Palestinian Natural Gas Ambitions

By Simon Henderson*

Most of the natural gas (about 40 tcf) found so far in the Eastern Mediterranean’s Levant Basin has been in Israel’s Exclusive Economic Zone (EEZ), with a small amount offshore Cyprus, but one of the earliest discoveries, in 2000, was offshore the Gaza Strip. The exploitation of this discovery, the Gaza Marine field (1 tcf), could provide more reliable electricity to the Gaza Strip and boost the revenues of the Palestinian Authority (PA) in the West Bank.

Gaza Marine is the single largest Palestinian economic asset – though earlier this year the PA also invited tenders to explore for oil in an area of the West Bank from just north of Qalilya to the west of Ramallah.

Prospects for discovering oil in commercial quantities there seem slim but meanwhile development of Gaza Marine remains elusive – the latest setback occurred in March when news of reconciliation between the PA and Hamas in the Gaza Strip reportedly prompted the Israeli government to withdraw from talks on its development.

‘GIFT FROM GOD’

A 25-year exploration license for the marine area off the Gaza Strip was awarded by the PA in 1999. The license is held by the BG Group (formerly, British Gas), with 90%, and the Athens-based Consolidated Contractors Company (CCC), with 10%. Under the terms of the license agreement, CCC and the Ramallah-based Palestine Investment Fund (PIF) have options to increase their ownership to a combined 40% of the license at the development stage.

BG Group is the operator of the license and discovered the Gaza Marine field about 36km offshore in water about 600ms (2,000ft) deep. A second successful well was drilled in the same year to confirm the size of the field at around 1 tcf. In September 2000 – on the eve of the Second Intifada - Palestinian leader Yasser Arafat stood on a fishing boat circling the offshore exploration platform as a huge flame of the gas shot into the air. He declared it was “a gift from God to us, to our people, to our children. This will provide a solid foundation for our economy, for establishing an independent state with holy Jerusalem as its capital.”

Initial proposals for exploiting the gas included selling it to Egypt where it could be converted into liquefied natural gas (LNG) for export, although the price of the gas was not agreed. The Israel Electric Corporation (IEC) also expressed interest in buying the gas but, again, the price was an issue.

In 2001, a technical review recommended the development of the field and a pipeline to an onshore processing terminal. In 2002, the PA approved an outline development plan. In 2005 and 2006, BG Group favored the option of sending the gas from Gaza Marine to the Idku LNG plant, partly owned by BG Group, on Egypt’s Nile Delta.

This range of options was acceptable to the PA, which took the view the Gaza Marine gas did not have to be used in the West Bank and Gaza Strip. A so-called “molecule swap” or “electron swap” was acceptable. The main anxiety of Palestinian officials was that the gas should not be sold “cheaply” – an often difficult concept, considering there is no international price for natural gas, though there are benchmarks.

The level of international diplomatic interest in the development of the field increased in 2013 with both the East Jerusalem-based Office of the Quartet Representative, led by former British Prime Minister Tony Blair, and US Secretary of State John Kerry focusing attention on the positive aspects of Palestinian economic development. Indeed, in October 2013, an unnamed Israeli official was quoted as saying that Prime Minister Binyamin Netanyahu’s government was “very supportive” of the project.

RESOURCE POOR

The Palestinian territories of the West Bank and Gaza Strip produce neither oil nor natural gas. US Government figures, as reported in the CIA World Factbook, estimate electricity consumption in 2010 in the West Bank as being 4.573bn kilowatt-hours. The equivalent figure for the Gaza Strip, but for 2009, is given as 202,000 kilowatt-hours. The 2010 estimated figure for Israel is a comparatively huge 48.73 billion kilowatt hours. In terms of electricity installed generating capacity, the CIA World Factbook gives a figure for the West Bank of 140,000 kilowatts, but notes this figure includes the Gaza Strip. In fact, the 140,000 kilowatts figure is the installed capacity for the single power plant in the Gaza Strip. The West Bank itself has no power plant.

The US Energy Information Administration (EIA), part of the Department of Energy, says in its May 2013 Country Analysis Note for the Palestinian Territories that: “In 2010, the Palestinian Territories generated only 445mn kilowatt-hours (KWh) of electricity, enough to meet just 10% of demand.” Electricity imports, mainly from Israel, accounted for the remaining 90% of demand. This imbalance will only have widened since then.

The result is that the Palestinian areas of the West Bank are almost wholly dependent on the Israel Electric Corporation (IEC) for the supply of electricity. The Gaza Strip’s dependence is lessened by the electricity generated from the Gaza power station. Two minor exceptions have been that the West Bank city of Jericho is connected to the Jordanian grid as well as the Israeli grid, and the Gaza Strip city of Rafah has been linked to the Egyptian grid. Supplies of electricity from Jordan to Jericho have been disrupted by interruptions in the flow of Egyptian natural gas to Jordan, caused by pipeline sabotage in Egypt’s Sinai region.

INVESTMENT CRUCIAL

The electricity distribution system in the West Bank requires substantial investment to cope with expanding demand. In January 2014, the three Israeli companies with a share in Israel’s Leviathan field (Avner, Delek Drilling and Ratio) announced that the Palestine Power Generation Company (PPGC) had agreed to buy $1.2 bn worth of natural gas over a 20-year period when the giant field begins production. The Leviathan gas would fuel a new $300mn, 200MW (though some reports say 300MW) power plant planned for construction near the city of Jenin in the north of the West Bank. The Jenin power station would take between two and two and a half years to come into operation, a time period compatible with plans for the Leviathan field coming onstream in either late 2016 or early 2017.

The distribution system in the Gaza Strip is even more in need of investment. In 2007, the World Bank estimated losses during distribution to be around 25%. An equivalent figure for Jordan was half this and for Israel it was around 3%.

The Gaza power plant started operations in 2002. Although it has a capacity of 140MW, it has been operating at around only 70MW. In 2006, the plant was damaged by an Israeli air strike after militants linked to Hamas had kidnapped the Israeli soldier, Gilad Shalit. By December 2007, it had been repaired and its capacity was 80MW. An additional 120MW is supplied from the Israeli grid and, since 2006; about 17MW has been supplied to Rafah by Egypt. The total supply, around 200-220MW, is much less than estimates of demand in the Gaza Strip, which are in the order of 400MW.

Apart from the lack of supply, the current electrical transmission infrastructure in the Gaza Strip needs to be updated and expanded – the current network is incapable of sustaining a supply of 140MW, never mind 400 MW. There is no single electrical grid that covers the whole of the Strip. The Gaza power plant, which lies south of the city, supplies much of the northern part of the Strip. Some of the supplies from Israel come via transmission lines previously linked to one-time Israeli settlements. Supplies from Egypt to Rafah are limited to the southern end of the Strip. The result is frequent black-outs and widespread use of emergency generators. In 2013, Palestinians in the Gaza Strip were experiencing as much as 12 hours of power cuts each day.

GAZA MARINE

Current plans for the development of the Gaza Marine field involve the construction of wellheads on the sea-bed, the laying of pipes to a collection unit and a subsea pipeline from this to the shore, making landfall at the coastal Israeli city of Ashkelon. The volume of production is predicted to be around 1.6 bcm per year (around 57mn cubic feet) giving a lifetime of 20 years to the field, a key investment requirement. It is pre-dicted that it will take three years from the decision to go ahead with exploitation, before the first gas flows ashore.

Capital investment required would be a reported $1bn. In an undated brochure, entitled “Investing in Our Children’s Future,” the PIF said that, by replacing the diesel fuel used by the Gaza power plant with natural gas, over $1bn would be saved in the cost to produce electricity during the lifetime of the project. The PIF 2012 Annual Report noted that the value of the natural gas offshore Gaza depends “largely on global prices” but put a total value at “several billion dollars.” It noted that about $100mn had been invested so far in the project.

Since there are only 10 years left of the original license agreement, the BG Group would need an extension to the license. CCC and the PIF would likely take the opportunity to increase their shareholdings within the terms of the original agreement.

There is available land for a receiving terminal for the gas from Gaza Marine in the industrial zone to the south of the city of Ashkelon. This area is already the location of the oil terminal owned by the Eilat Ashkelon Pipeline Company and the Rotenberg 2,250MW coal-fired power station.

After treatment in the receiving terminal - Gaza Marine’s gas is 99% methane so is described as not requiring much processing - the gas would be available for transfer into Israel’s natural gas main network, feeding power stations and petrochemicals across the country. In the absence of a power plant in the West Bank, the Gaza Marine natural gas would be fed to an Israel power plant to generate electricity. That electricity would then be supplied to the West Bank.

Israel’s offshore gas – in the past from the Mari-B field offshore Ashkelon and now from the Tamar field, 80 km off Haifa – comes ashore at the Ashdod Onshore Terminal (AOT), north of the city of Ashdod. Gas from Gaza Marine is not suitable to come ashore in Ashdod because the AOT lacks the capacity, is too far from the field and does not have the same proximity to Gaza as a facility would have in Ashkelon. Connecting the undersea pipework from Gaza Marine to the former production platform of the Israeli Mari-B field, which links directly to the AOT, is a theoretical option but the Mari-B pipework is old and the re-engineering of it, itself costing as much as an estimated $1bn, would impact negatively on the economics of the project.

The natural gas from Gaza Marine could also be available for the power plant in Gaza. This plant was originally designed to use natural gas but, in the absence of a supply of gas, was modified to burn industrial diesel, also known as gasoil. This diesel fuel was supplied by Israel from 2002 to 2010. From 2010 to 2013, fuel for the plant came via the tunnels under the border between Egypt and the Gaza Strip city of Rafah. This fuel was commercial diesel rather than industrial diesel, taking advantage of the low price of commercial diesel in Egypt, where the consumer is heavily subsidized.

In 2012, there were reported talks for the supply of Egyptian natural gas to the Gaza power plant. Adjusting the generators to use natural gas instead of diesel would be comparatively cheap, perhaps $10mn.

LEGALLY AMBIGUOUS

The license area where the Gaza Marine gas field was discovered has a curious legal status. Israel accepts it as belonging to the Palestinian Administration but in strict legal terms its status is ambiguous. In fact, in 2001, the Houston-based Noble Energy and its Israeli partner Delek took BG Group to court in Israel to challenge the license area it had been given by the PA. The court did not give a verdict because the Government of Israel said that, pending a final peace deal, it was the equivalent of “no-man’s water.”

Neither the PA, headquartered in Ramallah, nor the Hamas authorities, which de facto currently administer the Gaza Strip, have complete control of the area of the Mediterranean Sea over the Gaza Marine field. The administration of the sea off the coast of the Gaza Strip is defined by the Oslo Accord between the Palestine Liberation Organization and the State of Israel.

Under Article XI of the Annex to the May 1994 Cairo Agreement 22, sometimes known as the Gaza-Jericho Agreement, the sea off the Gaza Strip is divided into three Maritime Activity Zones, labelled K, L and M. Zone L is the main area, with Zone M bordering Egyptian waters and Zone K bordering Israeli waters. None of the Zones extend beyond 20 nautical miles from the shore, equivalent to about 37kms. The Gaza Marine field straddles this distance. The exploitation of the field will require vessels beyond the definition of those mentioned in the Annex so, both in Zone L and further out to sea, the approval of the Israeli navy will be needed. Since the Hamas takeover in Gaza in 2007, the Israeli navy has expanded its effective control of the offshore areas.

If and when a final peace deal is signed between Israel and the State of Palestine, it will be for the two states to agree their maritime border. It will also be for the State of Palestine and Egypt to decide on where the maritime border lies between those two countries. Currently, the western side of the license area, known as “Offshore Gaza,” runs at a 90 degree angle from the Egyptian border with the Gaza Strip at Rafah. This is at odds with the Egyptian view of its maritime border, subject to the supervision of the Multilateral Force Observers (MFO), the peacekeeping unit which supervises the military deposition of forces between Egypt and Israel. The Egyptian military’s view of the maritime border is that it extends as a straight line from the land border in Sinai, an interpretation which, if extended to an EEZ, would almost halve the Offshore Gaza license area.

According to the United Nations Convention on the Law of the Sea, which Egypt has ratified (though Israel has not), maritime borders between adjoining states would normally take the line at right angles to the line of the coast, ie favoring the existing shape of the Offshore Gaza license area. Additionally, a future State of Palestine could possibly go to the International Court of Justice to claim a larger EEZ as the convex line of the coast acts to the disadvantage of the Gaza Strip. Such a claim could extend to the current point where Cyprus-Egypt maritime border meets the Cyprus-Israel maritime border (23, 24). This is the same point in the ocean – Latitude 32 degrees, 53 minutes, 20 seconds and Longitude 32 degrees, 58 minutes, 20 seconds – although Israel and Egypt have yet to agree this point between each other. (The Cyprus-Lebanon maritime border agreement and the Israel-Cyprus agreement have a similar single point of intersection but, in this case, it has led to Lebanon, which is officially in a state of war with Israel, to lodge an additional claim.)

Apparently acknowledging that in the future a Palestinian EEZ may have a maritime border with Cyprus, Palestinian Prime Minister Rami Hamdallah discussed energy cooperation with visiting Cypriot Foreign Minister Ioannis Kasoulides in Ramallah in February 2014. A Palestinian official statement, quoted by Wafa, said the joint Palestinian-Cypriot committee will work towards signing cooperation agreements between them in various sectors, but mainly in the energy sector.

ONE AND ONLY

The Gaza Marine field is probably the only viable natural gas field in the Offshore Gaza area. There is also relatively small natural gas deposits near the maritime limit with Israel, known as the “Border Field.” On the Israeli side, it is known as “South Noa,” distinguishing itself from the nearby larger, though still small, “Noa” field, the first field to be discovered offshore the Gaza Strip and Israel, containing only an estimated 0.04 tcf.

If the EEZ of a future State of Palestine were to be larger than the current license area, the question of Palestinian natural gas resources could be reopened. There may also be the prospect of recoverable oil deposits as, within the Israeli EEZ, after examination of seismic and other data, Noble Energy intends to look for oil beneath the natural gas fields it has discovered.

*Simon Henderson is the Baker Fellow and Director of the Gulf and Energy Policy program at the Washington Institute for Near East Policy. This piece is based on his recent Policy Brief for the German Marshall Fund: “Natural Gas in the Palestinian Authority: The Potential of the Gaza Marine Offshore Field.”