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Gazprom’s Big Score | ASHARQ AL-AWSAT English Archive 2005 -2017
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A general view of the headquarters of Russian gas giant Gazprom is seen in Moscow in this June 29, 2012 file photo.(REUTERS/Maxim Shemetov/Files)

A general view of the headquarters of Russian gas giant Gazprom is seen in Moscow in this June 29, 2012 file photo.(REUTERS/Maxim Shemetov/Files)

A general view of the headquarters of Russian gas giant Gazprom is seen in Moscow in this June 29, 2012 file photo.(REUTERS/Maxim Shemetov/Files)

The mammoth Russia state gas firm Gazprom signed an agreement last week in Israel that not only solidly improves its commercial liquefied natural gas (LNG) strategy, but also looks set to shift the geopolitical balance in the strategic Mediterranean region in the company’s favor.

Under the agreement, Gazprom would have exclusive rights to market about 3 million tons of LNG annually for the next 20 years, equal to about 84 billion cubic meters in total, from the Tamar field. This will be liquefied in situ using expensive floating terminal technology that Gazprom would finance or invest in.

Exports aren’t expected before 2017 and Gazprom has six months to seal the deal. This will inevitably involve a lot of political maneuvering because Israel still hasn’t finalized a regulatory framework for the the development of its two massive discoveries, the Tamar and Leviathan gas fields, with 270 billion cubic meters (bcm) and 450 bcm respectively.

The two are part of the giant Levant basin in the Mediterranean, which Greece and Cyprus also share. The framework, which should be passed by the end of the year, will determine how much of the gas will be earmarked for domestic consumption to improve Israel’s energy security and how much will be exported to lucrative Asian LNG markets.

For Gazprom and Russia, as well as for Israel, the deal makes perfect business and geopolitical sense. The company is aggressively investing worldwide to build its LNG portfolio, both in supplying and trading, which the oil giants Shell and BP are also in the process of doing. Through this deal, Gazprom will be in a better position to supply the lucrative LNG market, which pays as much as $14 per million metric British thermal units (MMbtu), compared to Russia’s $11 MMbtu for piped shipments to Europe, its core market.

“Gazprom has a significant interest in protecting its market share and pricing from new entrant competition, especially in the European market,” said Julian Lee, senior energy analyst in the London-based Center for Global Energy Studies and an expert in Russian energy and gas markets.

“Gazprom wants to be involved because it feels that the most likely and closest market for Israeli LNG is the Mediterranean, and that would undermine its market. By controlling Israeli gas exports Gazprom is limiting the impact on its sales to Europe,” Lee said.

“Europe’s current concern over gas is over-dependence of Gazprom, which is why they are building LNG receiving terminals. That LNG is coming from Qatar, so in shipping distances, Israeli gas would be better.”

Moreover, Russia indirectly improves its leverage and its interests in the strategic Mediterranean and Middle East by broadening its diplomatic ties to Israel. It could also strengthen its position in North Africa, which has been in decline since NATO’S war to depose Muammar Gaddafi of Libya.

Israel can also potentially benefit from deeper relations with Russia. Gazprom has the financial muscle to develop the expensive floating liquefied natural gas (FLNG) projects and the commercial channels to sell LNG to Asia. While it is not the only company in this business, it can bring better geopolitical perks to the table than some of its competitors.

Russia does not want Turkey to become an energy hub, which would make the NATO member a direct strategic competitor and an obstacle to the Kremlin’s ambitions. Israel also worries about Turkey, not just over its more assertive inroads in the broader Middle East, especially in Syria, but more directly over the territorial claims Ankara has in the Mediterranean, namely in relation to Cyprus.

“Cyprus and the complete inability to talk to each other is going to cause real problems in the eastern Mediterranean,” Lee said. “I certainly think that Gazprom brings a big bravado on its shoulder in form of the Russian government. The leverage that could be brought to the table by a European country or an Asian one is much less.”

Stronger ties could also help Israel to prod Russia when it comes to Iran, even if only to a limited extent: “Russia has the most influence externally in Syria and arguably Iran. It can’t do any harm to have them commercially tied in with Israel’s security. Whether the deal is big enough for it to have significant leverage, I’m not sure. It’s a big deal for Israel, but for Russia it would be a fraction of its exports.”

Gazprom, though, has no influence over the ultimate driver of the marriage of interests with Israel, namely the country’s energy security concerns. Israel is running out of indigenous gas reserves, Egyptian imports will inevitably decline, while its domestic demand for energy soars as a result of higher industrial and power consumption.

Along with imports from Egypt, Israel’s main gas sources of natural gas are its Yam field, which is almost completely depleted, and its Mari field, which will also be depleted soon. Egyptian imports are not only jeopardized by pricing and political disputes, but more importantly because Egypt itself is running out of enough gas to simultaneously meet domestic consumption and export contracts.

To improve its energy security, the Israeli government is expected to approve a new regulatory framework by the end of the year to limit how much it will export from its huge new discoveries. A committee estimated that the country will need 450 bcm for the next 25 years, which roughly is the equivalent to about half of the combined production of Tamar and Leviathan.

“There is a clear consensus that excessive delays beyond this year would fail to capitalize on an important economic opportunity, so passage before the end of this year is highly likely,” writes Leslie Palti-Guzman, global gas market analyst of Eurasia Group, a risk geopolitical consultancy.

Overall, if the fields produce as expected, Gazprom’s LNG strategy will receive a huge boost, giving it a bigger share of the growing, lucrative Asian market. Depending on the successful development other ambitious—but often delayed—LNG projects throughout the world, it could verticalize its LNG business.

However, the potential production levels of those fields has recently come into doubt, which could ultimately affect the regulatory ceiling for exports. “There is a question whether that decision will be reviewed because recent exploration hasn’t been as successful,” Lee said.

The forecast of the Eurasia Group is also somewhat cautious, and its analysts state that exports in any form won’t begin before the end of the current decade. But this refers to the future: in the meantime, Gazprom will hang on to the advantage it has secured.