Start Up Nation, or East Germany? -- “A severe self-inflicted blow to the Israeli economy”

April 02, 2016

* “Israel has a well-earned reputation as the Start Up Nation where its brainpower and expertise have allowed it to become a new Silicon Valley of high-tech innovation and development. But that aspect of Israel’s economic culture has always competed with the socialist ethos that dominated its origins. The Labor Zionist movement worked wonders in helping to build the state of Israel, but it saddled the country with an economic model that might best be described as reminiscent of East Germany.” (Jonathan Tobin)

 

 

Tom Gross: Critics say that the decision by the Israeli supreme court to interfere with Israeli government plans to develop its natural gas fields, not only does major damage to the Israeli economy but risks derailing Israel’s strategically and diplomatically vital strengthening of ties with Greece and other EU states, and its reconciliation with Turkey.

Above: Greece’s left-leaning prime minister Alexis Tsipras and Israel’s right-leaning prime minister Benjamin Netanyahu had grown close largely as a result of the prospect of lucrative future potential energy cooperation. Greece had also been allowing the Israeli air force to use its airspace for training exercises.

 

CONTENTS

1. “Excessive” left-wing judicial interference
2. Haaretz and the Israeli left welcome decision
3. Decision potentially very damaging for Israel’s emerging strategic and military alliance with Greece and Cyprus
4. Crucial reconciliation with Turkey also now at risk
5. Obama and state department disappointed by Israeli court decision
6. Israel may now have to pay $12 billion in punitive damages
7. As Egypt plans to develop, Israel may now miss out on gas deals
8. Former FT journalist: A decision flying in the face of commercial realities
9. Start Up Nation, or East Germany?
10. Social media reaction
11. “Israel Supreme Court rules against offshore-gas deal” (Wall Street Journal, March 28, 2016)
12. “Israeli court strikes down natural gas development deal” (New York Times, March 28, 2016)
13. “How a court sank Israel’s economy” (Jonathan Tobin, Commentary, March 28, 2016)
14. “Natural gas judgment casts shadow over Israel’s energy plans” (Simon Henderson, Washington Inst., Mar 28, 2016)
15. “Shifting Eastern Mediterranean alliances” (Emmanuel Karagiannis, Middle East Quarterly, Spring 2016)

 

“EXCESSIVE” LEFT-WING JUDICIAL INTERFERENCE

[Notes below by Tom Gross]

This dispatch concerns the decision by Israel’s Supreme Court at the start of this week (which some readers may have missed since it was still the Easter holiday) to strike down a landmark deal signed by the government of Benjamin Netanyahu to develop and export Israel’s offshore gas reserves.

Netanyahu issued the following press release in response to the verdict:

“The High Court of Justice decision severely threatens the development of the gas reserves of the State of Israel.

“Israel is seen as a state with excessive judicial interference in which it is difficult to do business.

“Certainly nobody has any reason to celebrate that the gas is liable to remain in the depths of the sea and that hundreds billions of shekels will not reach the citizens of Israel.

“We will seek other ways to overcome the severe damage that this curious decision has caused the Israeli economy.”

 

HAARETZ AND THE ISRAELI LEFT WELCOME DECISION

The far left Israeli daily Haaretz, which campaigns relentlessly against Netanyahu and is believed to have been an influence on the judges, welcomed the verdict, saying in its lead editorial: “This was a landmark decision of judicial activism on the part of the court.”

 

DECISION POTENTIALLY VERY DAMAGING FOR ISRAEL’S EMERGING STRATEGIC AND MILITARY ALLIANCE WITH GREECE AND CYPRUS

But many other commentators think it is a disaster for Israel’s economy.

It may also be very damaging for Israel’s emerging strategic and military alliance with Mediterranean neighbors Greece and Cyprus. (For more on that, see past dispatches on this list and the piece further down this dispatch from the new edition of the Middle East Quarterly: Shifting Eastern Mediterranean Alliances, by Emmanuel Karagiannis.)

As Professor Karagiannis points out “Natural gas is the fastest growing source of energy in the world, currently accounting for 22 percent of total global energy consumption. It is both affordable and more environmentally friendly than other commercially feasible options, resulting in an increasing demand even in an era of dropping oil prices. That demand seems likely to be met in large part by the newly discovered gas reserves of the Eastern Mediterranean.”

 

CRUCIAL RECONCILIATION WITH TURKEY ALSO NOW AT RISK

Developing Israel’s enormous new finds of natural gas – Israel sits on more than 32 trillion cubic feet of gas – would also have strengthened Israeli economic, diplomatic and national security ties with Jordan, Egypt, Turkey and other countries.

A key reason the government of Turkey was ready to reconcile with Israel was the prospect that they could sign a deal to buy Israeli gas, which would have been cheaper for them than the expensive Russian, Iranian, and Azerbaijani gas, that they are currently reliant on.

Supporters of the deal say many of its opponents are motivated by blind and irrational hatred of Netanyahu, and a failure to understand international economics, rather than what is in Israel’s best international interests.

 

OBAMA AND STATE DEPARTMENT DISAPPOINTED BY ISRAELI COURT DECISION

As the New York Times notes (article below), the Obama administration (which in other respects has differences with the Netanyahu government) had also enthusiastically supported the deal that Netanyahu had signed, in the hope that energy ties would help build peaceful relations between Israel and its neighbors in the Middle East.

 

ISRAEL MAY NOW HAVE TO PAY $12 BILLION IN PUNITIVE DAMAGES

The companies involved (Texas-based Noble Energy and Israel’s Delek Group) are also very frustrated with the Israeli court decision, having already spent billions of dollars in exploration and infrastructure.

If the issue cannot be resolved, Noble may seek international arbitration against Israel, with a potential punitive award of up to $12 billion against the state of Israel.

 

AS EGYPT PLANS TO DEVELOP, ISRAEL MAY NOW MISS OUT ON INTERNATIONAL GAS DEALS

Netanyahu’s government has been trying to develop the field since it was discovered in 2010, against opposition from domestic political opponents.

As Simon Henderson, director of the Gulf and Energy Policy Program at The Washington Institute, writes:

“The Israeli government had intended to issue new tenders this summer for more exploration, but enticing foreign gas companies with the necessary skills and financial reserves to now drill in water 6,000 feet deep – where even an empty hole costs $100 million – could be challenging.” (His full piece is below.)

Meanwhile, while Israel continues to delay its gas development, other countries in the Eastern Mediterranean continue to develop and it may be harder for Israel to sell its gas to EU countries when it does eventually drill for it.

Last year, for example, the Italian conglomerate Eni discovered the Zohr field in Egypt which is believed to be even bigger than Israel’s Leviathan field.

 

A DECISION FLYING IN THE FACE OF COMMERCIAL REALITIES

Henderson, a former journalist at the Financial Times, writes: “Hopes of Israel becoming a mini-energy giant in the Eastern Mediterranean have seemingly evaporated. Yesterday’s decision flies in the face of commercial realities inherent to twenty-year, high-cost energy projects.”

Before the high court ruling the Leviathan gas field was slated to be ready for production in 2017.

The court gave the Knesset a year to revise the Israel government’s agreement with the gas companies, arguing that the deal was too favorable for the gas companies, which critics say is not true.

 

START UP NATION, OR EAST GERMANY?

As Jonathan Tobin writes in Commentary (his full article is below):

“Israel has a well-earned reputation as the Start Up Nation where its brainpower and expertise have allowed it to become a new Silicon Valley of high-tech innovation and development. But that aspect of Israel’s economic culture has always competed with the socialist ethos that dominated its origins. The Labor Zionist movement worked wonders in helping to build the state of Israel, but it saddled the country with an economic model that might best be described as reminiscent of East Germany.”

“Though many Israelis – especially those who constitute Netanyahu’s socialist and populist critics – may cheer the prospect of Nobel being denied profits, they may be forfeiting a golden opportunity to ensure their nation’s future.”

***

I attach five articles below. The first two are news reports, the other three are comment pieces.

-- Tom Gross


SOCIAL MEDIA REACTION

Among readers comments on social media:

“Thank God for the U.S. Constitution. That is the problem with Israeli justice. It is at the whim of politicians and judges. Whatever one thinks of an activist court in the U.S., their hands are still bound by the Constitution. After 68 years maybe it’s time for Israel to get one as well.”

“Congratulation to Israel Left for destroying the national economy.”

“The Israeli high court should not be proactive, as they have been in far too many cases, but should be more like the U.S. Supreme Court, which is reactive.”

“Most of my left wing friends have absolutely no idea concerning the details of the agreement. They are fed truckloads of media nonsense and eat it up, only because it is a right-wing government making the deal.”

“What the Israeli left don’t seem to understand about economics is that when any company or group is putting that much money into developing an asset anywhere must be some stability clause to ensure that a change in government will not take over or change the rules in mid-stream.”

* Please “like” these dispatches on Facebook here www.facebook.com/TomGrossMedia, where you can also find other items that are not in these dispatches.


ARTICLES

ISRAEL SUPREME COURT RULES AGAINST OFFSHORE-GAS DEAL

Israel Supreme Court Rules Against Offshore-Gas Deal
By Orr Hirschauge and Rory Jones
The Wall Street Journal
March 28, 2016

TEL AVIV – Israel’s Supreme Court on Sunday ruled against a landmark deal to develop and export the country’s offshore gas reserves, a major setback for Prime Minister Benjamin Netanyahu, who campaigned for it.

The panel of judges called the deal unconstitutional, citing a clause in its framework that gave energy companies pricing and regulatory stability for 10 years regardless of potential shifts in the government. The main stakeholders in the fields, U.S.-based Noble Energy Inc. and Israeli partner Delek Group Ltd, had argued that the stability clause was required for them to make the investments necessary to develop the fields.

The deal will be suspended for one year, the court said. Mr. Netanyahu’s government will be required to amend it during that period and potentially put the details to a vote in the Israeli parliament, known as the Knesset.

Israel’s regulator ruled the plan anticompetitive in 2014, saying Noble and Delek held a monopoly.

The energy companies have already been through several rounds of regulatory and legislative hurdles that have significantly delayed development. In total, Israel sits on fields with more than 32 trillion cubic feet of gas.

“The supreme court’s resolution severely threatens the development of Israel’s gas reserves. Israel is seen as a country with exaggerated legal interference that makes doing business hard,” Mr. Netanyahu said on his official Twitter account. “We will seek alternative ways to overcome the serious harm inflicted on Israel’s economy by this hard to understand resolution.”

Delek and Noble issued a joint statement with other companies involved. “In its resolution the court accepted the framework in whole, opposing only the stability clause. We congratulate such a resolution,” it said. “We call upon the government to put into place terms that include stability in a timely fashion.)

The deal hasn’t been popular domestically. Thousands of Israelis took to the streets over the past year in protest, complaining it would line the coffers of big business, offer Israeli consumers uncompetitive pricing compared with other Western countries, and send too much gas outside Israel, an energy-security risk.

In December, Mr. Netanyahu signed off on the deal, invoking an antitrust clause for the first time to force it through on grounds of national security.

The Israeli leader said the development of the gas reserves would enable Israel to develop economic ties with countries such as Jordan, Egypt, Cyprus, Turkey and Greece, a diplomatic boon and a critical measure for national security.

In response to Mr. Netanyahu’s decision, opposition lawmakers filed a petition in the court that objected to the plans to circumvent the regulator. Mr. Netanyahu appeared before the court in February to defend his move, the first ever appearance there by a sitting prime minister.

 

ISRAELI COURT STRIKES DOWN NATURAL GAS DEVELOPMENT DEAL

Israeli Court Strikes Down Natural Gas Development Deal
By Isabel Kershner and Stanley Reed
The New York Times
March 28, 2016

JERUSALEM – Israel’s High Court of Justice struck down on Sunday a deal that Prime Minister Benjamin Netanyahu reached in December to enable the development of a major offshore natural gas field.

The gas trove, called Leviathan, has the potential to transform Israel into an exporter of the fuel, but it has been plagued by delays.

The court specifically objected to a part of the agreement between the government and the project’s developers, which are led by Noble Energy, that prohibits changes to regulations affecting the project for 10 years.

Justice Elyakim Rubinstein, the court’s deputy president, said that the government did not have the authority to make such a long-term deal, which would bind its successors, especially “when the issue at hand is a matter of real political controversy.”

The court gave the government a year to work out an alternative solution, but that may lead to further delays in developing the field, which was discovered in 2010.

Noble Energy, based in Houston, has already reached preliminary agreements to export gas from Leviathan to Egypt and Jordan. The Obama administration has enthusiastically supported these efforts in the hope that energy ties would help build peaceful relations between Israel and its neighbors in the Middle East.

Plans to bring Leviathan’s gas to market have been slowed by a series of roadblocks, including a decision in 2014 by Israel’s antitrust commissioner that Noble and its partners would have too much power over the Israeli energy market. That ruling led Mr. Netanyahu to devise a deal under which Noble and its partners would divest part of their Israeli holdings, but now the court has objected to that arrangement.

Predictably, the Israeli government reacted with dismay to the court decision.

“The High Court of Justice decision severely threatens the development of the gas reserves of the State of Israel,” Mr. Netanyahu said in a statement. “Certainly, nobody has any reason to celebrate that the gas is liable to remain in the depths of the sea and that hundreds billions of shekels will not reach the citizens of Israel.”

Mr. Netanyahu also said that Israel was “seen as a state with excessive judicial interference in which it is difficult to do business.”

In recent years, discoveries by Noble and its Israeli partners, the Delek Group conglomerate, have helped transform Israel from a country heavily dependent on energy imports to one with a growing natural gas industry. The companies currently operate a field called Tamar, whose gas is used to generate roughly half of Israel’s electricity. Leviathan is twice the size of Tamar.

For many Israelis, however, the benefits of a surging natural gas industry are outweighed by concerns that Noble and its partners were becoming too powerful.

“The judges chose today to protect the separation of powers and the rule of law in Israel, to halt the limitless recklessness for the benefit of the gas tycoons, and to put up a glowing stop sign in order to defend the public and Israeli democracy,” Shelly Yachimovich, a lawmaker from the center-left Zionist Union group, wrote on her Facebook page on Sunday.

(Isabel Kershner reported from Jerusalem, and Stanley Reed from London.)

 

HOW A COURT SANK ISRAEL’S ECONOMY

How a Court Sank Israel’s Economy
By Jonathan S. Tobin
Commentary
March 28, 2016

For the first several decades of its existence, the state of Israel was the butt of the old Jewish joke about Moses leading the Jews to the one place in the Middle East without natural resources. But after the discovery of vast natural gas fields off its coast (as well as shale oil on land), the jest no longer made sense. As Arthur Herman wrote in a feature in the March 2014 issue of Commentary*, the potential bounty from the Tamar field that has already begun producing natural gas and the far bigger Leviathan site on which development has not yet begun had the potential to make Israel the world’s next energy superpower. The prospect of not only energy independence but also of a large export business that would not only enrich the Jewish state but enable economic ties that would create new relationships and alliances that would make it far more secure.

The only worry about all this was not whether the gas could be brought out or whether it would play a part in transforming Israel’s economy. The only problem was whether Israel’s fractious political system and over-regulated economy and a judiciary and bureaucracy that seem most comfortable when stifling innovation and growth rather than enabling it would find a way to gum up the works and stop the gas fields from being exploited. Unfortunately, we now have the answer to that question.

Yesterday’s ruling by Israel’s High Court of Justice struck down a deal that Prime Minister Netanyahu had brokered between the government and Texas-based Noble Energy – which has taken the lead in developing Israel’s big energy project – and an Israeli firm that would have allowed work on Leviathan to begin.

This decision is the culmination of years of maneuvering that pitted Netanyahu’s government against a coalition of left-wing opponents determined to stop the project.

Some Israelis objected to Nobel making too much money from Leviathan or that it would constitute a monopoly. Given that without the company’s foresight and investment, Israel’s energy revolution might never have taken place this was not as reasonable a complaint as it sounded. Nevertheless, Netanyahu and his government labored to come up with a compromise that was announced last June that brought the Delek company into the mix and limited Nobel’s control. The prime minister had to employ the power of the country’s Security Cabinet to override the decision of an anti-trust commissioner to spike the project. But his use of a national security rationale was justified since so much of Israel’s economic future rested on a common sense approach to the problem that would enable the project to start and allow the country to make deals with nations like Turkey for future export via pipelines.

The one catch in the agreement that Nobel needed was certainty. Netanyahu negotiated a “stability clause” that would ensure the producers that future governments would not try to swoop in and change the rules of the game. This was, again, a reasonable provision since Nobel would have already spent vast sums on developing the field and it would not be fair to it or its investors for Israel’s next government to demand a greater share of the profits or otherwise alter the arrangement. Without “stability” there is no way Nobel or any such developer would be willing to risk its financial life on doing business with Israel. But it is precisely this clause that the court struck down.

Israel has a well-earned reputation as the Start Up Nation where its brainpower and expertise have allowed it to become a new Silicon Valley of high-tech innovation and development. But that aspect of Israel’s economic culture has always competed with the socialist ethos that dominated its origins. The Labor Zionist movement worked wonders in helping to build the state of Israel, but it saddled the country with an economic model that might best be described as reminiscent of East Germany. The “start up” aspects of Israel’s economy grew up in industries that were not dominated by the Histadrut (an important institution that can best be understood as the moral equivalent of the AFL-CIO if the labor conglomerate also owned much of the nations’ leading companies). The deadening hand of regulation and state monopolies was largely freed up in the 1990s, but its spirit lives on.

Under Netanyahu, Israel’s economy has thrived, but the struggles of the middle class and other issues that are related to the transition from socialism, as well as the endemic problem of a small nation that is forced to support a relatively large army and security apparatus, continue to plague it. Combined with an environmental movement that exploits largely unreasonable worries about the impact of the gas fields on the coastline, there is a considerable constituency for slowing if not halting the project.

Add in a High Court that recognizes no limits on its power to intervene wherever it likes without a shred of authority that is actually rooted in law, and you have a perfect storm of factors that could doom Leviathan and expectations about Israel’s energy future.

For the moment, that is exactly what has happened. Unless Netanyahu’s government can think up some new stratagem that will enable it to circumvent the court, as the prime minister said, “the gas is liable to remain in the depths of the sea and that hundreds of billions of shekels will not reach the citizens of Israel.” He’s right about that. Unless the deal with Noble is saved, the Leviathan field will remain unexploited.

The battle over the natural gas fields was always whether people of vision and courage – like those involved in the development of the gas fields and a government that had the wisdom to back them – had the political power to ensure that naysayers could not prevail. As it turns out, that may not be the case. Without a political system that is ready to let those who invest in innovation profit from it, development of natural resources is always doomed along with a nation’s economic freedom and prosperity. With respect to what is probably the single most important battle to be fought for Israel’s economic future, the “Start Up Nation” appears to have beaten down by fear and envy. Though many Israelis – especially those who constitute Netanyahu’s socialist and populist critics – may cheer the prospect of Nobel being denied profits, they may be forfeiting a golden opportunity to ensure their nation’s future.

(* Tom Gross: You can see that article here: “Will Israel Be the Next Energy Superpower? It can be... if the Israelis allow it to happen” by Arthur Herman, Commentary magazine, March 1, 2014.)

 

NATURAL GAS JUDGMENT CASTS SHADOW OVER ISRAEL’S ENERGY PLANS

Natural gas judgement casts shadow over Israel’s energy plans
By Simon Henderson
Washington Institute
March 28, 2016

A new court decision could stunt exploitation of offshore gas reserves, open the possibility of a heavy punitive arbitration award, and hamper foreign investment in Israel.

***

On March 27, the Israeli High Court passed a judgement condemning a key aspect of the government’s planned “framework” deal with energy companies hoping to tap the country’s largest offshore natural gas field. The companies in question – Houston-based Noble Energy and its Israeli partner Delek – had pressed for a ten-year regulatory and pricing stability clause to facilitate the investment of around $6 billion needed to develop the giant Leviathan field, which lies eighty miles west of Haifa deep below the Mediterranean Sea. The court rejected that clause, ruling that the deal should be suspended for another year and requiring the government to amend the terms and obtain approval from parliament.

Prime Minister Binyamin Netanyahu described the judgment as “bizarre,” arguing via Twitter that it “severely threatens the development of Israel’s gas reserves.” He continued: “Israel is seen as a country with exaggerated legal interference that makes doing business hard. We will seek alternative ways to overcome the serious harms inflicted on Israel’s economy by this hard to understand resolution.”

Similarly, energy minister Yuval Steinitz called the judgement “miserable,” while Noble chief David Stover stated, “The court’s ruling... is disappointing and represents another risk to Leviathan timing. Development of a project of this magnitude, where large investments are to be made over multiple years, requires Israel to provide a stable investment climate... It is now up to the government of Israel to deliver a solution which at least meets the terms of the Framework, and to do so quickly.” If the issue cannot be resolved, Noble could resort to international arbitration against Israel, with a potential punitive award of up to $12 billion.

The ruling’s immediate consequence is to once again delay development of the Leviathan field, where the companies stopped working in December 2014 after the Israeli oil and gas regulator abruptly decided to reverse tentative approval of a compromise that would have spared the venture from being labeled a monopoly.

The issue has since become a political football, with opposition parties and activist groups claiming that the likely price for Leviathan gas will be unreasonably expensive and the profits for Delek and its Israeli partners too high. Netanyahu’s government, which survives with a single-seat majority in parliament, has countered by emphasizing the resultant boost to government revenues and Israel’s need to attract foreign investment.

The government had intended to issue new tenders this summer for more exploration, but enticing foreign gas companies with the necessary skills and financial reserves to drill in water 6,000 feet deep – where even an empty hole costs $100 million – could be challenging.

At present, Israel depends on gas from the offshore Tamar field, drilled by Noble in 2009 and in production since 2013. Less than half the size of Leviathan, it fuels nearly 60 percent of Israel’s electricity production. The government’s plans – now delayed if not derailed – are to increase the number of gas-fired power stations for domestic and industrial use while exporting surplus gas. Neighboring Jordan will receive a small amount of Tamar gas beginning next year, though plans for the multiyear sale of large volumes of Leviathan gas are on hold.

Meanwhile, gas development continues in other parts of the Eastern Mediterranean after years of quiet encouragement by the United States. In Cyprus, Noble discovered the Aphrodite field, which lies mainly in the island’s exclusive economic zone and stretches partly into Israel’s EEZ as well. Cypriot officials are currently trying to attract more companies to drill there. And last year the Italian conglomerate Eni found the Zohr field in Egypt’s EEZ; even bigger than Leviathan, it lies only three miles from Egypt’s maritime border with Cyprus. Various actors have drawn up elaborate schemes for Israel, Cyprus, Egypt, and Greece to cooperate in using and exporting this gas. Even Turkey, currently reliant on expensive Russian, Iranian, and Azerbaijani gas, had contemplated buying Israeli supplies – a commercial decision that would require political rapprochement with both Jerusalem and Cyprus, and which may be further complicated by the latest court judgement.

In short, hopes of Israel becoming a mini-energy giant in the Eastern Mediterranean have seemingly evaporated in little more than a year. Yesterday’s decision flies in the face of commercial realities inherent to twenty-year, high-cost energy projects. Theoretically, the parliament could pass a law allowing for the ten-year stability clause, but Netanyahu would likely be opposed by coalition partners eager to force new elections. Noble might also be able to obtain a different set of assurances that are acceptable to all parties. Without such a breakthrough, resolving the impasse would require broader societal awareness of the benefits of natural gas wealth and domestic political compromise, yet the prospects for either – never mind both – seem slim.

(Simon Henderson is the Baker Fellow and director of the Gulf and Energy Policy Program at The Washington Institute.)

 

SHIFTING EASTERN MEDITERRANEAN ALLIANCES

Shifting Eastern Mediterranean Alliances
by Emmanuel Karagiannis
Middle East Quarterly
Spring 2016

http://www.meforum.org/5877/shifting-eastern-mediterranean-alliances

The exploitation of energy resources in the Eastern Mediterranean has drawn together hitherto estranged states. In August 2013, Cyprus, Greece, and Israel signed onto the “EuroAsia Interconnector” project, which would install a 2000-megawatt underwater electric cable (illustrated above) to connect their power grids and to be a means by which “three nations ... [can] enhance their growth and prosperity” and build a “bridge of friendship between our nations.”

The Eastern Mediterranean is changing fast with its estimated 122 trillion cubic feet (tcf) of natural gas reserves (the equivalent of 21 billion barrels of oil) already having an impact on regional patterns of amity and enmity.[1] With Israel and Cyprus well underway to becoming gas exporters, the problematic Israeli-Lebanese and Cypriot-Turkish relationships have been further strained. At the same time, energy cooperation has been the driving force behind the nascent Greek-Cypriot-Israeli partnership, manifested in rapidly growing defense and economic cooperation. Clearly, the development of energy resources and their transportation will have far-reaching geopolitical implications for the Eastern Mediterranean and its nations.

THE STRATEGIC SIGNIFICANCE OF THE GAS RESERVES

Natural gas is the fastest growing source of energy in the world, currently accounting for 22 percent of total global energy consumption.[2] It is both affordable and more environmentally friendly than other commercially feasible options, resulting in an increasing demand even in an era of dropping oil prices. That demand seems likely to be met in large part by the newly discovered gas reserves of the Eastern Mediterranean.

Israel, for one, has the potential to become an important regional producer.[3] Its Tamar field was confirmed to have estimated reserves of 9.7 tcf[4] while its Leviathan gas field has the potential of producing up to 16 tcf.[5] Meanwhile, in November 2011, U.S.-based Noble Energy announced a major gas discovery south of Cyprus: The Aphrodite field was estimated to contain 7 tcf.[6] In February 2013, a seismic survey south of Crete indicated that rich hydrocarbon resources may soon be found in Greek waters.[7] Most recently, the Italian company Eni announced the discovery of a huge gas field off the coast of Egypt.[8]

For reasons of geographical proximity, these Mediterranean energy resources concern first and foremost the European Union – the world’s third largest energy consumer behind China and the United States.[9] While oil is still the dominant fuel, accounting for 33.8 percent of total EU energy consumption, natural gas comes in second at 23.4 percent.[10] The Eastern Mediterranean gas reserves have three distinct advantages for European governments (and companies) and are thus viewed by them as a strategic priority. First, due to their smaller sizes and populations, the needs of Israel and Cyprus are relatively low and most of their gas could be exported. Second, Eastern Mediterranean gas could partly cover Europe’s energy needs and thereby decrease its dependence on an increasingly volatile Russia. Finally, since both Israel and Cyprus lack the capital and the offshore drilling technology to develop gas reserves on their own, foreign energy companies have identified them as investment opportunities that could generate significant financial returns.

As the Middle East implodes, security of energy supply has become an important policy objective for the EU. Indeed, there is a consensus among European governments that new initiatives are needed to address energy challenges. The EU is already directly involved to some extent in Eastern Mediterranean energy affairs because Greece and Cyprus are member states while Turkey is a candidate for membership and has a customs union with the EU. Although the governments of the EU and Israel are often at odds politically, economic relations between Jerusalem and Brussels are close and multifaceted.

The development of Israeli and Cypriot gas fields could help strengthen Europe’s energy security. Currently, European countries import liquefied natural gas (LNG) from politically unstable countries such as Nigeria and Algeria. But the Eastern Mediterranean could serve as a third gas “corridor” for Europe, alongside Russian gas and the southeast European pipelines for Azeri gas. The Italian Eni company, the British Premier Oil, and the Dutch Oranje-Nassau Energie have clearly shown interest by bidding in the second round of licensing for natural gas exploration in the Cypriot exclusive economic zone (EEZ),[11] a sea zone prescribed by the United Nations over which a state has special rights.

The U.S. administration views Eastern Mediterranean gas as an alternative source for its European allies who depend heavily on Russian supplies.

Given the prominence of the Middle East for U.S. energy policy, it is hardly surprising that the gas finds in Israel and Cyprus have drawn Washington’s attention as well. Although the U.S. is likely to become the largest gas producer in the world as a result of increased use of shale gas, the administration views Eastern Mediterranean gas as an alternative source for its European allies who depend heavily on Russian supplies.[12] Within the private sector, the American company, Noble Energy, has played a leading role in the exploration process; it has a 40 percent stake in the Leviathan fields, a 36 percent stake in Tamar, and a 70 percent stake in Aphrodite.

Not surprisingly, these discoveries have attracted Moscow’s interest as well due to a potential, adverse impact on its gas exports to European markets. Russian energy companies, which often act as the Kremlin’s long-arm, are particularly active in the region. In February 2013, for example, Gazprom signed a 20-year deal with the Israeli Levant LNG Marketing Corporation to purchase liquefied natural gas exclusively from the Tamar field.[13] Then in December 2013, the Russian company SoyuzNefteGas signed an agreement with the Assad regime to explore part of Syria’s exclusive economic zone. One month later Putin signed an investment agreement with Palestinian leader Mahmoud Abbas to develop gas fields off the Gaza Strip.[14]

WARMING ISRAELI-GREEK RELATIONS

Energy considerations have a long history of influencing the course of relations between states, and the new gas discoveries are no exception to this rule, affecting Israel’s relations with both Greece and Cyprus.

Greek-Israeli relations have been frosty for decades. The postwar Greek governments typically followed a pro-Arab foreign policy in order to protect the large Greek community in Egypt, secure Arab support on the Cyprus dispute in the United Nations, and maintain access to cheap Arab oil.[15] While there was de facto recognition of the Jewish State in 1949, legal recognition needed to wait until 1990 under the right-wing Mitsotakis government. But the formation of a Turkish-Israeli strategic partnership in the mid-1990s provoked a strong backlash with Athens reverting to its pro-Arab policy.[16]

This policy, too, has changed with the rise of Recep Tayyip Erdoğan and his Islamist Justice and Development Party (Adalet ve Kalkınma Partisi, AKP) in Turkey since the early 2000s. With Athens alarmed by Ankara’s growing regional assertiveness, and Jerusalem disturbed by the new regime’s fiercely anti-Israel approach, Greek-Israeli relations improved rapidly with the two countries signing a string of agreements in the fields of security, energy, trade, and tourism, and exchanging official visits at the ministerial, presidential, and prime-ministerial levels.[17] In March 2012, the air-naval exercise Noble Dina, involving U.S., Israeli, and Greek forces, was conducted in the Aegean Sea while, a month later, a joint Greek-Israeli air exercise was held in central Greece. Most recently, Minister of Defense Panos Kammenos stated that “[Greek] defense planning should take into account friends and allies who seek defense cooperation in the region. And I clearly mean eastward toward Israel.”[18]

Athens’s new Israel policy has been largely unaffected by the frequent change of governments in recent years. The last three prime ministers before the current one – George Papandreou (2009-11), Loukas Papadimos (2011-12), and Antonis Samaras (2012-15) – all met with Israeli officials and concluded agreements, all the more striking given the political and ideological differences among them: Papandreou is a moderate, left-of-center politician; Papadimos is known as a liberal technocrat, and Samaras, a right-wing politician.

In the wake of the economic crisis that has roiled domestic Greek politics and the austerity measures that the EU has sought to impose on Athens, Greeks took to the polls in January 2015 and brought to power the left-wing SYRIZA (Greek acronym of the Coalition of the Radical Left) party, in coalition with the small, right-wing party, the Independent Greeks. This caused considerable alarm in Jerusalem as many senior SYRIZA officials have strong pro-Palestinian sympathies: European Member of Parliament Sofia Sakorafa, for one, is a self-proclaimed friend of Hamas while Prime Minister Alexis Tsipras has participated in pro-Palestinian rallies. In late December 2015, the Greek parliament passed a non-binding resolution recommending recognition of “Palestine” as a state.

And yet, the SYRIZA-led government has not distanced itself from Jerusalem. Foreign Minister Nikos Kotzias identified Turkey as a source of threats[19] while Minister of Defense Kammenos, leader of the Independent Greeks, harbors strong pro-U.S. and pro-Israeli views.[20] In late November 2015, Tsipras visited Israel and, yet again, on January 27, 2016, together with six members of his cabinet when they held a joint meeting with the Israeli government.[21] So it seems likely that the Greek-Israeli partnership will continue.

Athens is seeking bids for an Eastern Mediterranean pipeline to carry Israeli and Cypriot gas to Europe.

Beyond common concerns about Turkey’s intentions, Athens and Jerusalem share significant energy interests. Both countries want to implement the 1982 U.N. Convention of the Law of the Sea (UNCLOS) to facilitate the exploration and exploitation of the seabed;[22] and both maintain that the Eastern Mediterranean could be unilaterally developed through its division into exclusive economic zones of 200 nautical miles. In contrast, Ankara has not signed on to UNCLOS and favors a settlement in the Aegean and the Eastern Mediterranean that would take perceived Turkish interests into greater account.

Moreover, Greece’s location makes it a natural bridge between the energy-rich Eastern Mediterranean, including Israeli fields, and energy-consuming Europe, and Greeks see the country as a hub for bringing Eastern Mediterranean gas to European markets. In March 2014, Athens announced an international tender for a feasibility study of the Eastern Mediterranean pipeline to carry Israeli and Cypriot gas to Europe via Crete and the mainland.[23] While the proposed pipeline would be rather expensive and pass through disputed waters, Russian intervention in the Crimea and eastern Ukraine has given new momentum to the project as the EU looks for alternative sources of natural gas.[24] The European Commission has included the proposed pipeline in its list of “Projects of Common Interests” that could receive financial support.[25]

If Jerusalem and Nicosia decide to opt for liquefaction of their gas resources, then Greek-owned shipping could also play an important role in transporting liquid gas to the international market. During his visit to Israel in November 2015, Tsipras stated,

“One of the main issues in our discussions today was [sic] the opportunities arising in the fields of energy in the Eastern Mediterranean ... We are examining ways to cooperate in research, drilling, and the transportation of gas from Israel to Europe.”[26]

While energy is not the sole factor contributing to the improvement of bilateral relations, it has certainly played a crucial role in the convergence of Greek and Israeli interests in the Eastern Mediterranean.

JERUSALEM AND NICOSIA

The development and exploitation of Eastern Mediterranean energy resources have also given a boost to Israeli-Cypriot relations. Despite geographical proximity, the two countries have largely ignored each other for years. For most Israelis, Cyprus is either the site where Holocaust survivors were forcibly interned by the British (1946-49) as they sought refuge in mandatory Palestine or the closest place where couples unable or unwilling to contract a religious marriage in Israel are able to enter into a civil marriage.

For its part, Nicosia traditionally took a pro-Arab line in diplomatic settings that differed little from neighboring Greece; and just like in Greece, the AKP-induced chill in Turkish-Israeli relations had a warming effect on Cypriot-Israeli relations. In March 2011, Israeli president Shimon Peres hosted his Cypriot counterpart, President Demetris Christofias, who reciprocated this hospitality in November. Both sides came to view each other as potential counterbalances to Turkey’s presence in the Eastern Mediterranean. Cypriot defense minister Dimitris Iliadis signed an agreement on the “Mutual Protection of Confidential Information” in January 2012 with his Israeli counterpart, Ehud Barak,[27] and a month later, Netanyahu paid a visit to Nicosia, the first ever by an Israeli prime minister, to discuss energy and defense cooperation. According to press reports, the Cypriot navy is planning to buy two Israeli-manufactured hi-tech offshore patrol vessels in order to patrol its exclusive economic zone.[28]

The energy dimension of the nascent Israeli-Cypriot relationship is particularly strong. Nicosia has announced plans to build a liquefied natural gas plant in its Vassilikos industrial area to process its gas. Since the current gas finds are not large enough to make this multi-billion dollar project economically viable, Nicosia has suggested to Jerusalem that the two countries pool their gas reserves to form a single producing unit. In 2013, Minister of Energy Yiorgos Lakkotrypis declared:

[W]e feel that through a close collaboration with Israel, we will be able to be a major player in the world energy market, something that might be too hard for each country to achieve individually.[29]

The future of the Israeli-Cypriot partnership will also depend on the export route of the Israeli gas. Jerusalem has examined a number of options for the optimum utilization of its gas fields but probably prefers to export gas westward in order to improve its relations with European countries.[30] From the Israeli perspective, energy cooperation with Greece and Cyprus could build a new web of alliances with the EU that would help Jerusalem to break out of its increasing geopolitical isolation. The Netanyahu government even lobbied on behalf of Greece in Europe and the United States for an economy recovery plan.[31] In late March 2012, during an energy conference in Athens, then Israeli minister of energy Uzi Landau spoke of “an axis of Greece, Cyprus, and Israel and possibly more countries, which will offer an anchor of stability.”[32] In August 2013, the three countries signed an agreement to install a 2000-megawatt underwater electric cable to connect their power grids – the first of its kind to connect Europe and Asia.[33]

Most recently, in December 2015, a series of trilateral consultations was held in Jerusalem in which a set of issues were taken up and discussed, with energy development topping the list. The parties agreed to further promote trilateral consultations and to meet on a regular basis, beginning with a meeting of their heads of state in Nicosia on January 28, 2016.[34]

LEBANON, CYPRUS, AND ISRAEL

While revenues from the sale of oil and gas can bring wealth and prosperity to societies, they also have the potential to upset regional balances of power. In the Eastern Mediterranean, where countries have been locked in conflicts over territory for decades, gas discoveries seem likely to increase the stakes. Contested ownership of gas resources has, in fact, destabilized already strained relations between Israel and Lebanon as well as between Turkey and Cyprus.

Although a delimitation agreement between Lebanon and Cyprus was signed in January 2007, the Lebanese parliament has refused to ratify it to date, and Hezbollah declared the agreement “null and void because the Lebanese side that signed it had its official capacity revoked ... The sea, like land, is a one hundred percent legitimate Lebanese right, and we shall defend it with all our strength”.[35]

When in December 2010, Nicosia signed an agreement with Jerusalem demarcating their maritime borders, Beirut accused both states of violating its maritime rights.[36] The following year, in a televised speech marking the fifth anniversary of Hezbollah’s 2006 war with Israel, the group’s secretary general, Hassan Nasrallah, threatened Israel with a strike against its energy infrastructure:

“We warn Israel against extending its hands to this area and steal[ing] Lebanon’s resources from Lebanese waters ... Whoever harms our future oil facilities in Lebanese territorial waters, its own facilities will be targeted.”[37]

These are not hollow threats. Hezbollah has the military capacity to attack Israel’s offshore gas platforms should it choose to do so. The 2006 war revealed that its vast arsenal of missiles and rockets includes Chinese-manufactured C-802 anti-ship missiles (range 75 miles) and Zelzal-2 rockets (range 125-250 miles).[38] For its part, the Israeli navy is acquiring at least two 1,200-ton patrol-class vessels, along with additional unmanned aerial vehicles and missile-armed, remote-control gunboats.[39] In this way, Jerusalem seeks to deter possible raids from Lebanon. The protection and exploitation of gas reserves is thus seen by the Israeli leadership as a matter of national security.

TURKEY, CYPRUS, AND ISRAEL

The relationship between Turkey and Cyprus is yet another example of a long-standing conflict with few prospects of imminent resolution, and the AKP’s rise to power has only exacerbated the situation.

In Erdoğan’s increasingly paranoid worldview, the possible economic and diplomatic revival of Cyprus as a result of gas development poses a clear and present danger to Turkish national security. In September 2011, Ankara signed a continental shelf delimitation agreement with the “Turkish Republic of Northern Cyprus,” and shortly afterward, the Turkish state oil company (TPAO) started its first drilling near the occupied Cypriot city of Famagusta.

While Ankara has invited foreign companies to explore its Mediterranean coast for energy resources, only the Royal Dutch/Shell has thus far expressed interest.[40] In late October 2014, a Turkish research vessel entered the Cypriot EEZ to collect seismic data. Nicosia viewed this as a violation of its sovereign rights, since it had already licensed parts of its EEZ to foreign energy companies.[41]

Israeli and Turkish officials have recently concluded secret talks about bilateral reconciliation.

The energy factor has also internationalized the “Cyprus Problem,” creating a new point of friction between Ankara and Jerusalem. The Turkish government did not anticipate the rapid improvement of Israeli-Cypriot relations and fears that the bilateral cooperation will not be limited to the energy sector. Even before this development, Erdoğan had threatened Jerusalem over its gas exploration initiatives, warning that while “Israel has begun to declare that it has the right to act in exclusive economic areas in the Mediterranean...[it] will not be owner of this right.”[42] For its part Jerusalem has not remained passive, requesting Cypriot permission for the use of the Paphos air base by Israeli fighter jets.[43] In early November 2015, the two countries conducted the second Onisilos-Gideon military exercise in the western part of the island.

The internationalization of the “Cyprus Problem” extends well beyond the region. Chinese companies have already bid for gas exploration and liquefaction projects in the Eastern Mediterranean and are negotiating an agreement with the Cypriot government to purchase LNG by 2020. Consequently, Beijing has closely followed the Cyprus peace negotiations.[44]

AN ENGINE FOR CONFLICT RESOLUTION?

The Eastern Mediterranean energy boom has helped warm traditionally chilly bilateral relationships between some countries while aggravating already strained relations with others. Can it also become an engine for promoting regional cooperation?

While the last few years have seen a great deal of saberrattling out of Ankara, the likelihood of a military confrontation between Cyprus and Turkey, or Israel and Turkey, seems small. The construction and operation of energy infrastructure (e.g., pipelines, refineries, natural gas plants) is a costly business requiring political stability, and Ankara may not wish to undermine its role as an energy transit state. Indeed, Israeli and Turkish officials have recently concluded secret talks about bilateral reconciliation that covered, among other items, the laying of a natural gas pipeline between the two countries. This would allow Turkey to reduce its energy dependence on Russia (relations with which have worsened following the downing of a Russian fighter jet in November 2015) as well as to open up a new market for Israel’s natural gas projects off its coast.[45]

In addition, Ankara has offered to build a “peace pipeline” to transport Cypriot gas to European markets via Turkish territory.[46] Nicosia has not rejected this plan provided there is a resolution to the “Cyprus problem,” including the reunification of the island and the withdrawal of Turkish troops from the northern section. This bolsters the argument, advanced by the U.S. State Department among others, that gas profits could contribute to the island’s unification as both Greek and Turkish Cypriots would have major additional incentives to accept a peace deal.[47] It is no coincidence that the special representative for regional energy cooperation for the newly-established State Department’s Bureau of Energy Resources is based in the U.S. embassy in Nicosia.[48]

This optimism is rooted in the long-held, liberal view of international relations positing that economic benefits resulting from energy transportation can help resolve political conflicts. Yet if history offers any guide, an economic boom attending hydrocarbons exports can just as often lead to ethnocentrism and economic nationalism as to goodwill and shared prosperity. The production of large quantities of oil and natural gas in the North Sea, for example, has strengthened Scottish nationalism and may eventually lead to Scotland’s secession from the United Kingdom. Likewise, the Clinton administration’s promotion of a “peace pipeline” to carry Azerbaijani oil through the contested area of Nagorno-Karabakh and Armenia to the Turkish market failed because Armenia did not wish to make the necessary territorial concessions to Azerbaijan.[49] Then again, in 2004, Georgian leader Mikheil Saakashvili floated the construction of a Russian-Georgian oil pipeline through the breakaway republic of Abkhazia to facilitate a solution to the Georgian-Abkhazian conflict, only to be rebuffed by both Russia and Abkhazia.[50] The proposed Iran-Pakistan-India gas pipeline had the same fate in 2009 when the Indian government announced its decision not to participate in the project for security reasons.[51]

Evidently, such pipelines have failed to materialize because states were neither willing to surrender territory nor comfortable depending on hostile neighbors in return for possible economic benefits. Those who envisage the prospect of a “peace pipeline” positively affecting the current negotiations between Greek and Turkish Cypriots for the resolution of the “Cyprus Problem” may find themselves seriously disappointed.

CONCLUSION

The new substantial gas discoveries in the Eastern Mediterranean are rapidly transforming regional orientations. Energy interests have brought Israel closer than ever diplomatically to Cyprus and Greece and have played an important role in the apparent thaw in Israeli-Turkish relations. At the same time, energy has generated new tensions between producing countries and countries that feel excluded from the regional natural gas development opportunities. Relations between Turkey and Cyprus as well as between Israel and Lebanon, poor at best, have come under further strain.

U.S. and European interests will be well served by the emergence of the Eastern Mediterranean as a gas-exporting region.

Undoubtedly, U.S. and European interests will be well served by the emergence of the Eastern Mediterranean as a gas-exporting region. However, this will only be possible if there is a resolution to the ownership issue that can accelerate the pace of private investment in the regional gas industry.[52]

Without a region-wide legal agreement, energy companies may not be able to secure the necessary funding to develop and implement gas projects. Washington, which enjoys good relations with all Eastern Mediterranean countries, could act as a broker in hosting multilateral regional talks to defuse tensions and promote mutual understanding between countries in the region.

(Emmanuel Karagiannis is senior lecturer at the department of defense studies, King’s College, London.)

(For footnotes to this article see -- http://www.meforum.org/5877/shifting-eastern-mediterranean-alliances )

All notes and summaries copyright © Tom Gross. All rights reserved.