ISRAEL SEEKS TO DIVERSIFY ITS ENERGY SUPPLY TO

UNCLAS TEL AVIV 004703 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ENRG PREL EPET PGOV ETRD IS SUBJECT: ISRAEL SEEKS TO DIVERSIFY ITS ENERGY SUPPLY TO MEET GROWING DEMAND SENSITIVE BUT UNCLASSIFIED -- PLEASE HANDLE ACCORDINGLY. ¶1. (SBU) SUMMARY: IN ORDER TO MEET THE ENERGY DEMANDS OF A GROWING POPULATION AND A RISING STANDARD OF LIVING, ISRAEL WILL NEED TO DOUBLE ITS GENERATING CAPACITY OVER THE NEXT DECADE. IN AN EFFORT TO REDUCE ITS HEAVY DEPENDENCE ON IMPORTED OIL -- 90 PERCENT OF WHICH COMES FROM RUSSIA AND THE FORMER SOVIET UNION -- THE GOI IS DEVELOPING A STRATEGY THAT INVOLVES SHIFTING TO NATURAL GAS AND RENEWABLE ENERGY AS WELL AS PROMOTING ISRAEL AS AN ENERGY TRANSIT STATE. ALTHOUGH DISCOVERIES OF OFFSHORE NATURAL GAS RESERVES ARE PROMISING, THE ISRAEL ELECTRIC CORPORATION (IEC) ENJOYS DISCOUNTED GAS AND STILL RETAINS A VIRTUAL MONOPOLY ON THE NATURAL GAS INDUSTRY, WHICH HAS STIFLED COMPETITION AND DISCOURAGED INTERNATIONAL INVESTMENT IN ISRAEL'S NATURAL GAS MARKET. HOWEVER, IN AN EFFORT TO BOOST COMPETITION AND STAVE OFF A POTENTIAL ENERGY SHORTAGE, THE MINISTRY OF NATIONAL INFRASTRUCTURE (MONI) IS CONSIDERING ESTABLISHING A GOVERNMENT COMPANY THAT WOULD PURCHASE NATURAL GAS FOR THE ENTIRE POWER SECTOR. WHILE MANY IN THE ISRAELI PRIVATE SECTOR BELIEVE THE MOVE MIGHT REIGN IN THE IEC, THE MINISTRY OF FINANCE OPPOSES SUCH GOVERNMENT INVOLVEMENT, AND SEES IT AS A SHORTSIGHTED SOLUTION THAT WOULD DO MORE HARM THAN GOOD. IT IS UNCLEAR WHETHER THE GOI WILL ULTIMATELY IMPLEMENT THIS PLAN. A MORE CERTAIN STRATEGY FOR ISRAEL TO EXPAND AND DIVERSIFY ITS ENERGY SUPPLY WILL INVOLVE ITS PARTICIPATION IN INTERNATIONAL PIPELINE PROJECTS. END SUMMARY. -------------- MORE POWER, LESS DEPENDENCY -------------- ¶2. (U) ACCORDING TO NATIONAL FORECASTS, ISRAEL WILL NEED TO DOUBLE ITS GENERATING CAPACITY FROM SOME 10,000 MEGAWATTS (MW) TO 20,000 MW OVER THE NEXT DECADE IN ORDER TO SUPPLY A GROWING POPULATION ENJOYING A RISING STANDARD OF LIVING. ISRAEL'S ENERGY ECONOMY HAS BEEN BASED ALMOST ENTIRELY ON IMPORTED FOSSIL FUELS, MAINLY CRUDE OIL; HOWEVER, ISRAEL'S MINISTRY OF NATIONAL INFRASTRUCTURE IS DEVELOPING A STRATEGY TO REDUCE ITS DEPENDENCE ON FOREIGN OIL AND DIVERSIFY THE TYPES AND SOURCES OF ENERGY IT EXPECTS TO USE IN ORDER TO MEET FUTURE DEMAND. ¶3. (SBU) OMAR SELAH OF THE MONI FUEL AUTHORITY TOLD ECONOFF THAT ISRAEL IS "AN ISLAND ON ITS OWN" IN TERMS OF ENERGY INFRASTRUCTURE, AND NOTED THAT ISRAEL BUYS 90 PERCENT OF ITS OIL FROM RUSSIA AND COUNTRIES OF THE FORMER SOVIET UNION. HE POINTED TO THE RECENT POLITICAL INSTABILITY IN THAT REGION, SUCH AS THE TENSION BETWEEN RUSSIA AND GEORGIA, AS WELL AS THE SIGNIFICANT PERCENTAGE OF THE WORLD'S OIL RESERVES POSSESSED BY "UNFRIENDLY" COUNTRIES LIKE IRAN, IRAQ, AND VENEZUELA TO UNDERSCORE THE GOI VIEW THAT HEAVY DEPENDENCE ON A FEW SUPPLIERS OF FOREIGN OIL IS "RISKY." -------------- NATURAL GAS COULD BE A NATURAL CHOICE ... -------------- ¶4. (SBU) THE GOI STRATEGY INCLUDES LOOKING TO NATURAL GAS AS AN ALTERNATIVE TO IMPORTED OIL. MONI EXPERTS HOPE THAT IN THE NEAR FUTURE HEAVY INDUSTRIAL PLANTS WILL SWITCH FROM THE USE OF FUEL OIL AND OTHER DERIVATIVES OF CRUDE OIL TO NATURAL GAS, AND FORECAST THAT ISRAELS NATURAL GAS DEMAND WILL SIGNIFICANTLY INCREASE TO 200 BILLION CUBIC FEET (BCF) BY 2010 AND 434.4 BCF BY 2025, WHEN IT IS HOPED THAT NATURAL GAS WILL ACCOUNT FOR ONE-FOURTH OF ISRAEL'S TOTAL ENERGY CONSUMPTION. ¶5. (SBU) PROVEN NATURAL GAS RESERVES OFF THE SHORES OF ISRAEL AND GAZA HAVE BEEN ESTIMATED AT JUST OVER 1.5 TRILLION CUBIC FEET. CURRENTLY, THE ONLY MAJOR DOMESTIC SUPPLY OF NATURAL GAS COMES FROM AN OFFSHORE SITE NEAR ASHKELON OPERATED BY YAM THETYS, A U.S.-ISRAELI GROUP LED BY HOUSTON-BASED NOBLE ENERGY'S SUBSIDIARY, SAMEDAN. JACOB KATZ, GENERAL MANAGER OF DELEK ENERGY SYSTEMS, WHICH ALSO HAS A STAKE IN THE PROJECT, TOLD ECONOFF THAT THE SITE HAS TOTAL PROVEN RESERVES OF 1.13 TRILLION CUBIC FEET OF NATURAL GAS AND HAS AN 11-YEAR US $1.65 BILLION SUPPLY CONTRACT WITH THE ISRAEL ELECTRIC CORPORATION (IEC). IN ORDER TO MEET ITS ANTICIPATED STEEP RISE IN DEMAND, IN AUGUST 2005 ISRAEL SIGNED A 15-YEAR AGREEMENT WORTH US $2.5 BILLION WITH EASTERN MEDITERRANEAN GAS (EMG),AN EGYPTIAN-ISRAELI CONSORTIUM, WHICH WILL ENABLE ISRAEL TO PURCHASE 60 BCF OF NATURAL GAS ANNUALLY AT A LOCKED-IN PRICE OF US $2.75 PER MILLION BRITISH THERMAL UNITS (BTU) TO BE USED BY IEC. (NOTE: ALTHOUGH NATURAL GAS RESERVES HAVE BEEN DISCOVERED OFF THE COAST OF GAZA, BRITISH GAS (BG) AND ITS PALESTINIAN PARTNERS OWN THE LICENSE, AND ONGOING GOI EFFORTS TO ACQUIRE NATURAL GAS FROM BG HAVE NOT COME TO FRUITION. MONI OFFICIALS ADMIT THAT EVEN IF BG SUPPLIES GAS TO ISRAEL, A SHORTAGE IS LIABLE TO DEVELOP AS SOON AS 2018. END NOTE.) -------------- -------------- ... IF THERE IS ENOUGH GAS AND A FUNCTIONING MARKET -------------- -------------- ¶6. (SBU) EXPERTS CONSIDER THE ISRAELI NATURAL GAS MARKET A "FAILURE" DUE TO THE SMALL NUMBER OF SUPPLIERS. FOR MANY YEARS IEC HAS BEEN THE COUNTRY'S SOLE SUPPLIER OF ELECTRICITY, AND ALTHOUGH THE GOI RECENTLY OPENED THE MARKET TO INDEPENDENT POWER PRODUCERS (IPPS),ELECTRICITY IS STILL MAINLY CONTROLLED BY IEC. HEZI KUGLER, THE DIRECTOR GENERAL OF THE MONI, BELIEVES THAT EXPANDING SOURCES OF NATURAL GAS SUPPLY IN THE LONG TERM WILL ENABLE PRIVATE PRODUCERS TO ESTABLISH POWER STATIONS, GENERATE ELECTRICITY, AND POTENTIALLY STAVE OFF AN ENERGY SHORTAGE. THE GOI SUPPORTS A POLICY OF PRIVATIZATION OF GOVERNMENT BODIES AND AIMS TO ALLOCATE UP TO 20 PERCENT OF THE IECS GENERATION CAPACITY TO IPPS. TEN COMPANIES IN ISRAEL HAVE PLANS TO BUILD PRIVATE POWER PLANTS, THE LARGEST OF WHICH IS A US $500 MILLION, 800 MW FACILITY BEING CONSTRUCTED BY DORAD ENERGY. ¶7. (SBU) ISRAEL'S ELECTRICITY MARKET ALSO FACES A POTENTIAL SHORTAGE BECAUSE OF RISING PRICES FOR NATURAL GAS, AND BECAUSE PRIVATE ELECTRICITY PRODUCERS CANNOT COMPETE AGAINST IEC'S GUARANTEED PRICE OF US $2.75 PER MILLION BTU. POTENTIAL PRIVATE SECTOR ELECTRICITY PRODUCERS FACE A MARKET PRICE OF ABOUT US $4 PER MILLION BTU, MAKING IT UNECONOMICAL FOR THEM TO BUILD POWER PLANTS TO COMPETE WITH IEC. ¶8. (SBU) IN AN EFFORT TO HELP PRIVATE ISRAELI COMPANIES COMPETE WITH IEC, THE MONI HAS ADVOCATED ESTABLISHING A GOVERNMENT COMPANY THAT WOULD PURCHASE NATURAL GAS FOR THE ENTIRE SECTOR. SUCH A MOVE, MONI OFFICIALS BELIEVE, WILL ENCOURAGE THE ENTRY OF ADDITIONAL PRIVATE SUPPLIERS, FOSTER GREATER COMPETITION, AND HENCE LEAD TO BETTER PRICES FOR CONSUMERS BECAUSE THE GOI WOULD BRING PURCHASING POWER AND STATE GUARANTEES TO THE TABLE. HOWEVER, THE MINISTRY OF FINANCE OPPOSES GOVERNMENT INVOLVEMENT IN THE NATURAL GAS SECTOR, AND BELIEVES THE MOVE IS A SHORTSIGHTED SOLUTION THAT WOULD HARM COMPETITION IN THE LONG-TERM. AS THE DEBATE WITHIN THE GOI CONTINUES, IT IS UNCLEAR WHETHER THIS INITIATIVE WILL PROCEED. AMIT MOR, CEO OF ECOENERGY ISRAEL, AN ECONOMIC CONSULTING FIRM, TOLD ECONOFF THAT MANY PRIVATE SECTOR FIRMS SEE THE IEC AS "INEFFICIENT," AND WOULD LIKE TO SEE THE "IEC MONOPOLY" BROKEN UP. HE CAUTIONED THAT THE GOI HAS SUFFERED FROM A LACK OF FORESIGHT IN ITS LONG-TERM ENERGY PLANNING, NOTING, FOR EXAMPLE, THAT THE CONSTANT TURNOVER AT THE MONI -- THERE HAVE BEEN 13 DIFFERENT MINISTERS SINCE ITS INCEPTION -- HAS COMPLICATED EFFORTS. -------------- ISRAELS ROLE AS AN ENERGY TRANSIT STATE -------------- ¶9. (U) MONI MINISTER BINYAMIN (FOUAD) BEN-ELIEZER SAID DURING A RECENT CONFERENCE ON ENERGY TRANSIT AT HAIFA UNIVERSITY'S NEW CENTER FOR ADVANCED ENERGY STUDIES THAT THE ACADEMIC AND PRIVATE SECTORS HAVE ALSO BEGUN TO CONSIDER ISRAELS ROLE AS A TRANSIT STATE TO BE AN IMPORTANT COMPONENT OF ITS LONG-TERM ENERGY SECURITY. BEN-ELIEZER SAID THAT INTERNATIONAL PIPELINE PROJECTS COULD TRANSIT ISRAEL AND ALLOW IT TO PROMOTE REGIONAL COOPERATION, GENERATE INCOME, AND BENEFIT FROM NEW SOURCES OF OIL AND NATURAL GAS. ¶10. (U) KAZAKH OIL AND AZERI NATURAL GAS ARE TWO SUCH ALTERNATE SOURCES OF FUEL. KARIM MASSIMOV, DEPUTY PRIME MINISTER OF KAZAKHSTAN, HIGHLIGHTED DURING THE SAME CONFERENCE THAT KAZAKHSTAN HAS ALREADY HELD TALKS WITH ISRAEL ON CONNECTING IT TO THE BAKU-TBILISI-CEYHAN (BTC) PIPELINE. THIS WOULD GIVE ISRAEL THE ABILITY TO IMPORT NATURAL GAS FROM AZERBAIJAN AND OIL FROM KAZAKHSTAN, WHICH LOOKS TO INCREASE ITS ANNUAL OIL PRODUCTION CAPABILITY TO 3.5 MILLION BARRELS OF OIL BY THE YEAR 2015. ¶11. (U) EGYPT AND TURKEY ARE ALSO PROMISING POSSIBILITIES, ACCORDING TO BEN-ELIEZER, BECAUSE EGYPT MIGHT JOIN A 600-KILOMETER PIPELINE PROJECT DESIGNED TO TRANSPORT RUSSIAN AND CASPIAN NATURAL GAS FROM SAMSUN AND CEYHAN IN TURKEY TO HAIFA. A PORTION OF THIS GAS WOULD GO TOWARD MEETING ISRAEL'S NEEDS, AND THE REMAINDER WOULD FLOW SOUTH TO THE EGYPTIAN EL ARISH FACILITY, WHERE IT COULD BE LIQUEFIED AND MARKETED WORLDWIDE. MEHMET ALI BAYAR, A FORMER DIPLOMAT AND TURKISH POLITICIAN, SUGGESTED THAT TURKISH-ISRAELI COOPERATION IN THIS AND SIMILAR ENERGY TRANSIT PROJECTS COULD HELP COUNTER GAZPROM'S MONOPOLISTIC BEHAVIOR AND RUSSIAN POLITICAL PRESSURE. ¶12. (SBU) COMMENT: AS PART OF ISRAEL'S STRATEGY TO REDUCE ITS DEPENDENCE ON OIL, THE GOI ENVISIONS THAT FUTURE POWER PLANTS WILL UTILIZE COMBINED CYCLE GAS TURBINES FUELED BY NATURAL GAS. THOUGH ISRAEL IS LIKELY TO CONTINUE IMPORTING RUSSIAN OIL AND EGYPTIAN NATURAL GAS, THE ABILITY TO TAP INTO OTHERS' PIPELINES IS VITAL TO ITS EFFORTS TO EXPAND AND DIVERSIFY ITS ENERGY SUPPLY. SUCH CHANGES IN THE ENERGY SECTOR ARE STILL IN THEIR INFANCY -- AN ADVANTAGE FOR U.S. ENERGY COMPANIES LOOKING FOR BUSINESS OPPORTUNITIES IN ISRAEL. HOWEVER, IF ISRAEL CANNOT RECTIFY THE UNSUSTAINABLE IEC MONOPOLY ON DISCOUNTED NATURAL GAS, THE LOCAL ENERGY MARKET IS NOT LIKELY TO ATTRACT PRIVATE INVESTORS. END COMMENT. ********************************************* ******************** VISIT EMBASSY TEL AVIVS CLASSIFIED WEBSITE: HTTP://WWW.STATE.SGOV.GOV/P/NEA/TELAVIV YOU CAN ALSO ACCESS THIS SITE THROUGH THE STATE DEPARTMENT'S CLASSIFIED SIPRNET WEBSITE. ********************************************* ******************** JONES