Don’t Expect an Israel-Turkey Pipeline Reply

The relationship between Israel and Turkey has enough ups and downs as it is, and a pipeline for liquid natural gas is liable to create more downs than ups.

By: Nicholas Borroz

There is increasing hope that a full rapprochement will develop between Turkey and Israel, and that relations will once again be normalized (for further information, see the Al-Monitor article here).  As a result, there is speculation that Israeli natural gas will be exported through Turkey via pipeline on to other markets.  Such an export route is unlikely.

With good reason, Israel perceives itself to be surrounded by, at worst enemy states, and at best allies of convenience.  Keeping this in mind, consider the implications of an Israeli gas pipeline to Turkey.  If such a pipeline were built, Israel would become extremely dependent upon Turkey in order to get its gas to world markets.  That is unless Israel were to simultaneously build other export options such as pipelines to Cyprus or its own floating LNG (FLNG) facilities near the offshore fields.  But it will choose just one project because they are all prohibitively expensive.

It’s true that Israel’s new dependence on Turkey would be somewhat mitigated because Israeli in turn would gain leverage over Turkey; a new pipeline would help Turkey to wean itself off of dependence on Russian gas.  Turkey, however, would still be the dominant negotiator in the relationship:  nearly all of Israel’s exports would travel through Turkey while only a minority of Turkey’s imports would come from Israel.  The market power would be in Turkey’s favor.  Additionally, once built, Turkey might be tempted to increase rents for gas passing through a pipeline in its territory, another constraint for Israel.

If the pipeline were built, Israel would also be locked into exporting the gas to make up for the costs involved in building such a large energy infrastructure project.  Some experts fear that exports would result in current account surpluses, a shekel appreciation, and an overall decrease in exports, all the while requiring more security expenditures to protect the new infrastructure.  Those factors would spell future fiscal dilemmas for Israel.  This, along with a desire for energy independence, is one of the driving factors behind the push in Israel to restrict gas exports.

What makes much more sense is for Israeli to develop an LNG facility to export its gas.  This would allow Israel greater strategic flexibility; it could export the gas to a variety of locations and not be locked into a limited number of set destinations accessible via pipeline networks.  Particularly Asian markets would be attractive, given that selling prices for gas there are significantly higher than in Europe.  It’s important to note that costs of LNG transportation only become competitive with piped transportation of gas over distances of thousands of miles, disregarding selling price differentials.

If Israel were to build an LNG facility, it would prefer to build an FLNG facility near its offshore fields.  This would allow it to be independent and not rely on another country’s LNG facilities (sorry Cyprus), and it would also be cheaper than an onshore LNG facility.  According to publicly available information, an FLNG facility would cost between $3 and $4 billion.  On the other hand, onshore LNG facilities in either Israel or Cyprus, would cost between $7 and $15 billion, according to press articles.  The higher costs are likely due to the fact that the FLNG would have a lower capacity and no expensive underwater pipelines would be required to connect the fields to the onshore LNG facilities.

On many levels it appears to make sense for Israel to export gas to Turkey, particularly considering the prospects for normalized relations, the fact that Turkey is looking for gas, and Israel’s likely future excess of supply.  However, a gas pipeline between the two countries is unlikely.  Building a pipeline would force Israel to become dependent on Turkey, limit its export destinations, and potentially face future fiscal dilemmas as a result of gas exports.

Nicholas Borroz is an independent analyst of energy geopolitics with a focus on oil and gas transportation infrastructure.  You can reach him on Twitter (@Nborroz) or on his blog (nicholasborroz.wordpress.com).

 

Photo credit: Flickr Commons, Shell

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