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Six weeks have passed since the ‘al-Aqsa Flood’ military offensive, when Hamas conducted an operation by land, sea and air against Israel and triggered the latest phase of a war that has bloodied the Middle East for almost a century. For Israel, succumbing to the attack was out of discussion and it was vital to restore regional deterrence.
As the conflict in the Middle East begins to take on new contours in the wake of the IDF invasion of the Gaza Strip, international actors are carefully assessing the risk of the conflict spreading to a regional scale, involving neighboring countries and undermining an ambiguous partnership system.
If military actions have not yet expanded throughout the region, sparing several state actors from the involvement for the time being, consequences on other dimensions have already spread across borders. In particular, the energy sector is the first affected and has already prompted key actors and stakeholders to rethink the safety of key energy supply chains.
The Russian-Ukrainian war sparked what the IEA had described as the first global energy crisis: it endangered the energy security of entire international blocs, caused commodity prices to skyrocket and triggered a large-scale reconfiguration of world energy markets. The crisis was different from the ones experienced in the past, such as the 1970s oil shocks, because it impacted on all fossil fuels: for instance, the price of natural gas, dependent on Russian supplies, reached record highs.
Therefore, the latest resurgence of the Middle East conflict needs to be analyzed in this already uncertain global scenario, where heightened geopolitical risks for commodity markets are related to structural energy security issues.
The worsening situation prompted Israel to immediately stop production at the Tamar gas field on October 9, following an order by the Energy Ministry; in addition, Chevron, that owns 25% of the Tamar site, stopped the flow of the East Mediterranean Gas (EMG) pipeline between Israel and Egypt, further disrupting the gas supply chain. Since the export route to Egypt via the EMG was suspended, the gas flow was re-routed through Jordan via the Arab Gas Pipeline.
Eventually, after a month-long suspension, drilling resumed at the Tamar gas field, allowing Israel to stand on a more secure ground on the energy front.
In fact, according to Rystad Energy, Tamar represents 38% of Israel’s current gas production, while Leviathan and Karish account for 44% and 18%, respectively. Tamar supplies more than 70% of Israel’s domestic gas demand and is the primary source of gas-fired electricity generation. It is estimated that 5% to 8% of Tamar’s production is exported. On the other side of the equation stands Egypt, which imports about 7 billion cubic feet per year of natural gas from the Tamar and Leviathan fields. Since 2020, Israel has provided 5%-10% of Egypt’s natural gas supply, according to S&P Commodity Insights data.
Egypt imports gas from Israel primarily to meet its domestic needs; then converts some of it into liquefied natural gas (LNG), exporting the excess -along with its own LNG- to Europe. The UE imports most of the LNG it needs from the U.S. and Qatar, with Egypt contributing less than 5%; nevertheless, the disruption of regional supply chains may have a broader impact on the distribution of gas from the Middle East to Europe.
In fact, the prolonged shutdown of production of the Tamar field shows the potential repercussions of the war for Israel’s gas exports and, on a larger scale, for the regional energy balance. If the war was to escalate regionally, that could lead to a change in geometry of demand and supply of gas. In fact, it would be unlikely for producers in the Gulf Cooperation Council (GCC) to fill that gap, since most of their gas production is already under contract; even if additional volumes are available, gas companies in the GCC may not redirected it to the Middle East, since gas producers can achieve more competitive prices in Europe or Asia. In particular, of all the GCC gas producers, Qatar already sees most of its production already allocated under long-term contracts. In particular, the Qatari company QatarEnergy – the largest LNG producer in the world, now producing approximately 10 million tonnes per annum of LNG- recently announced the signing of a long-term contract with the italian company ENI for the supply of 1.5 billion m3/year of liquid natural gas.
In conclusion, while in the long term the energy markets have recovered from last year’s shock, the high geopolitical uncertainty and the continuous supply disruptions caused by the Middle East conflict may have the effect of a short-term increase in energy prices. Although it seems that the effects of this conflict on global markets could be overall moderate, the escalation may cause both oil and gas prices to remain volatile in the short term, with potential for a sharp rise if the conflict escalates further.
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