Gas sector?

Note: this was written in 2015

What is currently not a driver of the Israeli economy is export-based trade of natural resources. Historically, given its small size and not ideal location, Israel was not been blessed with raw materials or naturally occurring resources in abundance. However, this is potentially about to change, with the discovery of large natural gas reserves offshore which would, if extracted, turn Israel into a net exporter.

Whilst Israel had been extracting gas from the Mediterranean since 2004, large discoveries were made with the Tamar field in 2009 (approximately 10 trillion cubic feet) and the Leviathan field in 2010 (approximately 19 trillion cubic feet). Israel’s choice of partnering with certain energy companies such as Woodside Petroleum, that have significant experience with exporting liquefied natural gas (LNG), indicates a wish to export large quantities of gas through shipments.

The large quantities of natural gas could make Israel a net exporter, and the demand is such that contracts are already being drawn out. With increased natural gas revenues, Israel may decide to use the rents to invest more in the domestic economy or create a sovereign wealth fund – this would make the gas sector a definitive driver of Israeli development.

Another consequence of the new gas fields could be an increase in production costs of heavy industry, through switching from heavy fuel oil to gas. As energy is a cost of production, this could increase Israeli competitiveness – which together with its high skilled workforce and innovation could give a new breath of life to Israeli manufacturing.

However, gas is still not a given, as the earliest the Leviathan will be able to produce gas domestically is estimated to be around 2019. Additionally, concerns over regulatory risk have threatened development and exploration for new gas field in Israeli waters whilst Leviathan faces challenges onshore:

“Leviathan . . . will be developed, but with the regulatory challenges they have put in the last three to four years, they have killed the industry”

Nonetheless, according to the OECD Secretary General, the gas industry had already generated around one percentage point of growth for Israel – the same one percent that put Israel above the global average for annual growth.

Israel has the potential to be a major gas importer and use the rents gained from this to further stimulate its development. With two significant gas fields recently discovered – Tamar and Leviathan – Israel needs only to exploit this. Israeli natural gas will become a driver of the Israeli economy, but there is a chance that this may happen later rather than sooner.

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