The rapprochement agreement between Israel and Turkey presented Monday - and expected to be signed Tuesday - will also likely lead to the signing of a gas export deal by the end of next year, according to executives in the Leviathan partnership. The partners revealed they have opened talks with a consortium of 15 Turkish energy companies which expressed interest in half of the available reservoir.
The gas could also flow on from Turkey to Europe - which no longer wishes to rely on Russian gas. Both Israeli and Turkish sources believe Europe will import 8-10 BCM annually starting in 2020.
Turcas Petrol CEO Batu Aksoy said, “The primary benefit to creating a consortium of companies is the spread of the risks which are inherent in such a significant deal.” The Leviathan partners said Monday they were also holding talks with European companies operating in Turkey.
Demand outpaces supply
“The export of Israeli gas to Turkey is a win-win for both parties,” Turkish gas exeutive Nusert Comert told “Globes” on Monday, “This is the best deal financially and the right decision strategically.”
Comert says Turkish gas consumption has doubled in the past decade - up to 48.6 BCM - and will likely double again in the next twenty years. Turkey does not have its own natural gas reserves and is forced to import from a number of suppliers (including Iran, Russia, and Azerbaijan) at high prices.
Furthermore, ISIS activity in northern Iraq prevents the import of gas through the region, the gas flow from Russia through Ukraine is inconsistent, and the Tran-Anatolian gas pipeline (TANAP) through Azerbaijan - scheduled to open by 2018 - will now only be ready at the end of that year. Another proposed Russian pipeline - Turkish Stream - has been delayed and experts believe it will likely be scrapped entirely.
From Israel’s perspective, the deal will finally get the ball rolling on Leviathan’s development. In Israel, the realization has dawned that Egypt is no longer an attractive destination for a number of reasons: in the past year oil and gas prices have fallen rapidly, making exports to an Egyptian LNG facility (which will then export the gas to Europe) economically unsound; Egypt itself has discovered new gas reservoirs; and the price of natural gas in the country has risen, attracting international interest. If those reasons weren’t enough, Shell acquired BG - and it’s difficult to imagine the company would want to engage with Israel for such a large transaction.
Russian and American concerns
Experts in both Turkey and Israel note the opportunity for exporting gas to Europe as one of the key benefits of the reconciliation between the two countries. Europe, which relies on Russian for 30% of its gas consumption (largely pumped through Ukraine), is desperately seeking new ways to diversify its supply - especially because in recent months Russia has taken aggressive measures against Ukraine, including cutting off its gas supply, affecting Europe as a whole.
More importantly, Russia recently decided to cancel the South Stream Pipeline project connecting to Europe through Bulgaria.
A senior source in the Leviathan partnership said Monday: “The moment we can export gas to Turkey, we will be able to export to Europe.” Another source added, “Unlike with Egypt - where the gas flow is one-way from Israel to Egypt - the deal with Turkey is reciprocal.” He said that once Turkey connects a pipeline to Europe, Israel will - if necessary one day - be able to import gas through the same pipeline through which it exported it.
But none of this is a certainty. Russia, from which Turkey imports 55%-60% of its natural gas, will do everything in its power to prevent this project from getting off the ground. Russia is one of the largest oil and gas exporters in the world. Fifty percent of its economy is based on that export; the international sanctions against it, combined with falling oil prices, have hammered the country.
Gas executives believe Russia will follow a strategy of volume over value - similar to Saudi Arabia’s oil strategy - in order to maintain its hold on the market. A VP for state-owned Gazprom recently said the country would raise its gas production in 2016 by 8%, from 418.5 BCM in 2015 to 452 BCM in 2016.
Last month, after the meeting between Russian President Vladimir Putin and Israeli Prime Minister Benjamin Netanyahu, it was reported Putin wanted to participate in the development of the Israeli gas reservoirs; this month, it was reported Netanyahu invited Putin to do so. The Israeli defense establishment is concerned the Russians seek to sabotage the development of Leviathan to thwart competition with Russian gas - or at least to ensure it is not sold to Europe or Turkey.
Then there is the US, which began to export liquefied natural gas (LNG) last February. For now, it has only succeeded in exporting to Latin America. It had one European delivery - to Portugal - but there is no doubt its eyes are set on the Europe.
Until a year and a half ago, the natural gas in Europe cost $11-15 per mmbtu. In the US, the cost is $2 per mmbtu; it could sell the gas to Europe for $6.9 per unit (after expenses). Russia can compete in that price range but Israel cannot.
The Cyprus connection
From a technical perspective, exporting gas to Turkey is difficult but far from impossible - a submarine pipeline could begin at the Leviathan reservoir, pass through Cypriot waters, and land at the southernmost point in Turkey - at an estimated distance of 500-550 kilometers from the reservoir.
Sources inform “Globes” the two potential landing sites are Ceyhan and Iskenderun in southern Turkey. The pipeline would likely be constructed by Turkey using contractors since Israel does not have the know-how, the experience, or the appropriate equipment.
The natural gas companies said on Monday that all the existing pipelines serving Turkey reach its northern border, meaning a southern pipeline would increase its energy security. However, a submerged pipeline could cost as much as $2-4 billion - though the recently falling oil prices have also led to drops in iron and undersea equipment prices.
But beyond the cost and the technical challenge, there is also the question of Cyprus. The proposed pipeline between Israel and Turkey would pass through Cypriot economic waters - requiring the country’s approval. But relations between Cyprus and Turkey have been frosty since the latter occupied the northern part of the island in 1974.
A Cypriot energy executive - who preferred to remain anonymous - was furious at the deal between Israel and Turkey. He said, “a gas export deal between Israel and Turkey is a point of no return for Israeli-Cypriot ties. Israel is encouraging the conduct of Turkey on the island; it is not acceptable.”
Deputy Ambassador of Cyprus to Israel Michalis S. Firillas has even said his country would not authorize the construction of a pipeline because “though there are talks between the two sides of the island, Turkey would need to change its approach for them to reach a breakthrough.”
Alon Liel, the former Israeli ambassador to Turkey and a noted expert on the Turkish market, told “Globes” on Monday, “The deal with Turkey will hurt relations with Greece and likely Cyprus.” He mentioned the agreement signed in January between Cyprus, Israel, and Greece in Nicosia - which called for strengthening their trilateral ties. Liel said “Israel gave Cyprus and Greece the illusion that it was onboard; signing a deal with Turkey is a sort of betrayal.”
Letting Aphrodite free
The Cypriot energy executive, however, hinted at an opportunity to appease Cyprus: “Stop thwarting the development of Aphrodite.” The subtle hint to the “Globes” expose from last October which revealed Israel demanded Cyprus include it in its development of Aphrodite because some of the reservoir spills over into Israel’s Yishai reservoir. Meanwhile, Israel is refusing to sign a unitization agreement between the two states, which would officially regulate the development of their shared oil and gas reservoirs - thus delaying the development of the Cypriot field.
Israel could offer a “barter deal” wherein Israel “releases” the Aphrodite reservoir in return for the authorization for its Turkish pipeline. In that event, Cyprus could also connect to the pipeline and export gas to both Turkey and Europe.
Published by Globes [online], Israel business news - www.globes-online.com - on June 28, 2016
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