After years of relying on its neighbors for energy, Israel is poised to become an exporter of natural gas – provided it can find buyers. But some of the most promising customers or conduits for its newfound riches are the very countries with which Israel is at loggerheads.

Optimists argue that the mutual economic benefits of natural gas investment could give governments the incentive they need to work together. Already, Israeli companies have signed deals to supply Palestinian and Jordanian companies with natural gas.

Skeptics worry that they've got the order wrong: Diplomatic logjams need fixing before the gas can flow, lest investors get burned by politics. This risk is heightened by the location of Israel's offshore deposits and the challenge of where to build onshore processing plants.

Gideon Tadmor, chairman of Delek Drilling and one of the driving forces behind Israel’s recent discovery of natural gas fields in the Mediterranean, is among the proponents of energy cooperation as a path to peace.

“The [Palestinian Authority] PA – with whom we signed a contract – Jordan, Egypt, Turkey, and Cyprus are all relevant export destinations in the region,” says Mr. Tadmor. “And so the gas not only brings huge economic benefits to these countries, but also becomes a bridge between nations and an important stabilizing factor in the region.”

While Israel has peace agreements with Jordan and Egypt, relations remain businesslike at best, particularly with Cairo. The hope is that gas deals could lead to warmer relations. With Palestinians, economic cooperation could build badly eroded trust. Perhaps the most promising is Turkey, which has long been a significant trade partner of Israel. Relations went into a deep freeze after an Israeli naval raid on a Turkish ship headed for Gaza in 2010.

Nimrod Novik, a former Israeli business executive involved with East Mediterranean Gas (EMG), says there is a debate in Israel over which item needs to come first: peace treaties or commercial agreements.

“There are two schools. There are those who believe that business can pave the way for politics. And there are those who believe that political agreements must precede business, but once politics does its thing, business can create a safety net, and create a layer of common interests,” Mr. Novik said at last week’s Eastern Mediterranean Gas Conference in Israel. “I always believed that a stable political setting is a prerequisite for business involvement.”

EMG, a joint venture that sold Egyptian gas to Israel, learned a hard lesson two years ago, when Egypt’s state-run gas company canceled a 2005 deal to supply natural gas to Israel. Though both governments portrayed the breakup as purely commercial, the decision followed the 2011 overthrow of Egypt's longtime dictator and the rise of leadership more hostile to Israel.

That rupture illustrates some of the challenges Israeli companies and their partners now face as they consider gas deals that could involve building lengthy undersea pipelines, sharing liquefied natural gas (LNG) terminals, or potentially building a new LNG terminal outside Israeli territory – something that no other gas exporter in the world has managed to do.

Complicated 'win-win'

Israel’s natural gas reserves are located within two main gas fields in the eastern Mediterranean: Tamar, discovered in 2009 about 56 miles off the coast of Israel, with proven reserves of 10 trillion cubic feet (tcf); and Leviathan, discovered in 2010 and located 81 miles off the coast, with estimated reserves nearly double that amount (18-19 tcf).

Together, they could meet Israel’s energy needs for 30 to 50 years. Last year, the Israeli government took the controversial decision to make 40 percent of the proven reserves available for export. The decision could boost Israel’s new sovereign wealth fund to as high as $300 billion, but it could require Israel to import other fuel sources that some have estimated may cost as much as $200 billion.

So far Israeli gas companies and their partners, which include the US-based Noble Energy, have signed a 15-year, $500 million deal with Jordan’s Arab Potash, as well as a 20-year, $1.2 million deal with the Palestine Power Generation Company (PPGC), despite distrust between the Israeli government and the Palestinian Authority.

"Commercially, the agreement is a win-win. What’s in the mind of the Palestinian Authority and Israel is not my field," PPGC’s chief executive Walid Salman told Reuters. "Palestine and Israel are neighbors – if you're going to get fuel, it's best to get it from your neighbor. Not from overseas."

Israel is also mulling the possibility of supplying gas to Turkey, which has surging demand in its domestic market – 98 percent of its natural gas is imported – and wants to build pipelines to Europe; Cyprus, which wants to build an LNG plant; and Egypt, whose LNG plants are underutilized.

Each potential deal is fraught with complications, and while the prospect of gas profits may provide an extra incentive, it can also pose additional challenges.

“Potential economic benefits are insufficient to overcome deep-rooted political conflicts that, in some cases, have persisted for several generations,” argued Brenda Shaffer, a specialist in energy supply and foreign policy, in a recent brief on potential eastern Mediterranean gas deals. “However, cooperation in the development of these resources can reinforce any political breakthroughs” and improve economic prosperity, she added.

She also argued that the theory that energy trade could lead to greater peace assumes it would bring interdependence – which is rarely the case with natural gas deals. But by enabling cheaper desalination and more affordable electricity production, natural gas deals with Israel’s neighbors could reduce conflicts over water, improve local economies, and shore up weak governments vulnerable to public anger over not only electricity shortages but also relations with Israel.

Egypt: Negative public sentiment, terrorist attacks

Egypt has twice as much natural gas as Israel, but mismanagement has led to widespread energy shortages and lawsuits for failing to honor its commitments with foreign gas exporters. Gas imports could ease both situations.

But most Egyptians – who criticize Israel’s treatment of Palestinians, its use of military force in the region, and its decades of cozying up to Egypt’s autocratic government – are adamantly opposed to any economic deal with their Jewish neighbor.

In addition, the fact that Israel benefited from an extremely low price on Egyptian gas – even after finding Tamar and Leviathan – has stirred public resentment in Egypt. Such subsidized prices, as well as official corruption, caused Egypt to lose as much as $10 billion in gas revenues, according to a new report from the Cairo-based Egyptian Initiative for Personal Rights. Egypt provided gas to Israel for $1.50 per million British thermal units (btu), when analysts say it could have been getting as much as $9, Al-Monitor reports.

The deal was canceled a year after Egypt’s 2011 revolution, after more than a dozen militant attacks on the Egypt-Israel gas pipeline through the Sinai Peninsula. The cancellation caused the Israeli economy 20 billion shekels ($5.7 billion) in direct damages alone, much of which hit the Israel Electric Corporation, which is now stuck paying much higher rates for gas.

But despite the fraught relationship, several companies, including British Gas and Eni of Italy, have reportedly pushed for permission to build an underwater pipeline that would connect Leviathan to Egypt’s LNG terminals, which are underutilized due to Egypt’s increasing inability to supply gas for export.

Magdi Nasrallah, head of the Department of Petroleum and Energy Engineering at the American University in Cairo, says both Israel and Egypt could benefit from sharing the LNG terminals. But he says that an indirect route – such as a pipeline from Cyprus – is more likely to be palatable to the public.

“Egypt will definitely be more than happy to get into some sort of indirect collaboration…. This will be good for everyone,” he says. “In a deal like this, we will also gain because our LNG plants will be working and in return we will get some of the needed gas.”

That could save Israel the billions of dollars that it would spend to build its own LNG plant, as well as the hassle of solving environmental and engineering complications, which would take at least five years to sort out. Once the gas is converted to LNG, it can be exported to Asia, where Israeli gas companies will fetch much better prices than in Europe.

But it could be risky. “Israelis will be uncomfortable … putting such a large part of its economic future in the hands of Egypt,” says Robin Mills of Manaar Energy Consulting in Dubai.

Novik, the Israeli executive, said that any Israel-Egypt natural gas deal must be reinforced by other joint ventures to create a critical mass of business interests – similar perhaps to Turkey, where the volume of trade enabled businessmen to largely ride out the political tensions of the past few years. The failure to do that with Egypt doomed the 2005 gas deal, as well as an oil refinery built by EMG where the company was forced to sell its stake after the second Palestinian intifada broke out in 2000.

“If we look at the history of EMG, you see that when the atmosphere between the two countries was sour.… The project became a victim of the political atmosphere, and became a lightening rod of all the political hostility,” he says.

Despite that troubled history, Novik thinks that Egypt is the best option to export Israeli gas because it optimizes politics and economics: The new military government in Cairo is likely to be more open to deals with Israel and there’s less investment in infrastructure required, compared to exporting to Turkey and Cyprus. “I don’t anticipate a [Europe-like] brotherly embrace, but I do expect a businesslike cooperation. That will become a viable option."

Turkey/Cyprus: European gateway, but complicated politics

But Mr. Mills disagrees. The quickest and most economic option for Israeli gas companies looking for export routes, he says, would be to build a pipeline to Turkey, where some of the gas would be sold and the rest would go on to European markets.

While Israel-Turkey ties have been strained since 2010, trade has remained relatively robust with volume as high as $4 billion.

A pipeline between Israel and Turkey would, however, pass through the exclusive economic zones of Cyprus’s rival halves: one aligned with Greece, the other with Turkey. And Cyprus has its own gas and would likely want to be in on the deal, adding a potential new dimension to the intractable conflict over how to share the spoils of this new resource.

“It would be so lovely if we would live like Adam Smiths by self-interest, but I’m not sure that’s going to happen. [Potential gas profits] may create a potential carrot … but defining that carrot and how it is to be divided is a new problem, and it’s not an easy one to resolve,” says David Tonge, managing director of the energy consultancy IBS Research & Consultancy in Istanbul.

Cyprus is eager to sign a deal with Israel to serve as a “hub” where Israel’s offshore gas is converted to LNG, says Israeli energy consultant Gina Cohen. But only a few countries have seriously considered that possibility, among them Bolivia and Chile, and were unable to establish a workable arrangement.

Israeli security concerns

Although developing its gas reserves will allow Israel to make decisions without worrying about continued access to Arab oil, that former worry may effectively be replaced by concerns about attacks on its gas infrastructure.

Any ship can come within a third of a mile of Israel’s gas installations, since they are located in international waters, which makes them hard to defend. In addition, Hezbollah has rockets in its possession that can reach at least some of Israel’s natural gas installations, though Israel has vowed to beef up naval security to protect its newfound assets.

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But Israel's fortress mentality, borne out of decades of conflict with hostile neighbors, is counterproductive to the spirit of cooperation necessary for regional business, says former Jordanian foreign minister Kamal Abu Jabar.

“What is the sense of making peace if the Israelis are building higher walls around themselves than ever before?” he asks. “So long as Israel thinks of itself as a citadel, somehow outside the region and not belonging to it, how can you have real peace, real economics, real security?”