In the past decade, Israel as well as other countries in the eastern Mediterranean have discovered significant gas reserves in their respective waters. Much speculation has been around what are the options for the development of these gas fields in order to maximise benefit to the state and citizens.
A lot of this debate has centered around the proportion of gas that can be exported vs what is for domestic use, however to better understand the value of exporting the gas in the market, it is worth considering issues of supply and demand that exist today and which are projected for the next while.
The market for natural gas is divided in three with three different price points, because gas is not easily moved like oil and therefore the market can be segmented.
The first is very cheap unconventional gas extracted from shale rock in the North America.
The next is the European market which is supplied by pipeline gas largely by Russia’s Gazprom, as well as some supplies coming from north Africa and Norway. The market price for this gas is higher than shale gas from the USA, as it comes via long pipelines built in the Soviet era that run across Europe.
The last and most expensive market is the Liquified Natural Gas (LNG) market in Asia, which is costlier because of the price of liquifaction and regasification required to tranport it as a liquid. In this market, the biggest consumer is China, and the major suppliers are Qatar and Australia.
For Israel, the markets to consider would be the last two, of Europe and Asia. However it is important to understand just how Israel’s reserves compare with those of the existing suppliers and the demand there.
In order to supply Europe, a pipeline would have to be built in order to compete in that market of pipeline gas. This is a huge cost and the quantity of Israel’s gas is not large enough to meaningfully supply Europe, despite its best wishes to diversify from Russia.
To illustrate, all of Israel’s gas reserves does not equal 1 trillion cubic meters, whereas Russia’s massive gas fields in the Urals have over 47 trillion cubic metres. In fact, Israel comes in at number 29 in the world in terms of gas reserves, well behind the market leaders such as Qatar, Iran, and the USA. So although the fields are large enough to supply Israel for many years, in terms of global demand and markets, it is not in a position to make any significant change.
The only option it has for export on its own is in smaller regional markets, such as Jordan. However whilst Israel may not have a globally significant gas reserve, if further gas finds take place in the East Mediterranean, it could partner with freind and foe alike to supply Egypt which could then consolidate the gas from Israel, Cyprus, (eventually) Lebanon and its own reserves, to secure enough supply to be liquified and sent to the Asian market as a small player. Alternatively if Europe is willing to pay more to diversify its supply, it could be sent there.
Another option would be to pipe the gas from Egypt to nearby Algeria which already has pipelines to Europe, making the price more competitive than LNG, and a real and economically viable option for Europe.
What comes out is that the Eastern Mediterranean countries would need to make themselves into a consortium headed by Egypt in order to make their gas reserves marketable and relevant. This would be good for regional stability and also to take the pressure off the domestic market as they would not have the burden to export so much of its reserves on its own, allowing for low energy prices as well as export profits for years to come.