Report

Israel's Leviathan Captures Another Gas Deal

With the latest accord to sell natural gas to Jordan, Israel is slowly but surely becoming a linchpin of the region's energy supplies.

Israel has found another nearby customer for its abundant offshore supply of natural gas, a sign that the region's endless turmoil has not derailed energy development, even if Israel's newfound riches have yet to prove the geopolitical balm many expected.

The energy firms operating the giant Leviathan field off the coast of Israel said Wednesday that they had reached a preliminary 15-year deal to pipe natural gas to Jordan's electricity company. The nonbinding letter of intent comes on the heels of two similar deals to sell Israeli gas to Egypt, for use in that country's liquefied natural gas, or LNG, export terminals. The Jordanian sale still requires regulatory approval in both countries, as well as final agreement on pricing, and is expected to close by the end of the year. It could be worth $15 billion.

For Israel, it enhances the viability of the Leviathan project, key to the country's energy security, by providing an additional customer without the need to invest billions of dollars in a gas liquefaction plant to ship the fuel halfway around the world to Asia. The Jordanian deal would entail piping total of 1.6 trillion cubic feet of gas over 15 years; the Leviathan field holds about 22 trillion cubic feet of gas. Noble Energy, a U.S. firm that is the lead operator of Leviathan, said it now has preliminary agreements representing about 60 percent of the field's initial capacity.

For Jordan, the deal could be even more important. Leaders of Gulf states worry that the Islamic State's rampage through Iraq and Syria could spill into neighboring Jordan. Regional allies are pouring money into Amman to bolster the kingdom's chances of fending off the Sunni militants and keep its economy afloat. By providing a ready source of fuel for the power sector, the gas deal with Israel could help shore up energy-poor Jordan's economy and, by extension, its political stability.

"Israel is doing the United States a favor by using some of its gas for regional integration -- economic integration, certainly, and perhaps political integration," said Simon Henderson, director of the Gulf and Energy Policy Program at the Washington Institute for Near East Policy. "Jordan is short of energy and Israel is commercially the logical partner."

The State Department helped broker negotiations, according to Noble Energy. Senior U.S. officials on hand for Wednesday's announcement said the deal could further cooperation in the eastern Mediterranean.

Israel's emergence as an energy supplier for neighboring countries marks a sharp turnaround in just the last few years. Until 2012, Israel and Jordan both imported natural gas via pipeline from Egypt. But that export route was hammered by terrorists, undermined by falling Egyptian gas production, and closed during the brief rule of Mohammed Morsi, Egypt's anti-Israel former president.

Now Israel looks like a white knight to both countries. Israeli exports should supply feedstock for Egypt's LNG facilities, which have been all but shut down because of the drop in Egyptian gas production. For Jordan, the lack of energy resources pushed it to flirt with a host of desperate alternatives, including building expensive nuclear reactors; commercially priced natural gas would provide a way to supply electricity for years to come.

Preliminary deals are just that, however. And technical hurdles exist as well.

Commercial accords with Israel are still controversial with large chunks of the population in Arab states. Operators must build a pipeline from the offshore field that can carry the gas across the border to Jordan. And many customers in Jordan avoid paying their power bills, so Jordan's National Electric Power Company will likely have to overhaul its power distribution system to ensure that it can recoup the costs of purchasing Israeli gas at market rates, Henderson said.

And the Egyptian and Jordanian deals also underscore the limits of what Israeli energy can achieve. Egypt and Jordan, not coincidentally, are the two Arab states that have peace agreements with Israel; other would-be regional buyers, notably Turkey, have so far rejected any energy deals with Israel. Last month, the Turkish energy minister slammed the door on energy cooperation with Israel as long as the Gaza conflict remains unresolved.

Further afield, European energy officials have eyed Israel's newfound gas resources as a hedge against disruptions in supply from Russia, still embroiled in a battle with Europe and the United States over Ukraine. This summer, the European Union announced the creation of the Euro-Mediterranean Platform on Gas to jumpstart energy cooperation between Europe and potential suppliers in the Mediterranean. But with natural gas fetching significantly higher prices in Asia than in Europe, it is doubtful large volumes of Israeli gas would head north out of Egyptian LNG terminals.

Kobi Gideon - GPO - Getty

Report

The West's Tricky Economic War With Russia

What if Russians are feeling the squeeze of sanctions but Putin doesn't care?

The mere threat of additional Western sanctions against Moscow this week sent Russia's currency to new lows; it's down 12 percent this year. Inflation is expected to rise at least 1 percentage point. More than $100 billion in capital has already fled the country, by some estimates. Russia is feeling the Obama administration's intended financial pain. The only problem is that its faltering economy hasn't dissuaded President Vladimir Putin's Ukrainian ambitions.

The conflict in eastern Ukraine is hurting Russia in terms of lost investment, higher inflation, slower growth, and declining asset values. The ruble sank to new depths, dipping below 37 rubles to the dollar before recovering slightly, this week. Analysts' inflation expectations are up; according to a Reuters survey, 15 Russia watchers now expect inflation to hit 7.2 percent by the end of the year, in part because of Moscow's ban on Western food imports. According to the Russian government, $75 billion left the country in the first half of 2014, and officials predict that number will hit $100 billion by the end of the year. Others think that much is already gone. U.S. President Barack Obama said on Aug. 6 that between $100 billion and $200 billion has already fled the country. On Monday, Sept. 1, Russia's Economic Development Ministry downgraded growth expectations from 2 percent to 1 percent for 2015. Growth has already fallen below 1 percent for the first half of 2014, according to the World Bank.

The confluence of economic bad news with Putin's most aggressive stance in Ukraine brings to the fore a question that lingers under all sanctions programs: What if the targeted government doesn't care about the economic pain?

"The West needs to realize that economic and financial measures imposed to date haven't been effective in deterring Putin's ambitions in Ukraine -- and that even a maximalist financial isolation campaign alone may not be enough to stop Russian adventurism," Juan Zarate, a former senior Treasury Department official charged with overseeing sanctions for George W. Bush's administration, said in an email.

Investors' message to Putin is clear. A brief cease-fire agreement Wednesday pushed the ruble up 1.7 percent and sent the Russian Micex stock index climbing 3.5 percent, according to Bloomberg. But Ukraine quickly retracted the announcement after Moscow said it wasn't a party to the conflict and, therefore, couldn't strike a cease-fire deal. Putin later said that he had reached an agreement with Ukrainian President Petro Poroshenko to end the fighting in eastern Ukraine that included Kiev pulling troops out of the region, according to Russian state-owned media. Markets would doubtless welcome a return to peace, but uncertainty lingered Wednesday as to whether peace truly was on the horizon.

Obama greeted the cease-fire announcement with skepticism at a press conference in Tallinn, Estonia, where he was on a stopover before attending the NATO summit in Wales Thursday and Friday.

"No realistic political settlement can be achieved if effectively Russia says we are going to continue to send tanks and troops and arms and advisors under the guise of separatists, who are not homegrown, and the only possible settlement is if Ukraine cedes its territory or its sovereignty," Obama said on Wednesday.

The White House points to the billions of dollars moving out of Russia, the volatile Micex stock index, and the ruble's falling value as evidence that sanctions are inflicting economic pain. But if the goal of the sanctions was to get Putin to stop bullying Ukraine, then they have yet to hit the mark. Instead, Putin is telling the head of the European Union that he could conquer Kiev in two weeks -- if he wanted to. Yuri Ushakov, a Kremlin foreign-policy advisor, told the Guardian on Tuesday that Putin's remarks were taken out of context. NATO plans to station rapid-response forces to protect Eastern Europe, though it's unclear whether the United States -- the most powerful military in the 28-member alliance -- will participate.

Meanwhile, leaders on both sides of the Atlantic are again sifting through a variety of incremental financial measures to further isolate Russia's economy. Whether Russia would have been even more aggressive in the absence of sanctions is anyone's guess.

Yet Putin's unchanged stance toward Ukraine and Russian troops' engaging directly with Ukrainian forces have prompted calls for the West to send military support to Kiev. Top U.S. senators, including Republican John McCain and Democrat Robert Menendez, head of the Senate Foreign Relations Committee, want to arm the Ukrainians. But that position is not expected to gain wider traction.

"My guess is that, absent a dramatic change in the situation in Ukraine, the West will soon apply additional sanctions," Steven Pifer, a former ambassador to Ukraine and a senior fellow at the Brookings Institution, said in an email. "Providing arms may be a tougher question for [the] U.S., [and] other Western leaders."

The EU is considering implementing a new round of sanctions this week, but observers expect those to only incrementally tighten existing restrictions. European leaders could still postpone their next step to see whether Russia's cease-fire plan sticks. The toughest sanctions proposal on the table would strengthen prohibitions on Western investors lending money to Russian state-owned companies, according to a draft obtained by the Financial Times. EU leaders might also boycott the 2018 World Cup in Russia, according to the draft. The West's step-by-step approach has prompted criticism from some observers and ridicule from others.

"EU looking at banning double espresso sales in Russia," Tim Ash, head of emerging-markets research at Standard Bank, joked in an emailed analyst's note on Tuesday. "Single espresso sales will still be allowed for the time-being as the EU wants to give Putin plenty of opportunity to ramp down."

The West is going to financial war not with the weapons it has, but with the ones it is willing to use. For example, Europeans and Americans are not expected to restrict Western companies from handling Russia's sovereign bonds or ban Russia from using the international banking transactions system SWIFT (Society for Worldwide Interbank Financial Telecommunication). British officials advocated the move last week, according to a draft policy document obtained by Bloomberg.

Shutting Iran out of the SWIFT system, a crucial communications network for international banking, in 2012 was a turning point in the West's effort to isolate Tehran financially in order to get the government to stop its nuclear program. Many see the actions taken against Iran as a template for sanctions against Moscow, though Russia's economy is much more interconnected with the global -- and particularly European -- economy and its GDP is at least five times that of Iran's.

"They're going to be moderate so that we can continue telephone diplomacy with Putin," Mujtaba Rahman, Eurasia Group's head of European risk analysis, said from London. He said the debate has shifted in Europe toward potential military options, because economic deterrents aren't working. However, he expects more sanctions will be central to the European response as policymakers are unlikely to agree on a military solution.

Sanctions are also limited by the amount of economic pain Western countries are willing to endure in order to punish Russia. Europe's dependence on natural gas imports from Russia means that the bloc's economy could be severely damaged if Moscow decided to retaliate by turning off the spigot.

But European leaders have become more willing to take measures that could hurt their own economies as Russia has become more menacing in their view. French officials said Wednesday that they wouldn't allow the delivery of the first of two Mistral warships Russia ordered. France will likely have to return whatever Russia has already paid of the $1.6 billion price tag. Russian officials said the two ships were already two-thirds paid for, according to Bloomberg. That's a reversal from July when France defiantly refused to reconsider the contract, even in the face of criticism from other Western leaders. The United Kingdom was viewed as unlikely to strike out at Russia, thereby preserving London's place as a global finance hub for Russian businesses. Now British officials are advocating some of the toughest financial measures yet against Russia. As the conflict drags on, Europe's pain threshold could increase further.

Former Treasury Department sanctions official Elizabeth Rosenberg, who is now a senior fellow at the Center for a New American Security, said that was the case with Iran. Initially, the United States had trouble getting other countries to sign on, but as European leaders saw Tehran as more and more of a threat, they became more willing to reduce their economic ties, no matter the cost.

"The more that political circumstances escalate, it might be that there is a growing appetite for economic pain," Rosenberg said about Europe's view of the Ukrainian conflict. "I would urge caution for anyone suggesting that sanctions have been a failure."

Photo ANATOLII STEPANOV/AFP/Getty Images