Israel has a highly developed economy and democratic system of government. After experiencing two years of recession in 2001 and 2002 after the renewed Israeli-Palestinian violence which began in 2000, and a year of very slow growth in 2003, Israels economy is beginning to make a more robust recovery. Growth in real gross domestic product (GDP) in 2004 was 4.3 percent, and is forecast at 3.9 percent for 2005. Strong growth in exports of technology products, as well as a revival in the tourism sector, have contributed to the recovery over the last year.
Israel produces almost no oil and imports nearly all its oil needs (around 274,000 bbl/d in 2004). Traditionally, major oil import sources have included Egypt, the North Sea, West Africa, and Mexico. In recent years, however, Israel has stepped up its imports from Russia and the Caspian region (Kazakhstan, Turkmenistan, etc.) and now reportedly gets a majority of its oil from the former Soviet Union. Israels Oil Refineries Ltd. (ORL) also reportedly has negotiated with Mexico for annual supplies of around 3.7 million barrels (10,000 bbl/d), and in late November 2002, ORL signed a deal to purchase around 10,000 bbl/d from Angola at a cost of $100 million per year.
Although oil exploration in Israel has not proven successful in the past (current output is less than 1,000 bbl/d), drilling is being stepped up. Israels Petroleum Commission has estimated that the country could contain 5 billion barrels of oil reserves, most likely located underneath natural gas reserves. Geologically, Israel appears to be connected to the oil-rich Paleozoic petroleum system stretching from Saudi Arabia through Iraq to Syria.
Overall, around 460 oil wells have been drilled in Israel since the 1940s, with little success. In late September 2000, a contract was signed between U.S.-based Ness Energy International and Lapidoth Israel Oil Prospectors Corp. to commence further work on the Har Sedom 1 well. In May 2004, Givat Olam reported that it may have found up to 980 million barrels of oil reserves at the Meged-4 well near Kfar Sava, north of Tel Aviv. However, the company expects only 20 percent of the new reserves to be extractable. In April 2005, Zion Oil & Gas, Inc., based in Dallas and Tel Aviv, began drilling at the Maanit-1 well, located approximately 37.5 miles north-northeast of Tel Aviv.
Israel has sizeable deposits of oil shale, perhaps 600 million tons recoverable, with average production of about 9,000 bbl/d. Most of Israels shale oil resources are located in the Rotem basin region of the northern Negev desert near the Dead Sea. Oil shale is sedimentary rock containing organic material from which liquid fuel may be extracted, at a rate of perhaps 15-17 gallons of oil per ton of shale.
Since 1998, Israels government has been working to reform the highly centralized oil sector. Among other things, the process has ended the old cost-plus basis system, eliminated price controls for end users of petroleum products, and created more competitive conditions in general. Israel has two major refineries, both owned and operated by Oil Refineries Limited (ORL). The plants, which are located at Haifa (130,000 bbl/d) and Ashdod (90,000 bbl/d), meet all of Israels demand for refined oil products. In December 2004, the ministerial privatization committee, headed by Minister of Finance Benyamin Netanyahu, approved a proposal to privatize and split ORL. The Ashdod refinery will be sold to private investors in the first stage. Immediately afterwards, the state will sell its 74 percent share in the company as well as the 26 percent holding of the Israel Corporation in an issue on the Tel Aviv Stock Exchange, or through a private sale of blocks of shares in Israel or overseas. In December 2003, Israels Yam Thetis group signed an $8 million deal to supply natural gas to the Ashdod refinery.
Although Israel itself produces almost no oil, a comprehensive settlement of the Arab-Israeli conflict could affect Middle East oil flows significantly. Israels geographic location between the Arabian peninsula and the Mediterranean Sea offers the potential for an alternative oil export route for Persian Gulf oil to the West. At present, these oil exports must travel either by ship (through the Suez Canal or around the cape of Africa), by pipeline from Iraq to Turkey (design capacity 1.5-1.6 MMBD), or via the Sumed (Suez-Mediterranean) Pipeline (capacity 2.5 MMBD).
Israel has one main operational oil pipeline, known as the "Tipline," built in 1968 to ship Iranian oil from the Red Sea port of Eilat to the Mediterranean port of Ashkelon. During 2003, the Eilat-Ashkelon Pipeline Company (EAPC) conducted work necessary to reverse flows on the 42-inch line, which has a reported, current capacity of 400,000 bbl/d, with possible expansion to 1-1.2 million bbl/d (and 18 million barrels of storage capacity). Russias Tyumen Oil Company, as well as Kazakh interests, reportedly have expressed interest in the possibility of exporting their crude via the Mediterranean and then through the Israeli line to Eilat, where it could be loaded onto VLCCs (Very Large Crude Carriers) in the Red Sea for shipment to markets in Asia. This would represent an alternative to the Suez Canal, which can accommodate only smaller, "Suezmax" tankers. In October 2003, it was reported that Swiss trader Glencore would ship 1.2 million barrels of Kazakh CPC Blend crude and 600,000 barrels of sour Russian Urals through the line, at a cost of 26 cents/bbl.
Israel hopes to increase the share of natural gas in its fuel mix (especially for electricity generation, currently dominated by coal-fired plants) for energy security, economic, and environmental reasons. Over the next few years, natural gas will be replacing fuel oil in several of the older coastal power plants, as well as newer inland facilities. Demand for natural gas is expected to reach 282.5 billion cubic feet (Bcf) by 2010 and increase significantly thereafter. Israel has been looking into various supply options. One possibility is natural gas imports from Egypts Nile Delta and offshore regions, either overland across the Sinai peninsula, or via underwater pipeline to the Israeli coast. Israel also is developing its limited domestic natural gas reserves.
The East Mediterranean Gas (EMG) Company, a consortium of the Egyptian General Petroleum Corporation (EGPC), the Merhav group of Israel, and Egyptian businessman Hussein Salem, was established in 2001 to pursue the option of importing Egyptian natural gas. A government-to-government framework agreement, which was signed in June 2005, and calls for 60 Bcf per year of Egyptian gas to be imported to Israel for fifteen years, beginning in October 2006, with a possibility of a five year extension. A $300 million, 80.8-mile marine pipeline with a maximum capacity of 247.2 Bcf per year will be constructed from El Arish on Egypts Sinai peninsula to the Israeli coastal city, Ashkelon, with delivery and receiving facilities in both Egypt and Israel. Besides Israeli consumption, Egyptian natural gas could theoretically be used for power generation in the Palestinian Authority at a reported cost 3.5 cents per kilowatt-hour, about half the price charged by the IEC. Currently, Gaza is almost totally dependent on the IEC for its electricity needs. However, the EMG line is likely to bypass Palestinian territorial waters off the Gaza Strip and go directly from Egyptian to Israeli waters. A commercial agreement has yet to be signed.
Over the past four years, in an important development for a country which has never had significant domestic energy resources, several energy companies (Israels Yam Thetis group, Isramco and British Gas) have discovered significant amounts of natural gas off the coast of Israel (and even more off the Gaza Strip). Israels new offshore gas reserves belong mainly to two groups: 1) the Yam Thetis group (comprising the Avner Oil, Delek Drilling, and Samedan); and 2) a British Gas partnership with Isramco and others. In August 2000, Isramco/BG announced that it had discovered a large natural gas field 12 miles offshore at its Nir-1 well. The field reportedly contains natural gas reserves of 274 Bcf, and represents the third natural gas field discovered offshore Israel during 2000 (the largest two being Mari and Noa, with combined reserves of nearly 1.5 Tcf). However, in February 2004, Isramco announced that the Nir-1 well was not commercially viable. In July 2003, Yam Thetis had decided to abandon its Hana-1 well to the north of Mari. In early September 2001, Isramco had announced that BG was abandoning the Tommy, Orly, Shira and Aya concessions after analyzing geological and geophysical findings. In March 2005, Isramco announced plans to drill off the Ashdod coast at a cost of $13 million as part of the Med Ashdod oil and gas exploration partnership, which the company heads. It remains unclear as to which partners will participate in the project. Also, in March 2005, BG announced that it was quitting the Gal natural gas partnership,which it headed, almost completely abandoning its search for natural gas off the coast of Israel. BG concluded that the investment was not worthwhile without the certainty that it could sell natural gas to the IEC.
Natural gas has been discovered not only on Israels side of the border, but also in areas that lie in Palestinian territorial waters off the Gaza Strip. British Gas, which first struck gas in this area with its Gaza Marine-1 well in August 1999, signed a 25-year contract to explore for natural gas and set up a natural gas network in the Palestinian Authority (PA). In December 2000, BG successfully completed drilling a second natural gas well offshore Gaza. The drilling confirmed findings from the Marine-1 well, which had flowed at 37 Mmcf/d, indicating possible reserves of around 1.4 Tcf. In August 2003, Prime Minister Sharon reportedly vetoed a BG plan to import natural gas from the Marine field, citing concerns over where the money might flow. The Palestinian Authority wants to move forward with development of Marine-1, both for its own power generation needs as well as for export, but the project likely would not be economical based on demand in Gaza alone. BG does plan to proceed, however, with a third exploration well in August 2005.
In April 2002, Belgiums Tractebel indicated that it was withdrawing from a $400 million project to construct a natural gas distribution grid in Israel, ostensibly due to security concerns. Tractebel, which had held a 60 percent stake in the project consortium, had been the only bidder on the project, which was awarded in December 2001, and its expertise was considered crucial to the project. Following Tractebels withdrawal, Israels National Infrastructure requested that Israeli companies Paz Oil and Africa-Israel Investments, each of which held a 20 percent stake in the Tractebel consortium, come up with a replacement for Tractebel by mid-May 2002. In July 2002, BG decided not to join, dealing a major blow to the project, and triggering cancellation of the tender. Israels gas law requires that an experienced foreign company hold at least a 10 percent stake in the project. In August 2002, an Israeli consortium of Paz Oil, Africa-Israel Investments, and Batemen Engineering proposed adding a new foreign partner, Itera, which is affiliated with Russias Gazprom. In September 2002, IEC was authorized to build the entire grid, but in April 2003, Israels cabinet decided to reverse course and prevent IEC from building the grid. The cabinet reportedly was concerned that IEC should not be a monopoly in both electricity and in natural gas. In 2004, the Ministry of National Infrastructure granted Israel National Gas Lines (INGL), a state-owned company, a license for the construction and operations of the natural gas transmission system, which is expected to be completed by 2010.