War on Gaza: How Israeli LNG exports could weigh in heavily

The outcome of Israel’s war against Hamas in Gaza depends on several factors. One of them concerns Israel’s liquefied gas (LNG) exports. A crucial issue that often goes below the radar.

While from the above it is abundantly clear that Israel is using its energy exports to the regional market to contain the conflict from escalating beyond the Middle East, Iran and Moscow’s entry into the theatre is likely to likely to complicate its designs… ©ByTheEast

The Middle East, the epicenter of the conflict that has arisen between Hamas and Israel, is home to a substantial share of the world’s confirmed oil reserves. The region is pivotal to the worldwide energy markets due to its significant contributions as a leading exporter of oil and natural gas. It is not only responsible for 31% of the global oil production, but is also home to 18% of the global LNG output, 48% of the established global oil reserves, and 40% of the confirmed global gas reserves.

These figures only go to underscore the strategic importance of the Middle East in the global energy landscape.

Hamas-Israel Conflict

On October 7, 2023, the region saw a major escalation in conflict wherein Hamas launched attacks on Israeli settlements near the Gaza Strip, which in turn led to an Israeli military retaliation, which has since then quickly escalated into a full-fledged air and ground war within Gaza, resulting in unprecedented number of casualties on both sides.

The ripple effects of this conflict were almost instantly in Israel’s offshore gas industry. Just two days after the Hamas offensive, the Israeli Ministry of Energy directed Chevron, the operator of the field, to temporarily suspend operations at the Tamar field. Tel Aviv took this precautionary measure given its geographical proximity to the Gaza Strip: the platform is situated 25 kilometers to the northwest of the strip and 20 kilometers from the Israeli port of Ashkelon. It is vulnerability to potential rocket attacks from Hamas.

As a result, while some the LNG export to Egypt via the offshore East Mediterranean Gas (EMG) pipeline was halted, however, some of these exports were redirected through Jordan.

Israeli gamble – contain conflict to minimize fluctuation in prices

Israel’s rise as a significant player in the gas sector has been somewhat under the radar, primarily because its value chain is regionally confined. It lacks direct connections to global gas markets, with its only indirect link being through its gas exports to Egypt, which form part of Egypt’s supply mix and thus bolster Egyptian LNG exports.

Gas has become a critical component of Israel’s domestic energy mix. In the past, Israel was entirely reliant on imported fuels. However, with the development of its own gas resources and, to a lesser extent, renewables, the security of supply has undergone a significant transformation. It is now nearly 50% self-sufficient in terms of energy resources. The proportion of gas in the domestic mix is relatively high at 44%, compared to the EU average of 24%.

It is in Israel’s interest to contain the impact of its ground offensive into the Gaza Strip and the subsequent response from OPEC so as to not unhinge gas prices. If the conflict remains confined without impacting major oil producers or transit routes, its immediate impact on the fluctuations in LNG prices is expected to be minimal, leading OPEC to uphold its current production quotas. On the other hand, if the region experiences instability without directly affecting key oil sources or routes, speculative movements in the oil market may emerge, prompting OPEC to contemplate augmenting production to ensure price stability.

Energy supplies could be at substantial risk if the conflict extends to other nations or disrupts crucial passages such as the Strait of Hormuz. Such an event would necessitate OPEC to ramp up production or collaborate with non-OPEC oil producers to preserve market equilibrium. If the conflict intensifies to involve entities like Hezbollah or Iran, OPEC’s interventions will become increasingly vital, especially if this escalation is coupled with more stringent US sanctions on Iranian oil exports

Geopolitical implication – Energy Export Leverage

Israeli’s move to interrupt and reroute natural gas volumes through an alternative conduit via Jordan is significant geopolitical move since it caused a nearly 20% drop in Egypt’s daily gas imports. According Osama Kamal, Egypt’s former Petroleum Minister, Israel is strategically flexing its position as a gas exporter to exert political pressure on Egypt, with the aim to influence the handling of the Gaza Strip crisis.

Egypt, which produces approximately six billion cubic meters of natural gas daily and imported a similar amount from Israel last year, utilizes these gas volumes to power its national grid. The surplus volumes are liquefied and exported, contributing to foreign currency revenue.

However, domestic energy demand in Egypt is on the rise. This past summer, the government faced an energy shortfall as the load on the national grid exceeded the capacity of existing fuel reserves. Consequently, a load reduction plan was implemented in July, which, three months later, is still in effect, with daily power outages of an hour or more impacting households across the country.

The Israeli government’s decision to suspend production from the Tamar field led to a nearly 19% decrease in the volumes of Israeli gas export to Egypt, dropping from 800 million cubic feet per day to 650 million.

According to Kamal and Mohamed Saad, the head of the Gas Investors Association, the temporary production halt at Tamar will primarily impact the revenues Egypt earns from gas transiting its national grid and from liquefaction fees at the Damietta and Idku stations.

Following Chevron’s decision to cease deliveries via the East Mediterranean Gas Pipeline to Egypt and reroute them via the Arab Gas Pipeline, Kamal suggested that these decisions carry political ramifications and serve as leverage over Egypt.

Egypt’s Dilemma

With an LNG demand of approximately 61 Bcma, constituting a substantial 60% of the its energy demand, Egypt stands as the predominant gas market in the region. Its gas balance has been volatile, frequently oscillating between surplus and deficit.

In 2023, Egypt transitioned into a gas deficit.

In recent years, the volume of gas imports from Israel has nearly tripled, rising from 2.2 Bcm in 2020 to 6.3 Bcm in 2022. The majority of these imports have been transported via the EMG offshore pipeline, which was initially constructed to facilitate the export of Egyptian gas to Israel and functioned as such from 2008 to 2012. However, the pipeline’s direction has since been reversed, and in 2022, it transported 4.6 Bcm to Egypt. The remaining exports from Israel to Egypt were routed through Jordan.

Of note, despite being an offshore pipeline, the EMG runs parallel to Gaza. It was shut down in October 2023.

Egypt operates two LNG plants: the Idku’s ELNG project with a capacity of 7.2 MTPA (operated by Shell) and Damietta with 5.0 MTPA (operated by ENI). In 2022, the combined output was 7.2 million tons, with approximately 70% of these exports directed to Europe and Turkey. At the onset of 2023, Egyptian minister of Petroleum and Mineral Resources Tarek el-Molla projected that LNG exports would maintain similar levels at around 7.5 Mtes. However, this prediction proved to be significantly off the mark as export levels experienced a sharp decline. During the summer months, LNG production was virtually non-existent, leading to an annual export volume that could potentially fall below half of the 2022 volume.

Given the significantly reduced export levels, Egypt has transitioned into a net importer of gas in 2023, primarily through pipeline imports from Israel. The country finds itself in the midst of an unfortunate convergence of circumstances, with a decline in production and a surge in demand.

In the first half of 2023, Egyptian gas production saw a sharp decrease, and fell by by 9% largely due to issues at the Zohr offshore field resulting from water infiltration in the reservoir. With a concurrent increase from domestic demand, driven by a particularly hot summer that led to widespread power outages, the Egyptian government prioritized supplying the domestic market, leading to a strategic reduction in LNG exports.

This policy adjustment served as a critical lever in managing its energy crisis, limiting its regional play in the energy market.

The Lebanese Angle

The maritime boundary agreement inked between Israel and Lebanon in October 2022 marked a pivotal shift in their bilateral relations. Amidst Lebanon’s economic and political turmoil, the prospect of natural gas exploration in its waters emerged as a compelling incentive to coax Hezbollah into endorsing the pact. The agreement was perceived as a significant stride towards alleviating the tense relations between the parties and potentially laying the groundwork for future energy and economic collaborations.

However, the validity of this assumption is currently being put to the test in the wake of the events on October 7. Although it seems that Hezbollah was taken aback by Hamas’s attack, the organization swiftly mobilized to support “its Palestinian brothers” in the spirit of “the unity of the arenas.”

Hezbollah has been navigating the conflict with calculated restraint, adhering to a set of “rules of the game” recognized by both itself and Israel. Meanwhile, the United States has expressed its opposition to any broad-scale escalation.

In line with Washington’s endeavors to avert escalation on the northern front, covert dialogues have been intensively conducted in recent weeks between Israel and Lebanon/Hezbollah concerning disputes related to their land border and energy matters. To facilitate these negotiations, the Americans have enlisted the services of Special Envoy for Energy Affairs Amos Hochstein, who played a key role in mediating the original border agreement signed in October 2022.

Ibrahim al-Amin, Al-Akhbar’s editor, a pro-Hezbollah newspaper, highlighted the indirect link between Hochstein and the residents of Beirut, in relation to France’s TotalEnergies’ renewed drilling activities in Lebanese waters and the ongoing negotiations with Israel. The report suggests that Hochstein conceded that the halt in energy operations is politically motivated.

He also indicated that TotalEnergies intends to undertake further drilling in Block 9 as well as in Blocks 8 and 10, subtly implying that these activities will remain on hold as long as the conflict persists. Additional reports propose that American aid for the revitalization of Lebanon’s energy sector is being put forth as a prerequisite for deescalating the hostilities against Israel.

The U.S. perspective that Hezbollah’s influence can be tempered through the Lebanese energy sector is predicated on the escalating energy crisis in Lebanon, which has deteriorated since the signing of the 2022 agreement. Currently, Lebanon’s national electricity company, Electricité du Liban (EDL), can only supply around four hours of power daily to Beirut’s inhabitants, with no immediate prospects for improvement.

Lebanon’s electricity demand is approximately 3,500 megawatts, but its oil-dependent power plants can only generate around 1,800 megawatts. Lebanon has attempted to import electricity from Turkey via generator-equipped ships docked in Beirut’s port in recent years. However, these efforts were halted due to mounting debts and security concerns. An attempt was made last year to import electricity from Jordan, which would utilize Israeli natural gas, but the deal encountered obstacles due to U.S. sanctions on Syria, which is part of the electricity grid’s route from Jordan to Lebanon. Even if this deal were to come to fruition, the grid connections would only meet about 10% of Lebanon’s electricity needs. Consequently, many Lebanese who can afford it are dependent on privately owned solar-powered generators. Approximately 50,000 households, or about 4% of Lebanon’s 1.3 million households, have installed solar panels on their roofs.

Despite the Lebanese government’s optimism about offshore gas exploration, the country’s energy security is unlikely to improve in the coming years. This is because Lebanon’s energy sector is entirely dependent on imported oil for electricity generation, transportation, heating, and industry. Even if Lebanon were to discover gas in its waters this year, the country lacks the necessary gas infrastructure and gas-capable power stations.

Moreover, while TotalEnergies’ initial drilling in October 2023 did not yield promising results, a successful gas discovery in subsequent drilling would not provide an immediate solution to Lebanon’s energy crisis. It would take between five to seven years following a gas discovery for Lebanon to start reaping the benefits of export revenues or local gas usage, as the necessary infrastructure would need to be constructed from the ground up.

Cash is King – Israel had roped in Hamas in gas deal

The Israeli administration, with the approval of Prime Minister Benjamin Netanyahu and Defense Minister Yoav Gallant, is reportedly engaged in confidential negotiations with the Palestinian Authority (PA) to extract gas from the Gaza Marine field, located off the Gaza Strip’s coast, said regional sources suggesting that the Israeli government initiated internal deliberations about the gas field, situated 36km off the Gaza coast in the Mediterranean, following its establishment in late 2023.

The discussions have been revived as part of a recent political and security initiative between Israel and the PA, facilitated by the U.S., the sources report. The development and preparation of the Gaza Marine field for gas extraction were central to the discussions held during meetings in Aqaba and Sharm El-Sheikh.

These discussions involved Palestinian and Israeli security and political officials and were overseen by the U.S., with Jordan and Egypt also reportedly participating.

The Israeli delegation is headed by Tzachi Hanegbi, the Israeli National Security Council’s chief, and Ghassan Olyan, the coordinator of government operations in the occupied territories. The sources suggest that Israel views this step as economically beneficial for the Palestinians, potentially reducing long-term security tensions. However, they add that any gas extraction from Gaza Marine would require Israeli approval.

The sources also mention “complications” raised by the Israeli side, asserting that only states have the legal right to manage gas fields. The proposed solution to this deadlock is for Egypt to sponsor the gas extraction project, as the PA cannot undertake it independently, according to the Israelis.

Israel has reportedly informed the PA and the U.S. and Egyptian sides of the resumption of internal Israeli discussions on the matter through various channels. Despite some Palestinian skepticism, the Egyptian and U.S. sides support the project.

The Palestinians claim ownership of the Gaza Marine field, discovered in the late 1990s. However, gas has not been extracted from it due to Israel’s refusal of Palestinian requests to exploit it.

Sources suggested that there are “security challenges” associated with completing the project. According to an Israeli assessment, “Hamas will not remain passive, so the key question is how to develop” the gas field. There is also an Israeli concern that any such step may incite public criticism.

The field was initially developed in 2000 by British Gas, which subsequently transferred it to Royal Dutch Shell, which left in 2018. The field’s reserves are estimated at 1.1 trillion cubic feet of natural gas, or 32 billion cubic meters, equivalent to an annual production capacity of 1.5 billion cubic meters for 20 years.

In October 2023, a well-informed Palestinian source denied any Egyptian-Palestinian-Israeli agreement to extract gas from the Gaza Marine field. Source also stated that the consultations at that time were between the Palestinians and the Egyptians, without Israeli participation, as “we will not pay Israel to extract what belongs to us. This is unacceptable… and what is required of Israel is only not to obstruct the work.”

The Palestinian government had formed a ministerial committee to liaise with the Palestinian Investment Fund to finalize an agreement with Egypt to finance and operate the field. The gas extraction project is a crucial strategic plan for the PA, which has been grappling with a severe financial crisis since November 2021.

While from the above it is abundantly clear that Israel is using its energy exports to the regional market to contain the conflict from escalating beyond the Middle East, Iran and Moscow’s entry into the theatre is likely to likely to complicate its designs…