In April, the United Arab Emirates’ Mubadala Petroleum, which belongs to Mubadala Investment Co, a sovereign wealth fund with $232bn in assets, signed a memorandum of understanding to buy a 22 percent stake in Israel’s Tamar offshore field. Once completed, this will be the biggest business deal between the two Middle Eastern nations since they normalised their ties in August 2020.
While the recent escalation in the Occupied Palestinian Territories and Israel’s ongoing bombing of the Gaza Strip are expected to significantly increase the political risks associated with investing in the Israeli oil and gas sector, they are unlikely to deter Mubadala from completing the landmark deal.
The UAE has a lot to gain from the purchase, believed to be worth as much as $1.1bn, both economically and politically. Moreover, Israel is determined to complete the Mubadala deal at any cost, as it will increase other foreign investors’ interest in its oil and gas sector.
To fully understand the significance of this deal, and why it is likely to go forward regardless of the latest round of conflict in the region, we need to look at the dynamics that led to its creation.
Israel needs Emirati Cash
Israel is planning to launch a new bidding round for exploration and development licences in the marine territories surrounding its main gas fields – Tamar, Leviathan, Tanin and Karish – in the near future. It hopes that by issuing such licences it can significantly increase the volume of natural gas reserves that will be available to the country in the long run.
To achieve this goal, however, it needs to attract interest from major international oil companies (IOCs) – something it struggled to do in its previous bidding rounds.
Indeed, Israel’s gas fields drew little interest from the main Western IOCs in the past, with the exception of American Nobel and, more recently, Chevron. The majority of industry giants, including ExxonMobil and Total, abstained from participating in Israel’s previous bidding rounds, explaining their decision by pointing to the “complex” geopolitical situation around the country’s energy resources.
Israel’s gas fields are not large enough to secure unconditional interest from the leading OICs, but they are also too large for the gas extracted from them to be consumed exclusively within Israel. As a result, to attract OIC interest and make use of these resources, Israel needs to demonstrate that the gas it will extract can be sold in external markets. But this is not an easy task to accomplish.
To enter the Asian markets, Israel will need to develop Liquefied Natural Gas (LNG) production capabilities – something it currently does not have. Moreover, these markets are highly competitive, so the Israelis may not be able to break into them even if they develop the necessary production capabilities.
There are also several obstacles in the way of Israel’s entry into the saturated European market.
The Eastern Mediterranean pipeline project, or EastMed, which aims to deliver Israeli gas to consumer markets in southern Europe, is still far from completion some eight years after its inception. The final investment decision for the project is expected to be taken no earlier than 2022 and the international business community appears to have little enthusiasm for it.
The project itself is very expensive, which means the cost of gas will be high for its end users. Moreover, it carries several political risks, which makes it difficult for investors to put their support behind it. Turkey, a powerful regional player, views the project as a threat to its territorial claims in the Mediterranean. Moreover, it believes that the pipeline, which bypasses Turkey to connect Israel with Greece through Cyprus and Crete, would undermine its status as an energy hub powering Europe. It already voiced its opposition to the project and said it will do everything in its power to prevent its completion.
With its prospects for entering into the European and Asian markets still uncertain, Israel also turned its attention to its immediate neighbourhood. In 2016-2018, Jordan and Egypt signed agreements to purchase gas from Israel’s Leviathan and Tamar fields. While these agreements undoubtedly provided Israel with some relief, these are relatively small consumer markets and they cannot resolve Israel’s energy woes on their own.
On top of the aforementioned political and operational obstacles preventing Israel from securing major export deals, the significant security risks facing its fields are also posing a problem for its energy ambitions. In recent years, the Israeli authorities have been forced to admit that the country’s oil and gas infrastructure is vulnerable to attacks from Gaza – and the events of the past two weeks proved this point.
And yet, despite these myriad difficulties, Israel has not given up on its aspirations to become a major player in the global gas trade.
In 2020, Israel, alongside Egypt, Greece, Cyprus, Jordan and the Palestinian Authority formed the Eastern Mediterranean Gas Forum (EMGF). Italy and France soon joined the forum as members and the United States and the European Union were given permanent observer status.
Through the EMGF, Israel is trying to create a regional market, in which all players are geared towards cooperation rather than competition, to increase its chances of finding suitable investors and buyers. Moreover, it is trying to limit Turkey’s ability to hinder its efforts to enter European markets by supporting Egypt’s ambitions of becoming an alternative gas distribution hub in the region.
Despite these efforts, until recently Israel made limited progress towards fulfilling its ambitious gas excavation and export goals. But Mubadala’s April 2021 decision to buy Israeli company Delek Drilling LP’s 22 percent stake in the Tamar offshore field changed all this – and increased Israel’s chances of one day becoming a major player in the global energy trade significantly.
First of all, Mubadala’s decision to invest in an Israeli gas field signalled to the leading IOCs that the geopolitical situation around Israel’s gas resources is becoming more favourable for investments, and increased Tel Aviv’s chances of securing lucrative deals in its next bidding round for exploration and development licences. At the very least, it reassured the IOCs that they would not upset the powerful and oil-rich Gulf monarchies if they decide to invest in Israel.
Moreover, by inviting Mubadala to become a shareholder in the Tamar field, Israel entered into a lucrative relationship with a very rich investor that might also show interest in Israel’s other endeavours, such as its forthcoming bidding rounds for exploration licences and its plans regarding the creation of floating LNG plants.
Finally, the UAE and Chevron, which currently operates the Tamar field and has a 25-percent stake in it, are also active investors in Israel’s neighbouring countries and particularly Egypt. Thus, Mubadala’s investment in the Tamar field can encourage both the UAE and Chevron to increase their investments in the Egyptian gas infrastructure. The market experts are already discussing the possibility of Mubadala and Chevron buying a stake in Egypt’s Idku LNG plant.
If this happens, it will be possible to talk about the speedy formation of a regional LNG production complex, where Israel plays the role of feedstock supplier.
In this context, it is easy to see why Israel will do everything in its power to ensure the successful completion of Delek Drilling LP’s deal with Mubadala. But the UAE also has its own reasons to support this major investment.
Regional Power Play By UAE
The decision to invest in the Tamar gas field was clearly political and made by Abu Dhabi Crown Prince Mohammed bin Zayed, a key figure in the Emirati decision-making system who also leads Mubadala’s board of directors
On paper, Mubadala’s decision to buy a stake in Israel’s Tamar gas field is in line with its long-term strategy to expand its investment portfolio, determined by the growing global interest in gas as a “semi-green” fuel.
However, the prospects for Israeli gas in foreign markets, including the Emirati market, remain unclear. This makes the investment less secure and economically attractive. Experts believe that Delek Drilling LP’s shares will be sold to Mubadala at a relatively low price to compensate for the risks set by uncertainty. Nevertheless, there is more to the UAE’s decision to invest in an Israeli gas field than a general desire to expand its gas portfolio.
First of all, Mubadala’s investment seeks to secure a place for the UAE in a region where more energy resources are expected to be discovered in the near future. Such discoveries may one day make the Eastern Mediterranean region an important supplier of energy resources to the global market. This strategy is not new or exclusive to the UAE. Qatar previously acquired a stake in Cyprus’ Glaucus field for the same reasons.
Second, after last year’s much-advertised normalisation deal between the UAE and Israel, the two countries urgently need some proof of practical progress in their relations. Israel and the UAE already signed memorandums on cooperation in renewable energy development and the use of Israeli infrastructure for the transit of oil and petrochemical resources, but these agreements are yet to provide any practical results. The Mubadala-Delek deal, in turn, can be used as indisputable proof that normalisation provided both countries with material gains.
Third, by increasing its cooperation with Israel in the gas sector, the UAE is joining a loose bloc of countries that can be cautiously characterised as anti-Turkey in nature. These countries are also eager to challenge Turkey’s close ally Qatar’s interests in gas markets. As a result, some analysts perceived Mubadala’s decision to invest in the Tamar gas field as an effort by the UAE to collaborate more closely with Israel, and consequently with the EMGF, in response to the recent increase in Ankara’s influence over Libya. However, whether the Emiratis will be able to transform the EMGF into a more political and explicitly anti-Turkey organisation is still not certain. For instance, Israel did not show much frustration when the Palestinian Authority vetoed the UAE’s accession to the EMGF in March 2021. Probably the Israeli authorities do not want to anger Ankara too much, as some of the oil Israel needs still passes through Turkish territory.
In the end, it is still unclear whether the UAE will be able to achieve everything it initially intended by investing in an Israeli gas field. However, it is clear that the economic and political gains it can make through this investment are large enough that the ongoing escalation in violence in the region will not deter it from completing the deal. In this context, Mubadala’s entry into the Tamar gas field, and by extension the Israeli energy sector, can be considered as practically accomplished.
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