The Gaza War and the Eastern Mediterranean energy security Highlighting new troubles

The war with Hamas in Gaza and the clashes in the north against Hezbollah are inevitably affecting both the regional and global energy markets. Uncertainty is not suitable for economic markets, especially the energy sector. In the interim, few signals that have emerged thus far suggest a broader shift in the regional dynamics that influence energy sector operations from either a political or commercial angle.

Security risks to offshore gas assets in Israel are well established, and while the conflict has worsened Egypt's energy shortfall, it is not the cause of it. Israel’s energy ministry has also indicated that electric utilities in Israel should seek alternative fuel sources to meet their needs.

The share of gas in Israel’s energy mix is about 40%, up from zero in 2000. This rapid expansion has been driven by the electricity generation sector, previously dominated by coal; gas now provides 70% of Israel’s electricity.

In 2022, Israel produced 21.9 billion cubic metres (bcm) of gas, 11.4 bcm from the Leviathan gas field and 10.2 bcm from the Tamar gas field. Of this, 12.7 bcm was consumed domestically, while 5.8 bcm was exported to Egypt and 3.4 bcm to Jordan.

The development of Leviathan and Tamar, along with the smaller Karish field, which started production in October 2022, is forecast to add more than 15 bcm/year of supply by 2026. Moreover, during the first half of 2023, Israel took in over $263 million in natural gas royalties, according to government figures, a 23 per cent increase over the same period last year.

The disruption of gas flow from Israel amid the war with Hamas and ground operation in Gaza is of particular importance in terms of regional energy security, particularly for Egypt. Egypt is facing a shortage of natural gas for the local market, which has led to power outages from time to time.

Egypt’s LNG exports totalled about 7 million tons in 2022, of which 5 million tons went to the EU, compared to total EU imports of 96 million tons and global trade in LNG of over 400 million tons. Moreover, its dire economic situation necessitates gas flow from Israel – both for the domestic market and, no less importantly, for export.

Indeed, politics may loom large over Israel's gas exports to Egypt and smaller volumes that flow to Jordan. Consequently, amid Israel's ground operation in Gaza, public opinion in Egypt and Jordan has dramatically turned against Tel Aviv. Some even demand the local governments to terminate energy contracts with Israel. However, this sentiment has yet to present a tangible threat to imports of gas from Israel by either country.

In addition to the export potential, Israel may face backdrops in terms of energy partnerships with foreign stakeholders regarding the exploration works in the Mediterranean Sea.

For example, shortly after the war in Gaza unfolded, the Israeli energy ministry announced the results of its fourth offshore bid round on October 29, revealing that 12 exploration licenses had been awarded evenly between two consortia led by Italian oil and gas major Eni and SOCAR of Azerbaijan, respectively. As such, the extension of military operations alongside the Gaza Strip threatens Israel’s image as a stable partner and its contracts with Arab countries.

The diplomatic normalization between Israel and Arab countries was recently severely damaged after a long period of soaring. The mounting public pressure forced Qatar, Bahrain, and Saudi Arabia to cease normalization talks with Tel Aviv. Nevertheless, some Israeli partners like Cyprus suggest that political and economic ramifications from the Israel-Hamas war may provide an impetus to plans for a pipeline conveying offshore natural gas to Cyprus for processing and shipping to foreign markets.

As such, the fighting in the Gaza Strip and Israel’s desire to boost its energy security also lend weight to a proposed 2,000-megawatt undersea electricity cable that would connect the power grids of Israel and Cyprus to the European mainland via Greece.

In the last few years, the US has encouraged East Mediterranean states to diversify their energy sources, all the while tackling climate change. This energy diplomacy succeeded in some places, but the Gaza war has exposed the area’s high geopolitical risks.

For the time being, the war in Gaza has not created too many waves in either the regional energy sector or the global one. However, the uncertainty will increase as the crisis continues, especially against the background of the ground operation in the Gaza Strip.