The Middle East’s New Energy Giant

Israelis have always lamented that Moses led the ancient Israelites to the one patch of land in the Middle East bereft of energy resources. It turns out the sea offered more promise. At the end of December, a huge natural gas discovery was confirmed in the Eastern Mediterranean inside Israel’s territorial waters. Once referred to as an “energy island” that not only lacked energy reserves itself but was also cut off from the huge energy resources of the nearby Arab nations, Israel may well become over the next decade an energy exporter. The discovery of the Leviathan gas deposit in the Levant Basin marks a major development for Israel, with the potential for significant economic and strategic advantages, as well as implications for Europe, Russia, and the natural gas market.

Natural gas was first discovered off Israel’s coast in 1999, but the quantity was so small that until recently Israel was still contemplating importing natural gas from Russia by pipeline and liquid natural gas by tanker. Now Jerusalem’s plans are beginning to change. The Leviathan field, discovered by a consortium led by Houston-based Noble Energy, is the world’s largest offshore gas find in the past decade and vaults Israel into the ranks of the largest gas reserve holders in the world. (There are some indications that Leviathan might contain a world-scale oil deposit as well.)

Analysts believe that Leviathan could provide Israel with anywhere from 50-200 years of gas, at current levels of consumption, and more than meet growing demand for decades. In a few years Israel will no longer need gas from Egypt, which since 2008 has fueled 16 percent of Israel’s electricity and provided 40 percent of its natural gas. Israel plans to continue to buy Egyptian gas for the purpose of diversification and political ties, but the recent cutoff following sabotage of the gas pipeline in the Sinai highlights the dangers of dependence on Cairo.

There is a green payoff, too, since Leviathan will eliminate Israel’s demand for imported coal, which when burned emits more than twice as much carbon as natural gas. It will encourage further development of gas- and electricity-powered vehicles, and usher in tens of billions of dollars in infrastructure spending, much of which will need to come from foreign investment.

Leviathan’s abundance means Israel could export natural gas later this decade, most likely to Europe, which will face a widening gap between supply and demand. The most economical way to export to Europe would be by converting the gas to liquified natural gas (LNG) and shipping it by tanker. An LNG terminal could be built on Israel’s Mediterranean coast, float at sea, or be built in Cyprus.

Leviathan will enhance Israel’s strategic position in at least two important ways. First, it should lead to improved ties with other nations beyond the region. LNG exports could encourage improved political ties with potential buyers, such as Greece and other European countries. Israeli relations with Cyprus have already become closer; the two nations are negotiating a maritime border demarcation and a joint agreement to develop an LNG facility.

Second, its greater wealth and energy independence will make Israel less vulnerable to outside pressure. This is important as its neighborhood becomes less hospitable. In the last few weeks, Lebanon has replaced its pro-Western prime minister with one supported by Hezbollah, which is backed by Iran and Syria. Egypt is the more serious issue. Following the current turmoil, Egypt is likely to become less friendly to Israel and could use energy exports as political leverage. Indeed, many of the opposition forces in Egypt oppose selling any gas to Israel. Gas independence will mean any such attempted Egyptian ploy would be fruitless. Israel could also become relatively less concerned about the policies of Turkey, which was once a close ally but has recently become closer to Iran and other radical forces in the region. Turkey was hoping to reap revenue from transshipping natural gas from Russia and Central Asia to Israel, but that’s now off the table. And given Ankara’s support for the Turkish Republic of Cyprus, Turkey was also undercut with the recent Israeli-Cypriot agreements.

Even so, it won’t be entirely smooth sailing for Israel. According to the U.S. Geological Survey, Israel has a portion of the Levant Basin, but it is shared by Gaza, Lebanon, Cyprus, and the Turkey-dominated Turkish Republic of Northern Cyprus. Lebanon and Israel have exchanged tough rhetoric over border demarcation, and Beirut has already taken its case to the U.N.—and that’s not the worst of it. If there is another round of hostilities between Israel and Lebanon, a Hezbollah armed with tens of thousands of rockets might well target Israeli gas facilities.

Leviathan will also influence international relations through its impact on the global natural gas market. Israeli gas exports to Europe would compete with, and lead to reduced demand for, Russian gas, and thereby reduce Russia’s political influence in European capitals. And since Israeli gas exports would be priced by the gas market, they would further erode Russia’s beneficial gas export pricing, which has been uniquely pegged to oil prices, which are higher than gas prices. Reflecting Moscow’s interest in protecting its pricing and markets, its gas giant, Gazprom, which once wanted to sell Israel gas through Turkey, now wants to buy part of Israel’s gas fields. Reduced Russian influence in Europe is good for Israel’s chief ally, the United States. Washington has sought to undercut Russia’s dominant supply of natural gas to Europe, which is why it has supported construction of pipelines from Central Asia and the Middle East, like the proposed Nabucco line, that skirt Russia and Iran.

Not surprisingly, Leviathan has raised some domestic issues in Israel as well, most notably regarding taxation. Since the 1950s, Israel has held down tax rates on natural resource extraction, an added incentive to companies that dared to explore there. Now that huge natural energy resources have been discovered, the Israeli cabinet recently decided to raise the profit tax—prospectively and partially retroactively. If the Knesset votes in favor of this new tax regime, it could well lead to less gas being extracted and would pose a roadblock to further investment.

Despite some drawbacks and more details to be worked out, there’s no mistaking the fact that the Leviathan find represents a landmark event in the history of the state of Israel. Perhaps after all, on the matter of energy, Moses deserves greater navigational credit.

Michael Makovsky, a former energy market analyst at investment firms, is foreign policy director of the Bipartisan Policy Center and author of Churchill’s Promised Land: Zionism and Statecraft (Yale University Press).

Originally appeared in The Weekly Standard on February 21, 2011.