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Cablegate: Israel Seeks to Diversify Its Energy Supply To

VZCZCXYZ0027
RR RUEHWEB

DE RUEHTVA #4703 3351505
ZNR UUUUU ZZH ZUI RUEWMCF9133 3351503
R 011505Z DEC 06
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC0000
INFO ARAB ISRAELI COLLECTIVE
RUEHTA/AMEMBASSY ALMATY
RUEHAK/AMEMBASSY ANKARA
RUEHKB/AMEMBASSY BAKU
RUEHBR/AMEMBASSY BRASILIA
RUEHMO/AMEMBASSY MOSCOW
RUEHSI/AMEMBASSY TBILISI
RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC

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.

********************************************* ********************
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