The Russian press reported at the end of last week that Russia was seeking to enter the Israeli natural gas industry, following a meeting in Russia last Thursday between Russian President Vladimir Putin and Prime Minister Benjamin Netanyahu.
It is believed that Putin wants to take part in the development of the Leviathan gas reservoir. This was not the first time that Russia has tried to strengthen its foothold in the Middle East through control of gas reservoirs. In February 2013, Gazprom, the Russian state-controlled (50.1%, with 49.9% owned by private and other investors) national gas company, signed a memorandum of understanding to buy gas produced from the Tamar reservoir through a floating liquefied natural gas (FLNG) facility. Gazprom agreed to buy three million tons of LNG a year, amounting to 4.1 BCM. The project was never implemented, among other things because the Minister of National Infrastructure, Energy, and Water Resources never approved the export project.
Russia did not give up, however. Gazprom negotiated for several months to buy up to 30% of the Leviathan reservoir. The initiative to recruit a strategic partner in the rights to the reservoir originated in the realization by the current partners that they lacked the financial capability, know-how, and connections needed to realize the huge reservoir’s potential as soon as possible. According to reports, other companies that expressed interest in a partnership in Leviathan included South Korean company Kogas, Chinese company CNOOC, and Australian company Woodside. Gazprom has apparently submitted the highest bid.
However, while the Israelis, led by Yitzhak Tshuva’s Delek Group Ltd.(TASE: DLEKG), were enthusiastic about the possibility of the giant Russian company joining the Leviathan partnership, the US partner – Noble Energy – objected, preferring a Western partner, even on terms slightly inferior to those offered by Gazprom. Indeed, Woodside is the company with which the final negotiations took place, but it withdrew at the last minute, and no contract was ever signed.
Now that the Israeli gas industry is in its poorest position in a long time (dependent on a single reservoir, with the gas plan having stalled, a global gas glut, and plunging global oil prices), it appears that Putin is trying his luck again. Russia’s oil and gas revenues account for 50% of the country’s income (45% from oil and 5% from natural gas), but for Putin, a stake in an Israeli gas reservoir is a strategic-geopolitical issue, not an economic one.
Russia supplies 35% of Europe’s gas and 55% of Turkey’s, and both of these gas consumers are desperately seeking to diversify their sources of supply. Israeli gas flowing from Leviathan through a pipeline to Turkey, and from there to Europe through another pipeline, is one of the most feasible options. One of Israel’s main concerns is therefore that Russia’s primary aim is to forestall the development of Leviathan in order to prevent competition with Russian gas, or if it is developed, to make sure the gas is not sold to Turkey or Europe. Another concern is that Russian involvement in Israel’s gas reservoirs could prove the perfect excuse for the entry of Russian warships in order to “protect” the gas drilling platforms.
Of course, a partnership in Leviathan with the Russian energy giant also has advantages. Gazprom has professional capability in the development and export of gas reservoirs, the financial ability to raise its share of the financing needed to development the reservoir, and a market of customers – or the ability to ensure an off-taker customer. Either way, Israel must think twice about the consequences of such a partnership, which it is difficult to believe that the US will welcome.