendations and Court PetitionGiven the widespread resistance to the export of gas, the Israeli Government’s

Resolution 442 of June 23, 2013 adopted a plan that would allocate 540 BCM of gas for domestic needs, 20% more than the 450 BCM the committee recommended. It reduced the balance of export from 500 to 410 BCM or 40% of production except for reservoirs in existence before the adoption of this policy, which may export up to 50% of production(See table 3).

Table 3: Gas Export Proposed by the Zemach Committee and Government’s Decision Zemach Committee’s Recommendations, August 2012

Government’s Decision, June 2013

BCM Percentage BCM Percentage Domestic Usage 450 47.4 540 56.8 Balance for Export 500 52.6 410 43.2 Total Potential Reserve for Setting Policy

950 100 950 100

In the wake of the government decision, many Knesset members along with and environmental groups petitioned the Supreme Court (acting as the High Court of Justice) – questioning the authority of the Cabinet to decide on a matter of long-term economic importance without the involvement of the parliament. They argued for the transfer of the decision on the issue to the Knesset for legislative approval. In late October 2013, the Supreme Court rejected that the case for legislation in the Knesset and affirmed the

Ibid; See, “At a Glance: News in Brief about the Environment in Israel,” Israel Environment Bulletin,

Vol.39, July 2013, www.environment.gov.il. Ariella Berger, “Natural Gas at the Supreme Court: Far-Reaching Consequences,” August 7, 2013,

http://www.jpost.com/Opinion/Op-Ed-Contributors/When-the-wider-public-sphere-becomes-the-correct-forum-322380.

See “Minister of Environment at the Economic Affairs Committee: ‘We Are Not A Gas Empire, We Should Keep Reserves of the BCM 600 for the Israeli Market’,” Press Release [English], The Knesset, June 5, 2013. Framework for Increasing the Quantity of Natural Gas Produced from Tamar Natural Gas Field and

Rapid Development of the Leviathan, Karish and Tanin Natural Gas Fields and Others, Government Resolution 442, June 2013, Ministry of Energy, Water and Infrastructures, Government of Israel, http://media.corporate-ir.net/media_files/IROL/16/160695/press/17.08.2015-Draft%20of%20Government%20Resolution.pdf.

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government decision, most importantly, the 60:40 local use to export ratio. The decision would have paved the way for the development of Leviathan gas reserve, but another controversy regarding competition in the natural gas industry brewed simultaneously.

IV. Anti-Trust Issue

Ensuring competition in the natural gas industry has proved to be difficult. Although a large number of firms from Israel and US are involved in exploration and development of Israeli fields, they operate under the rubric of a single consortium. Further, Israel’s gas industry has not seen sufficient interest from the IOCs, because of issues related to the economies of scale given the relatively low level of discoveries, and overwhelming concern that business with Israel would damage their prospects in the more extensive and better-endowed energy markets of the Arab world. Moreover, in 2002, Israel’s ministry of energy stopped granting new exploration licenses so that it could formulate policies for the natural gas sector. Granting of permits for oil and gas exploration blocks recommenced in 2016, after a long gap of a decade-and-a-half, causing one or two large firms operating in the Israeli gas market to move towards monopolistic control inexorably.

Five months after assuming the charge of the head of the Antitrust Commission, Professor David Gilo announced on 6 September 2011, that he intended to examine whether Noble and Delek had violated anti-trust laws in 2007 during the acquisition of exploratory licenses. In particular, the cross-ownership Noble and Delek in the Tamar, Leviathan, and other offshore gas fields were under scrutiny for purportedly constituting a monopolistic arrangement in the natural gas market.

1.1 Monopolistic Holdings in Tamar and Leviathan In November 2012, Gilo declared the partners in Tamar a monopoly in the sale of gas

under the 1988 Restrictive Trade Practices Law (The Antitrust Law) as of mid-April 2013 ,which subjected all sale gas sales contracts from Tamar to the approval of the Antitrust Authority.

In the same press release that specified Tamar’s monopolistic status, the Antitrust Commissioner stated, “prohibitions and provisions that the monopolists are subject to under law… [will] also apply with regards to the partners’ natural gas activities aside from Tamar, such as Leviathan and Samson reservoirs.” Gilo informed Noble and Delek and Ratio Oil of his intent to declare their purchase of Leviathan licenses an improper Restrictive Arrangement under the Antitrust Law. Subsequently, negotiations began between the Antitrust Commissioner and the developers in an attempt to reach a deal in which the latter would agree to open up the gas production to competition in exchange for the withdrawal of all legal proceedings against them. Edna Adato, Hezi Sternlicht, Ze’ev Klein and Dan Lavie, “High Court Upholds Government’s Gas

Export Policy,” Israel Hayom, October 22, 2013. General Director of Restrictive Trade Practices Considers Declaring Delek to Have a Monopoly in the

Supply of Natural Gas and to Determine that Delek, Avner, Noble and Ratio were Sides to a Restrictive Arrangement in Relation to the ‘Leviathan’ Joint Venture, The Antitrust Authority, Government of Israel, Press Release, September 6, 2011, http://www.antitrust.gov.il/eng/subject/182/item/32860.aspx. The General Director of Restrictive Trade Practices Declares the Partners in the Natural Gas Reservoir

“Tamar” to have a Monopoly on Israel’s Natural Gas Supply, The Antitrust Authority, Government of Israel, Press Release, November 2012.

Ibid.


89

A period of protracted negotiations culminated in the “Antitrust Agreement” in March 2014 whereby Noble and Delek Group could continue to own the rights in Tamar and Leviathan fields provided they sold off their stakes in two smaller gas reserves, Karish and Tanin, to a third party (For holdings in gas fields, see Table 4). The Antitrust Agreement was incorporated into a draft consent decree and presented for public comment before its submission to the Antitrust Tribunal for approval. After releasing the details, Gill embarked on a lengthy process of hearings on the agreement and was inclined to defend it on several occasions.

However, in a sudden move on December 23, 2014, the Antitrust Commissioner recanted the consent decree, indicating that in his view the agreement would not succeed in producing viable competition in the gas market. Gilo declared shared stakes of Noble Energy-Delek partnership in Tamar (67%) and Leviathan (85%) a de facto monopoly and recommended breaking up of their control of Israel's two most prominent fields.

Table 4: Holdings in Israel’s Major Gas Fields as of 2015 (in percentage)Fields

Developers Tamar# Leviathan* Karish* Tanin* Dalit*

Noble 36 39.66 47.06 47.06 36 Delek Group^ 31.25 45.34 52.94 52.94 31.25 Isramco Negev 2 28.75 - - - 28.75 Dor Gas 4 - - - 4 Ratio oil - 15 - - - Total Stakes 100 100 100& 100& 100

^Delek Group consists of Delek Drilling and Avner Oil Corporation #Israel’s only producing field *Fields yet to be developed & Entire stakes sold to Energean Oil and Gas in 2016.

In response to Gilo’s recantation of the Antitrust Agreement that signified the re-emergence of the antitrust threat, Noble energy decided to declare a freeze on all its investments in Israel. Following the Antitrust Commissioner’s turnaround and with elections scheduled three months later, public debate on natural gas surged. Aside from the considerable resentment vented over the massive profits that would eventually accrue to the owners of the gas companies, the price paid by the Israel Electric Corporation (IEC) for the Tamar gas also captured public discussion.

At this stage, when matters had come to a head, PM Netanyahu appointed an inter-ministerial panel with members from ministries of energy, justice, finance and the Prime Minister’s office, and chaired by National Economic Council head Professor Eugene Kendall, to negotiate a new and comprehensive framework for the companies. After six

Source: “Operations,” http://www.delekdrilling.co.il/en/projects/projects; Lior Zano, “On the Way to the Seventh Gas Discovery in Israel: Delek Reports Gas Indications at Tanin Drill Site,” The Marker (in Hebrew), February 5, 2012, http://www.themarker.com/markets/1.1633954; “Energean Completes Tanin, Karish Deal with Delek,” Offshore Engineer, December 28, 2016, http://www.oedigital.com/component/k2 /item/14285-energean-delek-complete-tanin-karish-deal; “Noble Sees Positive Results from Flow Tests at Dalit Offshore Israel,” Rigzone, April 15, 2009, http://www.rigzone.com/news/oil_gas/a/75080/noble_sees _positive_results_from_flow_tests_at_dalit_offshore_israel/.

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government decision, most importantly, the 60:40 local use to export ratio. The decision would have paved the way for the development of Leviathan gas reserve, but another controversy regarding competition in the natural gas industry brewed simultaneously.

IV. Anti-Trust Issue

Ensuring competition in the natural gas industry has proved to be difficult. Although a large number of firms from Israel and US are involved in exploration and development of Israeli fields, they operate under the rubric of a single consortium. Further, Israel’s gas industry has not seen sufficient interest from the IOCs, because of issues related to the economies of scale given the relatively low level of discoveries, and overwhelming concern that business with Israel would damage their prospects in the more extensive and better-endowed energy markets of the Arab world. Moreover, in 2002, Israel’s ministry of energy stopped granting new exploration licenses so that it could formulate policies for the natural gas sector. Granting of permits for oil and gas exploration blocks recommenced in 2016, after a long gap of a decade-and-a-half, causing one or two large firms operating in the Israeli gas market to move towards monopolistic control inexorably.

Five months after assuming the charge of the head of the Antitrust Commission, Professor David Gilo announced on 6 September 2011, that he intended to examine whether Noble and Delek had violated anti-trust laws in 2007 during the acquisition of exploratory licenses. In particular, the cross-ownership Noble and Delek in the Tamar, Leviathan, and other offshore gas fields were under scrutiny for purportedly constituting a monopolistic arrangement in the natural gas market.

1.1 Monopolistic Holdings in Tamar and Leviathan In November 2012, Gilo declared the partners in Tamar a monopoly in the sale of gas

under the 1988 Restrictive Trade Practices Law (The Antitrust Law) as of mid-April 2013 ,which subjected all sale gas sales contracts from Tamar to the approval of the Antitrust Authority.

In the same press release that specified Tamar’s monopolistic status, the Antitrust Commissioner stated, “prohibitions and provisions that the monopolists are subject to under law… [will] also apply with regards to the partners’ natural gas activities aside from Tamar, such as Leviathan and Samson reservoirs.” Gilo informed Noble and Delek and Ratio Oil of his intent to declare their purchase of Leviathan licenses an improper Restrictive Arrangement under the Antitrust Law. Subsequently, negotiations began between the Antitrust Commissioner and the developers in an attempt to reach a deal in which the latter would agree to open up the gas production to competition in exchange for the withdrawal of all legal proceedings against them. Edna Adato, Hezi Sternlicht, Ze’ev Klein and Dan Lavie, “High Court Upholds Government’s Gas

Export Policy,” Israel Hayom, October 22, 2013. General Director of Restrictive Trade Practices Considers Declaring Delek to Have a Monopoly in the

Supply of Natural Gas and to Determine that Delek, Avner, Noble and Ratio were Sides to a Restrictive Arrangement in Relation to the ‘Leviathan’ Joint Venture, The Antitrust Authority, Government of Israel, Press Release, September 6, 2011, http://www.antitrust.gov.il/eng/subject/182/item/32860.aspx. The General Director of Restrictive Trade Practices Declares the Partners in the Natural Gas Reservoir

“Tamar” to have a Monopoly on Israel’s Natural Gas Supply, The Antitrust Authority, Government of Israel, Press Release, November 2012.

Ibid.


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A period of protracted negotiations culminated in the “Antitrust Agreement” in March 2014 whereby Noble and Delek Group could continue to own the rights in Tamar and Leviathan fields provided they sold off their stakes in two smaller gas reserves, Karish and Tanin, to a third party (For holdings in gas fields, see Table 4). The Antitrust Agreement was incorporated into a draft consent decree and presented for public comment before its submission to the Antitrust Tribunal for approval. After releasing the details, Gill embarked on a lengthy process of hearings on the agreement and was inclined to defend it on several occasions.

However, in a sudden move on December 23, 2014, the Antitrust Commissioner recanted the consent decree, indicating that in his view the agreement would not succeed in producing viable competition in the gas market. Gilo declared shared stakes of Noble Energy-Delek partnership in Tamar (67%) and Leviathan (85%) a de facto monopoly and recommended breaking up of their control of Israel's two most prominent fields.

Table 4: Holdings in Israel’s Major Gas Fields as of 2015 (in percentage)Fields

Developers Tamar# Leviathan* Karish* Tanin* Dalit*

Noble 36 39.66 47.06 47.06 36 Delek Group^ 31.25 45.34 52.94 52.94 31.25 Isramco Negev 2 28.75 - - - 28.75 Dor Gas 4 - - - 4 Ratio oil - 15 - - - Total Stakes 100 100 100& 100& 100

^Delek Group consists of Delek Drilling and Avner Oil Corporation #Israel’s only producing field *Fields yet to be developed & Entire stakes sold to Energean Oil and Gas in 2016.

In response to Gilo’s recantation of the Antitrust Agreement that signified the re-emergence of the antitrust threat, Noble energy decided to declare a freeze on all its investments in Israel. Following the Antitrust Commissioner’s turnaround and with elections scheduled three months later, public debate on natural gas surged. Aside from the considerable resentment vented over the massive profits that would eventually accrue to the owners of the gas companies, the price paid by the Israel Electric Corporation (IEC) for the Tamar gas also captured public discussion.

At this stage, when matters had come to a head, PM Netanyahu appointed an inter-ministerial panel with members from ministries of energy, justice, finance and the Prime Minister’s office, and chaired by National Economic Council head Professor Eugene Kendall, to negotiate a new and comprehensive framework for the companies. After six

Source: “Operations,” http://www.delekdrilling.co.il/en/projects/projects; Lior Zano, “On the Way to the Seventh Gas Discovery in Israel: Delek Reports Gas Indications at Tanin Drill Site,” The Marker (in Hebrew), February 5, 2012, http://www.themarker.com/markets/1.1633954; “Energean Completes Tanin, Karish Deal with Delek,” Offshore Engineer, December 28, 2016, http://www.oedigital.com/component/k2 /item/14285-energean-delek-complete-tanin-karish-deal; “Noble Sees Positive Results from Flow Tests at Dalit Offshore Israel,” Rigzone, April 15, 2009, http://www.rigzone.com/news/oil_gas/a/75080/noble_sees _positive_results_from_flow_tests_at_dalit_offshore_israel/.

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months of consultations between government officials and the developers, Israel’s energy minister Steinitz released the terms of the “gas framework” to the public on June 30, 2015. It dealt with not only the outstanding regulatory issues and the duopoly’s market share, but also the price of gas for the domestic use. Gilo, who was a member of the Kendall Committee, made it clear that he disapproved a compromise and announced his resignation a few days before the public announcement of the outline agreement.

1.2 Natural Gas Framework Commonly called the Natural Gas Framework , the agreement between the

government and field developers related to multiple issues under different laws. First of all, the Delek subsidiaries, Delek Drilling and Avner Oil Corporation, were required to sell their stakes completely in Tamar within six years of the adoption of the framework. Noble Energy could remain the field’s operator but needed to reduce its holding from 36% to 25%t over the same period. Further, Delek Group and Noble Energy would sell off their entire holdings in Karish and Tanin within 14 months from the approval date of the gas framework. Because the buyer would be required to sell gas only to Israel, export allocations intended for these reservoirs went to Leviathan.

Concerning the Leviathan reservoir, the companies will be able to remain without any change in ownership. The commencement date for commercial production from Leviathan and gas supply to the local market was extended, and placed at 48 months after the gas draft approval date. The framework amended Decision 442 provisions relating to export of natural gas. It relaxed some of the export decisions, allowing export from the Tamar field immediately, even before Leviathan started production.

Next, the gas price would be regulated in the market for the next six years from the date of signing of the framework. The developers of Tamar and Leviathan would offer the base price, derived by dividing the total revenues from natural gas sales by the total amount of natural gas supplied to consumers by the applicable leaseholder, both during the previous quarter.

The government for its part agreed that fiscal and regulatory rules related to the gas industry would not be changed for ten years following approval of the framework as long as the developers kept their commitments to develop the fields according to the outline.

In their first addresses following the release of the gas compromise outline, executives from the Delek-Noble partnership pledged their commitment to developing the Leviathan reservoir, while criticizing the harsh terms of the framework. The government claimed that the outline aimed to foster an environment of competition, reduce cross-ownership among gas deposits and encourage new investment. Above all, the framework emphasized the need to ensure reasonable prices during the intermediate period, until there was competition in the gas market. The critics, however, contended the framework only slightly reduced each ownership stake and did not break the partners’ control of the large fields, the point Gilo stressed while rejecting the gas compromise and announcing his resignation from the Antitrust Authority.

1.3 Political Maneuverings To circumvent the objection of the Antitrust Authority, the economy minister could

See Israel Oil and Gas Industry – Legal Update, Tel Aviv and Jerusalem: Yigal Arnon & Co., January

2016; Israel’s Upstream Natural Gas Sector Against the Backdrop of the New Gas Framework, MEITAR Law Form, June 7, 2016.


91

invoke Article 52 of the 1988 Restrictive Trade Practices Law (The Antitrust Law), citing foreign policy or national security reasons. Despite voting for the gas framework in the Cabinet meeting on August 16, 2015, Minister of the Economy Aryeh Deri was, however, unwilling to invoke Article 52. He held that the clause was untested and that he could not take the sole responsibility for authorizing such an agreement where there were monopoly concerns. Netanyahu wanted to avoid a Knesset vote and pass the framework through the Cabinet, being unsure of whether his entire coalition partners would support the deal. The PM convinced Deri to resign from his post, and the ministry of economy passed into the prime minister’s hands, paving the way for approval of the gas outline. On December 16, 2015, Netanyahu – exercising his right as economy minister under Section 52 of the Antitrust Law – signed the gas framework, activating it officially.

1.4 “Stability Clause” The opponents of the gas framework, including from public advocacy groups and

Opposition lawmakers, petitioned the Supreme Court, challenging its terms, particularly the so-called ‘stability clause,’ which implied that the government would not bring regulatory changes in taxation, antitrust limitations and export quotas for ten years. In March 2016, Israel's Supreme Court sitting as the High Court of Justice declared the binding provisions of no changes in legislation for ten years as illegal “because of the fundamental principle of a democratic regime according to which the government is not authorized to bind the Knesset's power.” The court gave the government latitude of a year to devise an alternative arrangement and fix the problematic parts; any further delay would lead to the cancellation of the framework.

In the backdrop of the court’s ruling, a government-backed committee headed by Eytan Sheshinski renegotiated the outline with the gas companies and reached a compromise deal. On May 22, 2016, the government announced its amended draft with a more lenient stability clause. While the new terms still referred to a 10-year extended regulatory environment that would encourage investments in the natural gas exploration and production sector, stating, “it no longer guarantees nor does it mandate that the government will abstain from and oppose the enactment of any material changes.” It also allowed for consideration of compensation in case of “changes could have a material adverse effect on the leaseholders.”

V. Creating Regional Interdependencies

The Mediterranean discoveries have made Israel self-sufficient in natural gas supply to its domestic market for at least 25 years. Besides, the country acquired the potential to export natural gas, a radical change from being an importer only a few years ago. For Israeli policymakers, gas supply is an instrument of foreign policy for fostering cooperation between the Jewish state and its regional foes. Prime Minister Netanyahu believes gas export from Leviathan will serve the political purpose of integration Israel firmly with its

Moran Azulay, “Netanyahu Fighting to Build Majority for Natural Gas Plan,” Reuters, June 29, 2015. Supreme Court of Israel, “Judgment,” [Hebrew] March 27, 2015, http://elyon1.court.gov.il/files/15/740

/043/t63/15043740.t63.htm. Shiri Shaham, Simon Weintraub, “Israeli Natural Gas Industry-Where Do We Go Now?” Oilfield

Technology, June 24, 2016, https://www.energyglobal.com/upstream/drilling-and-production/24062016/isr aeli-natural-gas-industry-where-do-we-go-now-part-1/.

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months of consultations between government officials and the developers, Israel’s energy minister Steinitz released the terms of the “gas framework” to the public on June 30, 2015. It dealt with not only the outstanding regulatory issues and the duopoly’s market share, but also the price of gas for the domestic use. Gilo, who was a member of the Kendall Committee, made it clear that he disapproved a compromise and announced his resignation a few days before the public announcement of the outline agreement.

1.2 Natural Gas Framework Commonly called the Natural Gas Framework , the agreement between the

government and field developers related to multiple issues under different laws. First of all, the Delek subsidiaries, Delek Drilling and Avner Oil Corporation, were required to sell their stakes completely in Tamar within six years of the adoption of the framework. Noble Energy could remain the field’s operator but needed to reduce its holding from 36% to 25%t over the same period. Further, Delek Group and Noble Energy would sell off their entire holdings in Karish and Tanin within 14 months from the approval date of the gas framework. Because the buyer would be required to sell gas only to Israel, export allocations intended for these reservoirs went to Leviathan.

Concerning the Leviathan reservoir, the companies will be able to remain without any change in ownership. The commencement date for commercial production from Leviathan and gas supply to the local market was extended, and placed at 48 months after the gas draft approval date. The framework amended Decision 442 provisions relating to export of natural gas. It relaxed some of the export decisions, allowing export from the Tamar field immediately, even before Leviathan started production.

Next, the gas price would be regulated in the market for the next six years from the date of signing of the framework. The developers of Tamar and Leviathan would offer the base price, derived by dividing the total revenues from natural gas sales by the total amount of natural gas supplied to consumers by the applicable leaseholder, both during the previous quarter.

The government for its part agreed that fiscal and regulatory rules related to the gas industry would not be changed for ten years following approval of the framework as long as the developers kept their commitments to develop the fields according to the outline.

In their first addresses following the release of the gas compromise outline, executives from the Delek-Noble partnership pledged their commitment to developing the Leviathan reservoir, while criticizing the harsh terms of the framework. The government claimed that the outline aimed to foster an environment of competition, reduce cross-ownership among gas deposits and encourage new investment. Above all, the framework emphasized the need to ensure reasonable prices during the intermediate period, until there was competition in the gas market. The critics, however, contended the framework only slightly reduced each ownership stake and did not break the partners’ control of the large fields, the point Gilo stressed while rejecting the gas compromise and announcing his resignation from the Antitrust Authority.

1.3 Political Maneuverings To circumvent the objection of the Antitrust Authority, the economy minister could

See Israel Oil and Gas Industry – Legal Update, Tel Aviv and Jerusalem: Yigal Arnon & Co., January

2016; Israel’s Upstream Natural Gas Sector Against the Backdrop of the New Gas Framework, MEITAR Law Form, June 7, 2016.


91

invoke Article 52 of the 1988 Restrictive Trade Practices Law (The Antitrust Law), citing foreign policy or national security reasons. Despite voting for the gas framework in the Cabinet meeting on August 16, 2015, Minister of the Economy Aryeh Deri was, however, unwilling to invoke Article 52. He held that the clause was untested and that he could not take the sole responsibility for authorizing such an agreement where there were monopoly concerns. Netanyahu wanted to avoid a Knesset vote and pass the framework through the Cabinet, being unsure of whether his entire coalition partners would support the deal. The PM convinced Deri to resign from his post, and the ministry of economy passed into the prime minister’s hands, paving the way for approval of the gas outline. On December 16, 2015, Netanyahu – exercising his right as economy minister under Section 52 of the Antitrust Law – signed the gas framework, activating it officially.

1.4 “Stability Clause” The opponents of the gas framework, including from public advocacy groups and

Opposition lawmakers, petitioned the Supreme Court, challenging its terms, particularly the so-called ‘stability clause,’ which implied that the government would not bring regulatory changes in taxation, antitrust limitations and export quotas for ten years. In March 2016, Israel's Supreme Court sitting as the High Court of Justice declared the binding provisions of no changes in legislation for ten years as illegal “because of the fundamental principle of a democratic regime according to which the government is not authorized to bind the Knesset's power.” The court gave the government latitude of a year to devise an alternative arrangement and fix the problematic parts; any further delay would lead to the cancellation of the framework.

In the backdrop of the court’s ruling, a government-backed committee headed by Eytan Sheshinski renegotiated the outline with the gas companies and reached a compromise deal. On May 22, 2016, the government announced its amended draft with a more lenient stability clause. While the new terms still referred to a 10-year extended regulatory environment that would encourage investments in the natural gas exploration and production sector, stating, “it no longer guarantees nor does it mandate that the government will abstain from and oppose the enactment of any material changes.” It also allowed for consideration of compensation in case of “changes could have a material adverse effect on the leaseholders.”

V. Creating Regional Interdependencies

The Mediterranean discoveries have made Israel self-sufficient in natural gas supply to its domestic market for at least 25 years. Besides, the country acquired the potential to export natural gas, a radical change from being an importer only a few years ago. For Israeli policymakers, gas supply is an instrument of foreign policy for fostering cooperation between the Jewish state and its regional foes. Prime Minister Netanyahu believes gas export from Leviathan will serve the political purpose of integration Israel firmly with its

Moran Azulay, “Netanyahu Fighting to Build Majority for Natural Gas Plan,” Reuters, June 29, 2015. Supreme Court of Israel, “Judgment,” [Hebrew] March 27, 2015, http://elyon1.court.gov.il/files/15/740

/043/t63/15043740.t63.htm. Shiri Shaham, Simon Weintraub, “Israeli Natural Gas Industry-Where Do We Go Now?” Oilfield

Technology, June 24, 2016, https://www.energyglobal.com/upstream/drilling-and-production/24062016/isr aeli-natural-gas-industry-where-do-we-go-now-part-1/.

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Arab neighbors. It “will promote cooperation with countries in the region [and] the ability to export gas [would make Israel] more immune to international pressure. We don’t want to be vulnerable to boycotts.” The idea of ‘economic peace’, repeatedly expressed by Israeli officials, relies on the premise that by fulfilling the demand for energy among its hostile neighbors, a transformed regional relationship based on mutual interest and underpinned by long-term gas contract, can be established. Exporting gas is thus more of a political decision than economic on the part of Israeli policymakers. With gas regulations firmly in place, Israel is preparing to export gas to regionally as well as trans-regionally.

1. Jordan Israel is looking at Jordanian market as the first destination for its gas exports. Jordan,

partially reliant on Egyptian gas to satisfy domestic demand, started experiencing gas shortages beginning in 2011. As Egypt faced disruptions in gas production and a declining surplus due to the disturbances caused by the Arab Spring, it faltered on export commitments to Jordan and Israel. The Hashemite kingdom had to switch to using heavy fuels, which placed a cost of at least $10billion on the state exchequer. Jordan’s energy crisis has been exacerbated by the influx of refugees from Syria, adding to the severity of energy demand. To alleviate the crisis, King Abdullah authorised import of cheap gas from Israel, despite significant opposition in the Jordanian parliament – 70% of the population comprises Palestinians, who are hostile to Israel.

1.1 Trade Deals with Israel and Mutual Interests The Leviathan gas developers have signed a MoU with Jordan’s National Electric

Power Company Limited (NEPCO) in September 2016 for the export of 45 BCM of natural gas over a 15-year period. Supply will begin once the Leviathan field comes online in 2019. This $10 billion energy import agreement is the first gas sales and purchase agreement for Leviathan and a crucial step towards raising finances for the future development of the Leviathan project.

Positives of the deal for Jordan include building energy security by obtaining natural gas from a stable source at fair market prices linked to Brent oil and a firm floor price. Together with the existing LNG import at Aqaba, Jordan would be able to fortify itself against supply disruption and develop economically. The development of Leviathan gas field is also vital for Israel’s gas supply wholly sourced from the Tamar field. Therefore, the diversification source of supply is essential for the energy security of Israel, not least the environmental benefits.

An Israeli-Jordanian deal much less under the public eye is the contract signed between the Tamar partnership and Jordanian state-owned firms, Potash and its affiliate, and Jordan Bromine for use at their facilities near the Dead Sea. In February 2014, the two Jordanian entities signed $500 million deal with Israel’s developers to acquire 1.8 BCM of

Ylenia Gostoli, “Israel-Europe Gas Deal Sparks Criticism,” Al Jazeera, April 23, 2017. “Signing of An Agreement for Export of Natural Gas from the Leviathan Project to the National Electric

Power Company of Jordan,” September 26, 2016, https://ir.delek-group.com/news-releases/news-release- details/signing-agreement-export-natural-gas-leviathan-project-national.

Rory Jones, “Investors in Israeli Natural Gas Agree to Supply Deal With Jordan,” The Wall Street Journal,September 26, 2016. See Sharon Udasin, “Israel To Supply Gas To Jordan In $10 Billion Deal,” Jerusalem Post, September

26, 2016.


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gas from Israel’s Tamar gas field for 15 years, with the US officials acting as a mediator.In January 2017, Israel quietly began exporting natural gas to Jordan after Arab Potash and Jordan Bromine through Israel’s national pipeline network. The trade has been kept deliberately low profile because of the political sensitivities in Jordan about business with Israel.

Notably, the geopolitical and strategic aspects of these deals are as crucial as the economic aspects. By signing a long-term agreement on a vital resource such as gas amidst the ongoing unrest in the Palestinian territory as well as the country itself, Jordan has signaled that it is willing to put its interest above the Palestinian issue. Indeed, it has been possible as a result of Israeli-Jordanian security cooperation since the intensification of the civil war in Syria and the arrival of a vast number of refugees in Jordan.

2. Egypt Israel needs Egypt, as it would be a sizable market and a gateway to other markets in

Europe. Taking this into account, Israelis keen on using Egypt’s liquefaction facilities in Damietta and Idku as export terminals. The option for the transport of Israeli gas to Egypt could be either through reversing the flow in the Al Arish-Ashkelon pipeline that crosses Sinai, or the construction of a new undersea pipeline to the two Egyptian liquefaction terminals. While the former appears risky given the deteriorating security situation in Sinai, the latter is a more practical option, “not only because of the royalties and revenues Israel will collect but also because of the potential positive impact on Egypt-Israel bilateral relations.” Spanish-Italian-owned Union Fenosa Gas (UFG), which operates the Damietta LNG terminal, and, Royal Dutch Shell, which runs the Idku LNG terminal (taken over from British Gas), could open the way for export of Israeli gas to Europe.

2.1 Gas Export Deals In June 2014, the Leviathan developers signed a letter of intent, proposing an annual

supply of about seven BCM for 15 years to the liquefaction plant in Idku. Similarly, in May 2014, Noble Energy agreed to export 70 BCM of natural gas from Tamar field to UFG’s liquefaction facility in Damietta. The preliminary agreement covered 15 years. Further, in October 2014, the Leviathan partners reached a nonbinding agreement with Dolphinus Holding limited – a conglomerate of influential Egyptian non-government industrial and commercial gas consumers – to supply up to four BCM annually over 10-15 years.

Israeli gas negotiations with Egyptian entities halted in December 2015 over the ruling

“Noble Energy Announces Agreement To Sell Tamar Gas To Multiple Customers In Jordan,” Noble

Energy, February 19, 2014, http://investors.nblenergy.com/releasedetail.cfm?releaseid=826568; “Jordan Agrees Gas Purchase Deal with Israel,” The Economist Intelligence Unit, September 29, 2017, http://coun try.eiu.com/article.aspx?articleid=1894657373.

See Neri Zilber, “Israel’s Secret Arab Allies,” The New York Times, July 14, 2017; Amos Harel, “Israel and Jordan Grow Closer as Iranian Foothold in Southern Syria Grows Stronger,” Haaretz; June 21, 2017; “Israel Gives Jordan Helicopters for Border Security,” Reuters, July 23, 2015.

Antonia Dimou, “Israel and Cyprus: In Search of Solutions to Natural Gas Challenges in the Eastern Mediterranean,” Foreign Policy News, October 10, 2016. Antonia Dimou, “East Mediterranean Gas Cooperation and Security Challenges,” National Security and

the Future (Zagreb, Croatia), Vol.17, Number 1-2, 2016, p.102. Dimou, 2016, p.102. “Will Israeli Natural Gas Flow in Egypt’s Pipelines?” Energy Egypt, July 15, 2016, https://energyegypt.

net/2016/07/15/will-israeli-natural-gas-flow-in-egypts-pipelines/. Mohamed Samir, “Will Israeli Natural Gas Flow in Egypt’s Pipelines?” Ibid.

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Arab neighbors. It “will promote cooperation with countries in the region [and] the ability to export gas [would make Israel] more immune to international pressure. We don’t want to be vulnerable to boycotts.” The idea of ‘economic peace’, repeatedly expressed by Israeli officials, relies on the premise that by fulfilling the demand for energy among its hostile neighbors, a transformed regional relationship based on mutual interest and underpinned by long-term gas contract, can be established. Exporting gas is thus more of a political decision than economic on the part of Israeli policymakers. With gas regulations firmly in place, Israel is preparing to export gas to regionally as well as trans-regionally.

1. Jordan Israel is looking at Jordanian market as the first destination for its gas exports. Jordan,

partially reliant on Egyptian gas to satisfy domestic demand, started experiencing gas shortages beginning in 2011. As Egypt faced disruptions in gas production and a declining surplus due to the disturbances caused by the Arab Spring, it faltered on export commitments to Jordan and Israel. The Hashemite kingdom had to switch to using heavy fuels, which placed a cost of at least $10billion on the state exchequer. Jordan’s energy crisis has been exacerbated by the influx of refugees from Syria, adding to the severity of energy demand. To alleviate the crisis, King Abdullah authorised import of cheap gas from Israel, despite significant opposition in the Jordanian parliament – 70% of the population comprises Palestinians, who are hostile to Israel.

1.1 Trade Deals with Israel and Mutual Interests The Leviathan gas developers have signed a MoU with Jordan’s National Electric

Power Company Limited (NEPCO) in September 2016 for the export of 45 BCM of natural gas over a 15-year period. Supply will begin once the Leviathan field comes online in 2019. This $10 billion energy import agreement is the first gas sales and purchase agreement for Leviathan and a crucial step towards raising finances for the future development of the Leviathan project.

Positives of the deal for Jordan include building energy security by obtaining natural gas from a stable source at fair market prices linked to Brent oil and a firm floor price. Together with the existing LNG import at Aqaba, Jordan would be able to fortify itself against supply disruption and develop economically. The development of Leviathan gas field is also vital for Israel’s gas supply wholly sourced from the Tamar field. Therefore, the diversification source of supply is essential for the energy security of Israel, not least the environmental benefits.

An Israeli-Jordanian deal much less under the public eye is the contract signed between the Tamar partnership and Jordanian state-owned firms, Potash and its affiliate, and Jordan Bromine for use at their facilities near the Dead Sea. In February 2014, the two Jordanian entities signed $500 million deal with Israel’s developers to acquire 1.8 BCM of

Ylenia Gostoli, “Israel-Europe Gas Deal Sparks Criticism,” Al Jazeera, April 23, 2017. “Signing of An Agreement for Export of Natural Gas from the Leviathan Project to the National Electric

Power Company of Jordan,” September 26, 2016, https://ir.delek-group.com/news-releases/news-release- details/signing-agreement-export-natural-gas-leviathan-project-national.

Rory Jones, “Investors in Israeli Natural Gas Agree to Supply Deal With Jordan,” The Wall Street Journal,September 26, 2016. See Sharon Udasin, “Israel To Supply Gas To Jordan In $10 Billion Deal,” Jerusalem Post, September

26, 2016.


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gas from Israel’s Tamar gas field for 15 years, with the US officials acting as a mediator.In January 2017, Israel quietly began exporting natural gas to Jordan after Arab Potash and Jordan Bromine through Israel’s national pipeline network. The trade has been kept deliberately low profile because of the political sensitivities in Jordan about business with Israel.

Notably, the geopolitical and strategic aspects of these deals are as crucial as the economic aspects. By signing a long-term agreement on a vital resource such as gas amidst the ongoing unrest in the Palestinian territory as well as the country itself, Jordan has signaled that it is willing to put its interest above the Palestinian issue. Indeed, it has been possible as a result of Israeli-Jordanian security cooperation since the intensification of the civil war in Syria and the arrival of a vast number of refugees in Jordan.

2. Egypt Israel needs Egypt, as it would be a sizable market and a gateway to other markets in

Europe. Taking this into account, Israelis keen on using Egypt’s liquefaction facilities in Damietta and Idku as export terminals. The option for the transport of Israeli gas to Egypt could be either through reversing the flow in the Al Arish-Ashkelon pipeline that crosses Sinai, or the construction of a new undersea pipeline to the two Egyptian liquefaction terminals. While the former appears risky given the deteriorating security situation in Sinai, the latter is a more practical option, “not only because of the royalties and revenues Israel will collect but also because of the potential positive impact on Egypt-Israel bilateral relations.” Spanish-Italian-owned Union Fenosa Gas (UFG), which operates the Damietta LNG terminal, and, Royal Dutch Shell, which runs the Idku LNG terminal (taken over from British Gas), could open the way for export of Israeli gas to Europe.

2.1 Gas Export Deals In June 2014, the Leviathan developers signed a letter of intent, proposing an annual

supply of about seven BCM for 15 years to the liquefaction plant in Idku. Similarly, in May 2014, Noble Energy agreed to export 70 BCM of natural gas from Tamar field to UFG’s liquefaction facility in Damietta. The preliminary agreement covered 15 years. Further, in October 2014, the Leviathan partners reached a nonbinding agreement with Dolphinus Holding limited – a conglomerate of influential Egyptian non-government industrial and commercial gas consumers – to supply up to four BCM annually over 10-15 years.

Israeli gas negotiations with Egyptian entities halted in December 2015 over the ruling

“Noble Energy Announces Agreement To Sell Tamar Gas To Multiple Customers In Jordan,” Noble

Energy, February 19, 2014, http://investors.nblenergy.com/releasedetail.cfm?releaseid=826568; “Jordan Agrees Gas Purchase Deal with Israel,” The Economist Intelligence Unit, September 29, 2017, http://coun try.eiu.com/article.aspx?articleid=1894657373.

See Neri Zilber, “Israel’s Secret Arab Allies,” The New York Times, July 14, 2017; Amos Harel, “Israel and Jordan Grow Closer as Iranian Foothold in Southern Syria Grows Stronger,” Haaretz; June 21, 2017; “Israel Gives Jordan Helicopters for Border Security,” Reuters, July 23, 2015.

Antonia Dimou, “Israel and Cyprus: In Search of Solutions to Natural Gas Challenges in the Eastern Mediterranean,” Foreign Policy News, October 10, 2016. Antonia Dimou, “East Mediterranean Gas Cooperation and Security Challenges,” National Security and

the Future (Zagreb, Croatia), Vol.17, Number 1-2, 2016, p.102. Dimou, 2016, p.102. “Will Israeli Natural Gas Flow in Egypt’s Pipelines?” Energy Egypt, July 15, 2016, https://energyegypt.

net/2016/07/15/will-israeli-natural-gas-flow-in-egypts-pipelines/. Mohamed Samir, “Will Israeli Natural Gas Flow in Egypt’s Pipelines?” Ibid.

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of the International Chamber of Commerce. That pronouncement directed the two Egyptian gas companies, Egyptian General Petroleum Corporation or EGPC and Egyptian Natural Gas Holding Company or EGAS, to pay a compensation of $1.76 billion to the IEC, for non-fulfilment of contractual obligation to supply gas to the Israeli firm. East Mediterranean Gas (EMG), a private joint venture of two Israeli and Egyptian businessmen, which oversaw Israeli-Egyptian gas deals from 2008 to 2012, was awarded $288 million in compensation. In the wake of the Arab Spring uprising, a declining gas production scenario, as well as repeated attacks on the gas pipeline serving natural gas to Israel had prompted Egypt to halt the supplies in April 2012. In August 2017, Egypt reportedly reached an initial agreement with Israel to resolve the arbitration case. Israel agreed to compensation reduction in exchange for allowing the private gas players to import gas from Israel.

The Egyptian government issued a decree in August 2017, on the back of a law approved by Parliament in July and ratified by President Abdel Fattah el-Sisi, which would permit private companies to obtain a license from the natural gas regulatory authority to import and sell gas on the Egyptian market. On the heels of these changes, the Leviathan developers reportedly began to negotiate with the Dolphinus Holdings in August 2017 to sell about three BCM of gas a year via an alternative route through Jordan. The gas would enter Egypt via a pipeline through Jordan operated by Jordanian-Egyptian Al Fajr, instead of a more direct route through Sinai by the Arish-Ashkelon pipeline.

Egypt’s is rapidly developing the supergiant offshore Zohar gas field in the Mediterranean, discovered in August 2015 by the Italian energy company ENI. Once it comes online, gas from the Zohar will have a direct impact on Israeli exports not only to Egypt but regionally as well, including any potential gas deals with Cyprus and Turkey.

3. Europe Israel is considering two pipeline options to export gas to Europe. One pipeline could be

built via Cyprus and Greece to Italy, while the other is proposed from the Israeli Leviathan field to the coast of Turkey from where options to connect further to Europe are manifold. The pipeline via Cyprus to Europe, called the East Med Pipeline, will aggregate and connect Israeli and Cypriot deposits with onshore pipelines in Greece and Italy. The successful implementation of the project will likely reduce Europe’s dependence on Russian natural gas. It is unlikely that the project would see the light of the day before 2025, according to various forecasts.

One of Europe’s leading independent investment research companies in a preliminary

See Mohamed Ayyad, “Egypt Freezes Negotiations on Gas Imports from Israel,” Daily News Egypt,

December 6, 2015; Nesma Nowar, “Gas Negotiations to Start with Israel?” Al Ahram Weekly, Issue 1343, May 4-10, 2017. See Ahmed Saeed, Asmahan Soliman, “An Egyptian-Israeli Agreement: New Maritime Borders and

Israeli Gas Imports for A Reduced Gas Fine,” Madamasr, August 30, 2017, https://www.madamasr.com/e n/2017/08/30/feature/politics/an-egyptian-israeli-agreement-new-maritime-borders-and-israeli-gas-imports-for-a-reduced-gas-fine/. “Egypt to Import Israeli Gas?” Al-Ahram Weekly, Issue 1357, August 17-23, 2017. Yaacov Benmeleh, David Wainer and Mohammad Tayseer, “Leviathan Partners in Talks to Pipe Israeli

Gas to Egypt Via Jordan,” August 9, 2017, https://www.bloomberg.com/news/articles/2017-08-09/leviatha n-partners-in-talks-to-pipe-gas-to-egypt-via-jordan-j658joiy; “Arab Gas Pipeline (AGP), Jordan, Syria, Lebanon, Egypt,” http://www.hydrocarbons-technology.com/projects/arab-gas-pipeline-agp/.

Adel Abdel Ghafar, “Egypt’s New Gas Discovery: Opportunities and Challenges,” September 10, 2015, https://www.brookings.edu/opinions/egypts-new-gas-discovery-opportunities-and-challenges/.


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feasibility report has concluded that the East Med pipeline was “technically feasible, economically viable, and commercially competitive.” The pipeline, which would have an initial transport capacity 10 BCM per year, would connect the Eastern Mediterranean gas reserves to Greece and in conjunction with the Poseidon Pipeline, into Italy. About 1900km long, and reaching the depth of 3 km, East Med pipeline is poised to be the world’s longest and deepest offshore pipeline, estimated to cost $7.3 billion.

A pipeline to Turkey from the Israeli gas field could join the Southern Gas Corridor (SGC) that aims to bring gas resources from the Caspian, Central Asian, Middle Eastern and East Mediterranean gas into European markets. The three conduits of the SGC are the Azerbaijan-Turkey Trans-Anatolian Gas Pipeline (TANAP), South Caucasus Pipeline (SCP), and Trans Adriatic Pipeline (TAP) Europe’s gas supply security. At present, the primary supply source for the SGC is the Shah Deniz gas field (Phase 2), located in the Azerbaijani sector of the Caspian Sea. However, the fate of Israeli gas depends on where this gas makes an entry in Turkey and its final destination. Many envisage Turkey as the sole consumer, at least in the first few years.

3.1 Challenges Facing East Med Pipeline and Alternatives Israel alone cannot create the economies of scale needed to make the primary gas

exports from the Eastern Mediterranean competitive. It would require complex maneuverings to link the Leviathan field to Aphrodite (Cyprus) and Zohar, a problematic scenario, notwithstanding the limits of the region’s gas potential. After Leviathan, there has been no significant discovery in Israeli EEZ; many wells have turned out dry or semi-dry. Besides, Israel’s failed bid to attract major oil companies to drill in its 24 blocs has left it with a limited supply of gas.

Isramco Negev 2 and Modiin Energy announced in August 2017 that they are returning the licenses to develop the 252 BCM Daniel East and West fields, because of the geological risk, the difficulties expected in commercializing the gas, and the lack of investors’ interest in Israeli fields. This development is a major blow to Israel’s ambition to become a gas exporter and remain energy independent at the same time. While ENI, Total, Exxon Mobil and Qatar Petroleum are drilling in Cyprus’ four blocks, there has been no substantial discovery since Aphrodite in 2011. While the Aphrodite field is big enough to cater to Cyprus’ domestic demand, it is probably not large enough for export with 128 BCM of gas reserves.

Egypt is the only country whose gas potential can energize the East Med. It’s supergiant offshore Zohar field has an estimated 850 BCM of gas with the production

“The East Med Pipeline Project: A Project of Common Interest for the Diversification of Gas Supplies to Europe,” March 8, 2017, http://www.eurogas.org/uploads/media/EDISON_MargheriEastMed_EP_8.03. 2017.pdf.

“A Direct Link to New Sources for Europe,” http://www.igi-poseidon.com/en/eastmed. Leman Zeynalova, “Israeli Gas Supply to Europe part of SGC Concept,” Trend News Agency, July 14,

2017; Sara Israfilbayova, “Expert: Southern Gas Corridor efficient route for Israeli Gas Export,” Azernews,August 30, 2017, https://www.azernews.az/oil_and_gas/118329.html. Simone Taglipietra, “Is the East Med Gas Pipeline just another EU Pipe Dream?” Bruegel, May 10,

2017, http://bruegel.org/2017/05/is-the-eastmed-gas-pipeline-just-another-eu-pipe-dream/. “Israeli Exploration Group to Return Daniel Natgas Field Licenses,” Reuters, August 20, 2017. “Total, Eni to Start Drilling off Cyprus,” April 6, 2017, http://www.theoilandgasyear.com/news/total-eni-

to-start-drilling-off-cyprus/; “Three blocks awarded offshore Cyprus,” Oil and Gas Journal, December 23, 2016, http://www.ogj.com/articles/2016/12/three-blocks-awarded-offshore-cyprus.html. East Med E&P: Our Assets, Delek Group.

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of the International Chamber of Commerce. That pronouncement directed the two Egyptian gas companies, Egyptian General Petroleum Corporation or EGPC and Egyptian Natural Gas Holding Company or EGAS, to pay a compensation of $1.76 billion to the IEC, for non-fulfilment of contractual obligation to supply gas to the Israeli firm. East Mediterranean Gas (EMG), a private joint venture of two Israeli and Egyptian businessmen, which oversaw Israeli-Egyptian gas deals from 2008 to 2012, was awarded $288 million in compensation. In the wake of the Arab Spring uprising, a declining gas production scenario, as well as repeated attacks on the gas pipeline serving natural gas to Israel had prompted Egypt to halt the supplies in April 2012. In August 2017, Egypt reportedly reached an initial agreement with Israel to resolve the arbitration case. Israel agreed to compensation reduction in exchange for allowing the private gas players to import gas from Israel.

The Egyptian government issued a decree in August 2017, on the back of a law approved by Parliament in July and ratified by President Abdel Fattah el-Sisi, which would permit private companies to obtain a license from the natural gas regulatory authority to import and sell gas on the Egyptian market. On the heels of these changes, the Leviathan developers reportedly began to negotiate with the Dolphinus Holdings in August 2017 to sell about three BCM of gas a year via an alternative route through Jordan. The gas would enter Egypt via a pipeline through Jordan operated by Jordanian-Egyptian Al Fajr, instead of a more direct route through Sinai by the Arish-Ashkelon pipeline.

Egypt’s is rapidly developing the supergiant offshore Zohar gas field in the Mediterranean, discovered in August 2015 by the Italian energy company ENI. Once it comes online, gas from the Zohar will have a direct impact on Israeli exports not only to Egypt but regionally as well, including any potential gas deals with Cyprus and Turkey.

3. Europe Israel is considering two pipeline options to export gas to Europe. One pipeline could be

built via Cyprus and Greece to Italy, while the other is proposed from the Israeli Leviathan field to the coast of Turkey from where options to connect further to Europe are manifold. The pipeline via Cyprus to Europe, called the East Med Pipeline, will aggregate and connect Israeli and Cypriot deposits with onshore pipelines in Greece and Italy. The successful implementation of the project will likely reduce Europe’s dependence on Russian natural gas. It is unlikely that the project would see the light of the day before 2025, according to various forecasts.

One of Europe’s leading independent investment research companies in a preliminary

See Mohamed Ayyad, “Egypt Freezes Negotiations on Gas Imports from Israel,” Daily News Egypt,

December 6, 2015; Nesma Nowar, “Gas Negotiations to Start with Israel?” Al Ahram Weekly, Issue 1343, May 4-10, 2017. See Ahmed Saeed, Asmahan Soliman, “An Egyptian-Israeli Agreement: New Maritime Borders and

Israeli Gas Imports for A Reduced Gas Fine,” Madamasr, August 30, 2017, https://www.madamasr.com/e n/2017/08/30/feature/politics/an-egyptian-israeli-agreement-new-maritime-borders-and-israeli-gas-imports-for-a-reduced-gas-fine/. “Egypt to Import Israeli Gas?” Al-Ahram Weekly, Issue 1357, August 17-23, 2017. Yaacov Benmeleh, David Wainer and Mohammad Tayseer, “Leviathan Partners in Talks to Pipe Israeli

Gas to Egypt Via Jordan,” August 9, 2017, https://www.bloomberg.com/news/articles/2017-08-09/leviatha n-partners-in-talks-to-pipe-gas-to-egypt-via-jordan-j658joiy; “Arab Gas Pipeline (AGP), Jordan, Syria, Lebanon, Egypt,” http://www.hydrocarbons-technology.com/projects/arab-gas-pipeline-agp/.

Adel Abdel Ghafar, “Egypt’s New Gas Discovery: Opportunities and Challenges,” September 10, 2015, https://www.brookings.edu/opinions/egypts-new-gas-discovery-opportunities-and-challenges/.


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feasibility report has concluded that the East Med pipeline was “technically feasible, economically viable, and commercially competitive.” The pipeline, which would have an initial transport capacity 10 BCM per year, would connect the Eastern Mediterranean gas reserves to Greece and in conjunction with the Poseidon Pipeline, into Italy. About 1900km long, and reaching the depth of 3 km, East Med pipeline is poised to be the world’s longest and deepest offshore pipeline, estimated to cost $7.3 billion.

A pipeline to Turkey from the Israeli gas field could join the Southern Gas Corridor (SGC) that aims to bring gas resources from the Caspian, Central Asian, Middle Eastern and East Mediterranean gas into European markets. The three conduits of the SGC are the Azerbaijan-Turkey Trans-Anatolian Gas Pipeline (TANAP), South Caucasus Pipeline (SCP), and Trans Adriatic Pipeline (TAP) Europe’s gas supply security. At present, the primary supply source for the SGC is the Shah Deniz gas field (Phase 2), located in the Azerbaijani sector of the Caspian Sea. However, the fate of Israeli gas depends on where this gas makes an entry in Turkey and its final destination. Many envisage Turkey as the sole consumer, at least in the first few years.

3.1 Challenges Facing East Med Pipeline and Alternatives Israel alone cannot create the economies of scale needed to make the primary gas

exports from the Eastern Mediterranean competitive. It would require complex maneuverings to link the Leviathan field to Aphrodite (Cyprus) and Zohar, a problematic scenario, notwithstanding the limits of the region’s gas potential. After Leviathan, there has been no significant discovery in Israeli EEZ; many wells have turned out dry or semi-dry. Besides, Israel’s failed bid to attract major oil companies to drill in its 24 blocs has left it with a limited supply of gas.

Isramco Negev 2 and Modiin Energy announced in August 2017 that they are returning the licenses to develop the 252 BCM Daniel East and West fields, because of the geological risk, the difficulties expected in commercializing the gas, and the lack of investors’ interest in Israeli fields. This development is a major blow to Israel’s ambition to become a gas exporter and remain energy independent at the same time. While ENI, Total, Exxon Mobil and Qatar Petroleum are drilling in Cyprus’ four blocks, there has been no substantial discovery since Aphrodite in 2011. While the Aphrodite field is big enough to cater to Cyprus’ domestic demand, it is probably not large enough for export with 128 BCM of gas reserves.

Egypt is the only country whose gas potential can energize the East Med. It’s supergiant offshore Zohar field has an estimated 850 BCM of gas with the production

“The East Med Pipeline Project: A Project of Common Interest for the Diversification of Gas Supplies to Europe,” March 8, 2017, http://www.eurogas.org/uploads/media/EDISON_MargheriEastMed_EP_8.03. 2017.pdf.

“A Direct Link to New Sources for Europe,” http://www.igi-poseidon.com/en/eastmed. Leman Zeynalova, “Israeli Gas Supply to Europe part of SGC Concept,” Trend News Agency, July 14,

2017; Sara Israfilbayova, “Expert: Southern Gas Corridor efficient route for Israeli Gas Export,” Azernews,August 30, 2017, https://www.azernews.az/oil_and_gas/118329.html. Simone Taglipietra, “Is the East Med Gas Pipeline just another EU Pipe Dream?” Bruegel, May 10,

2017, http://bruegel.org/2017/05/is-the-eastmed-gas-pipeline-just-another-eu-pipe-dream/. “Israeli Exploration Group to Return Daniel Natgas Field Licenses,” Reuters, August 20, 2017. “Total, Eni to Start Drilling off Cyprus,” April 6, 2017, http://www.theoilandgasyear.com/news/total-eni-

to-start-drilling-off-cyprus/; “Three blocks awarded offshore Cyprus,” Oil and Gas Journal, December 23, 2016, http://www.ogj.com/articles/2016/12/three-blocks-awarded-offshore-cyprus.html.

East Med E&P: Our Assets, Delek Group.

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start-up expected by the end of 2017. Indeed, Egyptian authorities do not seem to be interested in the East Med pipeline, having at their disposal two LNG terminals underutilized since 2014, when gas supplies were prioritized for the domestic market. Improved political stability and enhanced investment have seen a target of 22 LNG shipments in 2017 from Idku that is expected to rise upwards in 2018 and 2019, as the terminal approaches maximum output capacity by 2020 to coincide with the onset of Zohar’s production. Zohar is expected to start producing 28 million cubic meter (MCM) of gas per day by the end of 2017 and 70-85 MCM per day in 2019.

An alternative scenario is the establishment of a new Eastern Mediterranean gas hub with Israel and Cyprus, based on the existing export infrastructure. Shell is reportedly considering a plan to buy five BCM of gas a year from Israel’s Leviathan field, combine it with the production from Cyprus’s Aphrodite field, in which it holds a 35% stake, and pump it to Idku LNG plant production trains.

4. Turkey Turkey is strategically located to serve as a transport route for the supply of the gas

and oil extracted from the Eastern Mediterranean to Europe. With a high-growth economy, Turkey’s energy needs have intensified. Ankara could not only import Israeli gas, but it can also fulfil its ambition of becoming a regional energy hub for export to Europe. The normalization between Israel and Turkey in June 2016 after six years of the Mavi Marmara incident is linked to the prospect of gas trade between the two countries. Turcas, a leading Turkish energy company, has been negotiating behind-the-scenes to purchase natural gas from Leviathan through a long-term contract. An Israeli-Turkish pipeline has another enduring value; it could also find use for the reverse flow of gas, from Centre Asian, Middle Eastern and Russian sources. Such a picture would make Israel an integral part of the global gas regime and enhance its energy security.

4.1 Pipelines to Turkey A subsea gas pipeline running from Leviathan’s floating production ship before

heading off to northeast along Cyprus’ coastline is emerging as the most viable alternative and probably more affordable route for export of Israeli gas. The aim is to build a 480-km underwater pipeline from the Leviathan offshore field to the Turkish port of Mersin, with an annual capacity of 30 BCM of which 7-10 BCM would be for Turkey, and the remaining

“Eni’s Activities in Egypt,” https://www.eni.com/enipedia/en_IT/international-presence/africa/enis-acti

vities-in-egypt.page. “Shell’s Idku LNG Ramps Up Exports,” Energy Egypt, July 15, 2017, https://energyegypt.net/2017/07/1

5/allsource-analysis-shells-idku-lng-ramps-up-exports/; “LNG Supply Projects and Regasification Plants,” Shell Global, http://www.shell.com/energy-and-innovation/natural-gas/liquefied-natural-gas-lng/lng-suppl y-projects-and-regasification-plants.html. “Shell to Mull Buying Israeli, Cyprus Gas for Egypt Plant,” https://www.bloomberg.com/news/articles/

2017-08-20/shell-is-said-to-mull-buying-israeli-cyprus-gas-for-egypt-plant. Gurel Ayla, Tzimitras Harry and Faustmann Hubert, East Mediterranean Hydrocarbons, Geopolitical

Perspectives, Markets and Regional Cooperation, PRIO Cyprus Centre Friedrich Ebert Stiftung Brookings Institution, March 2014, http://library.fes.de/pdf-files/bueros/zypern/11607.pdf, p.106. Author’s interview with Mr Cenk Pala, Government Relations Coordinator of TurkStream, Ankara, June

7, 2017. Indeed, Israel’s potential as a buyer of energy would build political cooperation and fortify its strategic

position in the era of low gas prices. According to BP Statistical Review of World Energy, June 2017, Israel’s gas demand growth in 2016 was the highest in the world at 14.5% for 9.7 BCM.


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volume would go to Europe. However, the two potential routes from Leviathan gas field to Turkey are risky, marred by unresolved political disputes with transit countries, which could obstruct the project from moving forward.

4.2 The Turkish Option and Constraints First, the ideal route for an Israeli-Turkish pipeline would be along the Levantine

coastline of Lebanon and Syria, because of the shallower seabed. However, political and security risks prevent its realization. The civil war in Syria and lack of demarcation of the respective EEZ in the Eastern Mediterranean between Israel and Lebanon due to hostility between the two countries renders the idea impracticable. A notional route could bypass unstable Syria and Lebanon crossing the Cypriot EEZ: however, any development on this track will depend on the resolution of the Cyprus problem. Cyprus maintains that Turkey should agree to end the division of the island before the Cypriot government can give a green signal to the construction of the Turkish-Israel gas pipeline through its territorial waters. Turkey wants to use Israel’s good offices to get Cyprus to agree to the building of the pipeline without any precondition.

5. Palestinians When it comes to the Palestinian-Israeli front, discussions revolve around the

Palestinian control of the West Bank’s energy industry. A deal signed between Leviathan partners and the Palestine Power Generation Company, which envisages the supply of about 4.75 BCM of gas over a 20-year period to a 200-megawatt power plant , is in jeopardy, as the Palestinian people are vehemently opposed to energy import from Israel, despite the constant shortages. Besides, the transport of gas will require the construction of a 10-km gas pipeline from northern Israel to the West Bank region. There is no progress on the proposed pipeline either because of the complete breakdown of political relations between Israel and the Palestinian Authority.

VI. Risk of Conflict

Regional anxieties may become an obstacle as Israel attempts to explore its options to move gas to lucrative markets. A maritime boundary conflict between Israel and Lebanon could hinder gas development in the region, as well as land dispute onshore, could limit energy trade regionally. Lebanon and Israel are both net energy importers and suffer from energy security problems. In spite of the promising economic opportunities, a complex conflict has emerged between Lebanon and Israel.

1. Israel and Lebanon Israel and Lebanon have never had a maritime boundary delimitation arrangement, a

fact stemming from the absence of diplomatic relations and formal state of war between the Matthew Bryza, “Eastern Mediterranean Natural Gas: Potential For Historic Breakthroughs among Israel,

Turkey, and Cyprus,” in Sami Andoura, David Koranyi, eds., Energy in the Eastern Mediterranean: Promise Or Peril? Egmont Paper 65, Egmont Institute and the Atlantic Council, May 2014, http://www.eg montinstitute.be/content/uploads/2014/05/ep65.pdf?type=pdf, pp.24,41,46; Harald Hecking, et al, Optionsfor Gas Supply Diversification for the EU and Germany in the next Two Decades, ewi Energy Research & Scenarios (ewi ER&S), Cologne and The European Centre for Energy and Resource Security (EUCERS), London, October 2016, http://www.ewi.research-scenarios.de/cms/wp-content/uploads/2016/10/Options-f or-Gas-Supply-Diversification.pdf, pp.22.

See Sharon Udasin, “Palestinian Power Company Nixing Leviathan Gas Import Deal,” Jerusalem PostMarch 11, 2015.

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start-up expected by the end of 2017. Indeed, Egyptian authorities do not seem to be interested in the East Med pipeline, having at their disposal two LNG terminals underutilized since 2014, when gas supplies were prioritized for the domestic market. Improved political stability and enhanced investment have seen a target of 22 LNG shipments in 2017 from Idku that is expected to rise upwards in 2018 and 2019, as the terminal approaches maximum output capacity by 2020 to coincide with the onset of Zohar’s production. Zohar is expected to start producing 28 million cubic meter (MCM) of gas per day by the end of 2017 and 70-85 MCM per day in 2019.

An alternative scenario is the establishment of a new Eastern Mediterranean gas hub with Israel and Cyprus, based on the existing export infrastructure. Shell is reportedly considering a plan to buy five BCM of gas a year from Israel’s Leviathan field, combine it with the production from Cyprus’s Aphrodite field, in which it holds a 35% stake, and pump it to Idku LNG plant production trains.

4. Turkey Turkey is strategically located to serve as a transport route for the supply of the gas

and oil extracted from the Eastern Mediterranean to Europe. With a high-growth economy, Turkey’s energy needs have intensified. Ankara could not only import Israeli gas, but it can also fulfil its ambition of becoming a regional energy hub for export to Europe. The normalization between Israel and Turkey in June 2016 after six years of the Mavi Marmara incident is linked to the prospect of gas trade between the two countries. Turcas, a leading Turkish energy company, has been negotiating behind-the-scenes to purchase natural gas from Leviathan through a long-term contract. An Israeli-Turkish pipeline has another enduring value; it could also find use for the reverse flow of gas, from Centre Asian, Middle Eastern and Russian sources. Such a picture would make Israel an integral part of the global gas regime and enhance its energy security.

4.1 Pipelines to Turkey A subsea gas pipeline running from Leviathan’s floating production ship before

heading off to northeast along Cyprus’ coastline is emerging as the most viable alternative and probably more affordable route for export of Israeli gas. The aim is to build a 480-km underwater pipeline from the Leviathan offshore field to the Turkish port of Mersin, with an annual capacity of 30 BCM of which 7-10 BCM would be for Turkey, and the remaining

“Eni’s Activities in Egypt,” https://www.eni.com/enipedia/en_IT/international-presence/africa/enis-acti

vities-in-egypt.page. “Shell’s Idku LNG Ramps Up Exports,” Energy Egypt, July 15, 2017, https://energyegypt.net/2017/07/1

5/allsource-analysis-shells-idku-lng-ramps-up-exports/; “LNG Supply Projects and Regasification Plants,” Shell Global, http://www.shell.com/energy-and-innovation/natural-gas/liquefied-natural-gas-lng/lng-suppl y-projects-and-regasification-plants.html.

“Shell to Mull Buying Israeli, Cyprus Gas for Egypt Plant,” https://www.bloomberg.com/news/articles/ 2017-08-20/shell-is-said-to-mull-buying-israeli-cyprus-gas-for-egypt-plant. Gurel Ayla, Tzimitras Harry and Faustmann Hubert, East Mediterranean Hydrocarbons, Geopolitical

Perspectives, Markets and Regional Cooperation, PRIO Cyprus Centre Friedrich Ebert Stiftung Brookings Institution, March 2014, http://library.fes.de/pdf-files/bueros/zypern/11607.pdf, p.106. Author’s interview with Mr Cenk Pala, Government Relations Coordinator of TurkStream, Ankara, June

7, 2017. Indeed, Israel’s potential as a buyer of energy would build political cooperation and fortify its strategic

position in the era of low gas prices. According to BP Statistical Review of World Energy, June 2017, Israel’s gas demand growth in 2016 was the highest in the world at 14.5% for 9.7 BCM.


97

volume would go to Europe. However, the two potential routes from Leviathan gas field to Turkey are risky, marred by unresolved political disputes with transit countries, which could obstruct the project from moving forward.

4.2 The Turkish Option and Constraints First, the ideal route for an Israeli-Turkish pipeline would be along the Levantine

coastline of Lebanon and Syria, because of the shallower seabed. However, political and security risks prevent its realization. The civil war in Syria and lack of demarcation of the respective EEZ in the Eastern Mediterranean between Israel and Lebanon due to hostility between the two countries renders the idea impracticable. A notional route could bypass unstable Syria and Lebanon crossing the Cypriot EEZ: however, any development on this track will depend on the resolution of the Cyprus problem. Cyprus maintains that Turkey should agree to end the division of the island before the Cypriot government can give a green signal to the construction of the Turkish-Israel gas pipeline through its territorial waters. Turkey wants to use Israel’s good offices to get Cyprus to agree to the building of the pipeline without any precondition.

5. Palestinians When it comes to the Palestinian-Israeli front, discussions revolve around the

Palestinian control of the West Bank’s energy industry. A deal signed between Leviathan partners and the Palestine Power Generation Company, which envisages the supply of about 4.75 BCM of gas over a 20-year period to a 200-megawatt power plant , is in jeopardy, as the Palestinian people are vehemently opposed to energy import from Israel, despite the constant shortages. Besides, the transport of gas will require the construction of a 10-km gas pipeline from northern Israel to the West Bank region. There is no progress on the proposed pipeline either because of the complete breakdown of political relations between Israel and the Palestinian Authority.

VI. Risk of Conflict

Regional anxieties may become an obstacle as Israel attempts to explore its options to move gas to lucrative markets. A maritime boundary conflict between Israel and Lebanon could hinder gas development in the region, as well as land dispute onshore, could limit energy trade regionally. Lebanon and Israel are both net energy importers and suffer from energy security problems. In spite of the promising economic opportunities, a complex conflict has emerged between Lebanon and Israel.

1. Israel and Lebanon Israel and Lebanon have never had a maritime boundary delimitation arrangement, a

fact stemming from the absence of diplomatic relations and formal state of war between the Matthew Bryza, “Eastern Mediterranean Natural Gas: Potential For Historic Breakthroughs among Israel,

Turkey, and Cyprus,” in Sami Andoura, David Koranyi, eds., Energy in the Eastern Mediterranean: Promise Or Peril? Egmont Paper 65, Egmont Institute and the Atlantic Council, May 2014, http://www.eg montinstitute.be/content/uploads/2014/05/ep65.pdf?type=pdf, pp.24,41,46; Harald Hecking, et al, Optionsfor Gas Supply Diversification for the EU and Germany in the next Two Decades, ewi Energy Research & Scenarios (ewi ER&S), Cologne and The European Centre for Energy and Resource Security (EUCERS), London, October 2016, http://www.ewi.research-scenarios.de/cms/wp-content/uploads/2016/10/Options-f or-Gas-Supply-Diversification.pdf, pp.22. See Sharon Udasin, “Palestinian Power Company Nixing Leviathan Gas Import Deal,” Jerusalem Post

March 11, 2015.

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two countries. Both countries have made claims over a triangular expanse of approximately 860 square km (expected to be rich in gas and oil) of the marine territory for decades, but the dispute exacerbated following maritime agreements that Cyprus signed with Lebanon in 2007 and Israel in 2010. Lebanon has rejected the Israel-Cyprus EEZ agreement, accusing it of infringing its EEZ and has delayed the ratification of Lebanon-Cyprus EEZ Agreement. The Israeli government is planning to introduce a bill in the Knesset openly establishing its maritime economic border with Lebanon. Many believe Israel is seeking to annex the triangular zone as the report follows on the heels of the publication of gas and oil and gas exploration tender by the new Lebanese government led by President Michel Aoun.

2. Greece and Turkey The discovery of natural gas in the Eastern Mediterranean revived an age-old dispute

between Greece and Turkey regarding the delineation of their exclusive zones. Greece wants to declare its EEZ in the Aegean and Eastern Mediterranean, including the islands of Megisti (Kastellorizo), Agios Georgios (Ro) and Strongyli. Turkey is wary of the inclusion of these islands, stressing they expand the Greek EEZ to encroach upon what should be its economic zone. Ankara also opposes the EEZ delineation treaties that Cyprus has concluded with Egypt, Israel and Lebanon, without a similar agreement between Turkey and Cyprus. Under these circumstances, the discovery of more resources could raise the stakes and lead to further conflict among the claimants.

VII. Conclusion

The discovery of the Tamar followed by the Leviathan fields, motivated the Israelis to

emphasize the need for a “fix” of the energy tax and royalties’ regime, in what became a heated and significant debate in the public arena. They reminded the government and the investors of the public ownership of the gas resource and their entitlement to its transformative potential. At the same time, the people understood that compromises are necessary for the development of the resource and its projection in the strategic policymaking. While the public debates and legal proceeding showcased Israel’s democratic culture, the Supreme Court through its opinions outlined the separation of powers between Israel’s executive and legislature. From the perspective of gas sector, the regulatory framework is already having a favorable impact on trade agreements and investments. However, a glaring lapse is Israel’s almost complete dependency on foreign expertise for exploration and production. Israel lacks a public-sector oil and gas enterprise, which can represent the government stakes in the E&P projects at home and abroad. In most oil and gas-rich countries, public sector companies play a fundamental role in

“US Proposes Deal over Disputed Lebanon-Israel Gas Field,” The New Arab, July 8, 2015, https://ww

w.alaraby.co.uk/english/news/2015/7/8/us-proposes-deal-over-disputed-lebanon-israel-gas-field. Meier Daniel, “Lebanon’s Maritime Boundaries: Between Economic Opportunities and Military

Confrontation,” Papers on Lebanon, June 2013, http://lebanesestudies.com/wp-content/uploads/2013/10/ maritime.pdf; Andrew Shibley, “Blessings and Curses: Israel and Lebanon’s Maritime Boundary Dispute in the Eastern Mediterranean Sea,” Global Business Law Review, Vol.5, Issue 1, 2016, http://engagedscholars hip.csuohio.edu/gblr/vol5/iss1/; John Reed, Erika Solomon, “Israel and Lebanon Clash over Maritime Border Amid Oil Interest,” Financial Times, March 28, 2017.


99

exploration and development, to ensure the resources is used strategically for the broadest advantage of the state – concerning availability, pricing, and revenue earnings.

The patterns of friendship and hostility in the Eastern Mediterranean are changing with the discovery of natural gas reserves in the region. Israel is attempting to use its gas resources to advance peace with its Arab neighbors, although the prospects are far-fetched in the existing scenario of turmoil in the region; gas export to Jordan, however small in proportion, is a positive step. Energy interests have also brought Israel closer than ever to Cyprus and Greece, and have played a significant role in the current thaw in Israeli-Turkish relations. At the same time, the discovery of gas resources has produced new strains between producing countries and countries that have been slow in utilizing the emerging opportunities. Relations between Turkey and Cyprus, as well as between Israel and Lebanon, have come under further strain. Whilst, the emergence of the Eastern Mediterranean as a gas-exporting region will undoubtedly serve manifold interests, resolution of the ownership issues is a prerequisite for the accelerated development of the gas industry. Without a region-wide legal agreement on the EEZ, energy companies may not be able to secure the necessary funds to build infrastructures to transport gas to various markets.

99


98

two countries. Both countries have made claims over a triangular expanse of approximately 860 square km (expected to be rich in gas and oil) of the marine territory for decades, but the dispute exacerbated following maritime agreements that Cyprus signed with Lebanon in 2007 and Israel in 2010. Lebanon has rejected the Israel-Cyprus EEZ agreement, accusing it of infringing its EEZ and has delayed the ratification of Lebanon-Cyprus EEZ Agreement. The Israeli government is planning to introduce a bill in the Knesset openly establishing its maritime economic border with Lebanon. Many believe Israel is seeking to annex the triangular zone as the report follows on the heels of the publication of gas and oil and gas exploration tender by the new Lebanese government led by President Michel Aoun.

2. Greece and Turkey The discovery of natural gas in the Eastern Mediterranean revived an age-old dispute

between Greece and Turkey regarding the delineation of their exclusive zones. Greece wants to declare its EEZ in the Aegean and Eastern Mediterranean, including the islands of Megisti (Kastellorizo), Agios Georgios (Ro) and Strongyli. Turkey is wary of the inclusion of these islands, stressing they expand the Greek EEZ to encroach upon what should be its economic zone. Ankara also opposes the EEZ delineation treaties that Cyprus has concluded with Egypt, Israel and Lebanon, without a similar agreement between Turkey and Cyprus. Under these circumstances, the discovery of more resources could raise the stakes and lead to further conflict among the claimants.

VII. Conclusion

The discovery of the Tamar followed by the Leviathan fields, motivated the Israelis to

emphasize the need for a “fix” of the energy tax and royalties’ regime, in what became a heated and significant debate in the public arena. They reminded the government and the investors of the public ownership of the gas resource and their entitlement to its transformative potential. At the same time, the people understood that compromises are necessary for the development of the resource and its projection in the strategic policymaking. While the public debates and legal proceeding showcased Israel’s democratic culture, the Supreme Court through its opinions outlined the separation of powers between Israel’s executive and legislature. From the perspective of gas sector, the regulatory framework is already having a favorable impact on trade agreements and investments. However, a glaring lapse is Israel’s almost complete dependency on foreign expertise for exploration and production. Israel lacks a public-sector oil and gas enterprise, which can represent the government stakes in the E&P projects at home and abroad. In most oil and gas-rich countries, public sector companies play a fundamental role in

“US Proposes Deal over Disputed Lebanon-Israel Gas Field,” The New Arab, July 8, 2015, https://ww

w.alaraby.co.uk/english/news/2015/7/8/us-proposes-deal-over-disputed-lebanon-israel-gas-field. Meier Daniel, “Lebanon’s Maritime Boundaries: Between Economic Opportunities and Military

Confrontation,” Papers on Lebanon, June 2013, http://lebanesestudies.com/wp-content/uploads/2013/10/ maritime.pdf; Andrew Shibley, “Blessings and Curses: Israel and Lebanon’s Maritime Boundary Dispute in the Eastern Mediterranean Sea,” Global Business Law Review, Vol.5, Issue 1, 2016, http://engagedscholars hip.csuohio.edu/gblr/vol5/iss1/; John Reed, Erika Solomon, “Israel and Lebanon Clash over Maritime Border Amid Oil Interest,” Financial Times, March 28, 2017.


99

exploration and development, to ensure the resources is used strategically for the broadest advantage of the state – concerning availability, pricing, and revenue earnings.

The patterns of friendship and hostility in the Eastern Mediterranean are changing with the discovery of natural gas reserves in the region. Israel is attempting to use its gas resources to advance peace with its Arab neighbors, although the prospects are far-fetched in the existing scenario of turmoil in the region; gas export to Jordan, however small in proportion, is a positive step. Energy interests have also brought Israel closer than ever to Cyprus and Greece, and have played a significant role in the current thaw in Israeli-Turkish relations. At the same time, the discovery of gas resources has produced new strains between producing countries and countries that have been slow in utilizing the emerging opportunities. Relations between Turkey and Cyprus, as well as between Israel and Lebanon, have come under further strain. Whilst, the emergence of the Eastern Mediterranean as a gas-exporting region will undoubtedly serve manifold interests, resolution of the ownership issues is a prerequisite for the accelerated development of the gas industry. Without a region-wide legal agreement on the EEZ, energy companies may not be able to secure the necessary funds to build infrastructures to transport gas to various markets.

israel’s mediterranean gas governance: evolution of...

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