Friday, December 24, 2010

Israel's Emerging Energy Sector

Guest Column by David Wurmser and Jonathan M. Baron

Even as heads of state and foreign ministers contemplate every development in Israeli-Palestinian negotiations, historians may instead note the coming weeks as the moment when the Jewish State emerged as a noteworthy exporter of fossil fuels. The economic and strategic impact of Israeli energy production could prove far more important than any diplomatic event in recent memory. In the eastern Mediterranean, fewer than 100 miles offshore Israel, a heretofore unexploited energy basin holds the potential to establish the Jewish State as a global model for energy security, resource management, and economic growth.

Wedged between Cyprus and the shoreline from Syria to Sinai, the Levant Basin encompasses approximately 32,000 square miles. The first noteworthy hydrocarbon discovery in the area was made in March 2000 offshore Israel west of the city of Ashkelon. This find, which ultimately was determined to contain about 1 trillion cubic feet (Tcf) of natural gas, encouraged additional exploration. In January 2009, a major natural gas discovery was confirmed at the Tamar field within 60 miles of the northern coast of Israel. Beneath approximately 5,500 feet of ocean and another 10,500 feet of sand and rock, Tamar holds a resource now estimated at 8.4 Tcf, which represents the world’s largest natural gas discovery in 2009. Even at significantly greater consumption rates, the field should supply all of Israel’s domestic natural gas demand for at least 20 years.

Tamar, however, may be only the beginning. At this moment, drilling is underway to explore the Leviathan field, estimated to have a 50 percent probability of holding a gross mean resource of 16 Tcf, or nearly double Tamar, with the results expected by the end of the month. The total, lifetime financial value of Leviathan could exceed the entire current annual budget of the State of Israel. Moreover, Leviathan is only one of many prospects currently being pursued across the Levant Basin, and the majority of those opportunities, as with all of the aforementioned discoveries, are within the equivalent of Israel’s exclusive economic zone. An assessment of the Levant Basin published by the U.S. Geological Survey earlier this year estimated a total mean volume of 122 Tcf of undiscovered, technically recoverable gas resources.

The implications of robust Israeli natural gas development are profound and possibly transformative. First, electricity costs should decrease meaningfully relative to scenarios under which Israel depends on foreign energy sources, including Egypt. Second, inexpensive and reliable natural gas means a lower cost of producing desalinated water, a major concern for Israel. Third, natural gas holds the potential to facilitate and expedite the conversion of Israel’s car fleet to electric vehicles and thereby displace consumption of much more expensive and less secure oil. Fourth, using natural gas for power generation, as opposed to fuel oil or coal, emits significantly lower levels of carbon dioxide, which could carry a high cost if an international agreement puts a price on such emissions. And fifth, if exploration at Leviathan is successful, resulting development would make Israel a natural gas exporter as China and India are experiencing explosive growth and clamoring for energy resources.

These outcomes would act as an historically significant stimulus to the Israeli economy, already considered one of the most dynamic and resilient in the world. In addition, through direct royalties and taxes on production, the government stands to collect tens-of-billions of dollars in unanticipated revenue. Inflows to the government should rise considerably beyond such levels as broad-based economic growth driven by lower energy costs materializes. All of these plausible benefits could make the discovery of natural gas the most important economic event for Israel since 1948.

But the fiscal and broader economic value of significant natural gas production would not be the most lasting or important impact. With the emergence of a true domestic energy sector, Israel could finally mitigate the long-standing risks posed by near-total dependence on foreign energy suppliers. And none too soon. Currently, a substantial portion of Israel’s gas supply comes from Egypt, which faces an impending succession. Moreover, powerful constituencies within Egypt increasingly are calling for an end to normal relations with Israel, of which gas exports are a highly visible example.

Of course, an occurrence of this magnitude creates challenges. Israeli policy makers will need to manage with great care the infrastructure planning process required to support development. Exploration and production companies depend on a stable tax and regulatory environment, which is threatened by rising populism. Energy exports strengthen a currency and can reduce the competitiveness of domestic companies in international markets. Iran’s pursuit of nuclear-weapons capability constitutes a strategic threat that must be addressed for Israel to achieve its full potential.

If Israel maximizes the opportunities presented by offshore energy production, the resulting combination of accelerated economic growth and improved energy security promises to provide Israel with a foundation for unprecedented achievements.

David Wurmser, Ph.D. served as a senior advisor on the Middle East to Vice President Richard B. Cheney. He is the founder and executive member of Delphi Global Analysis Group, a geopolitical risk management firm. Jonathan M. Baron, who formerly held senior staff positions with members of the Republican leadership in Congress, is the founder and president of Baron Public Affairs, LLC, a consultancy specializing in mitigating risks and leveraging opportunities created by government policy. The companies have advised clients on Israel’s natural gas sector.

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