Although Israel does not produce significant amounts of energy, it is located strategically for regional energy transit and also is an important variable in the Middle East security situation.Information contained in this report is the best available as of October 2000 and is subject to change.
General Background:
Israel currently faces significant challenges, particularly political, although the country's economy had (prior to the current Palestinian-Israeli clashes) been improving, and seemed set for solid growth in coming years.
Besides a booming high-technology sector, Israel had undertaken important structural reforms (such as privatization and reduced controls on foreign currency exchanges and profit remittances by foreign companies), and apparent progress in peace negotiations was helping to attract tourists and foreign investment (up 63 percent in the first half of 2000 over the same period in 1999).
Overall, Israel's real economic growth had been expected to reach 3.9 percent in 2000, up from 2.2 percent in 1998, although still down from a 6 percent annual average between 1990 and 1995.
Now, however, Israel's economic (and political) prospects are more murky, and largely dependent upon progress in the "peace process." Consumer price inflation is averaging around 2.3 percent, with unemployment around 9 percent.
The country's budget deficit has declined to an estimated 1.5 percent of GDP this year.
Over the last decade, Israel has made some progress in the direction of a more open, competitive, market-oriented economy, although public spending still accounts for more than half of the country's GDP and the top marginal income tax rates exceed 60 percent.
Israel continues to make moves (although haltingly) towards privatizing government-owned companies, including the Ports and Railways Authority, the Oil Refineries Company, and others.
Tax reforms and cuts are a possibility, although they are opposed by the Histadrut, Israel's trade union federation and a traditional power base of the Labor Party.
In general, supporters of economic liberalization believe that Israel's economy is strong enough to compete globally. Both privatization and spending cuts are opposed by the Histadrut and others.
Israel's trade deficit is projected to fall to around $4 billion in 2000, from more than $6 billion in 1999. Israel has been working to reduce its trade deficit by increasing its exports.
Over the long term, Israel's export sector, led by high-technology (which has accounted for roughly 75 percent of Israel's export growth in recent years), is expected to grow strongly.
In late September 2000, serious violence erupted between Israelis and Palestinians. The violence, which continues as of late October, is the most serious in years, and has prompted serious concerns for the future of the "peace process," as well as for the Middle East region in general.
Energy:
Until recently, with a significant offshore natural gas discovery, Israel has had essentially no commercial fossil fuel resources of its own, and has been forced to depend almost exclusively on imports to meet its energy needs.
Israel has attempted to diversify its supply sources and to utilize alternatives like solar and wind energy.
Traditionally, Israel has relied on expensive, long-term contracts with nations like Mexico (oil), Norway (oil), the United Kingdom (oil), Australia (coal), South Africa (coal), and Colombia (coal) for its energy supplies.
Israel also has pursued other, cheaper sources of energy, like Egyptian gas. In November 1998, then- National Infrastructure Minister Ariel Sharon said that the major decision on Israel's energy supply for the 21st century had been delayed by 1 year.
This was to allow further time to secure a supply source for natural gas, Israel's preferred fuel for several reasons (including environmental and financial), as opposed to coal.
Israel hopes to significantly expand (to 25 percent) natural gas in its energy mix by 2005.
Although the Israeli government in principle favors privatization of state-owned companies, the energy sector remains largely nationalized and state-regulated, ostensibly for national security reasons.
In fact, little progress on energy sector privatization has been made since the late 1980s, when Paz Oil Company (the largest of three main oil-marketing companies in Israel) and Naphtha Israel Petroleum (an oil and gas exploration firm) were sold to private investors.
Meanwhile, other energy companies such as the Oil Refineries Company, which operates Israel's two refineries (at Haifa and Ashdod), and the Oil Products Pipeline Company, which operates Israel's oil pipelines, remain state-owned, with no definite plans to privatize them in the near future (although the current Israeli government appears to favor such privatization, at least in principle).
In early 1996, the Israel Electric Company's (IEC)'s monopoly was extended for another 10 years, with private producers permitted to supply 10 percent of Israel's electricity demand by 2000.
In February 2000, Israel and the United States signed an energy cooperation agreement. The agreement includes cooperation in the fields of gas, coal, solar power technology, and electric power generation.
In addition, US Energy Secretary Bill Richardson signed a letter of intent with Israel's Atomic Energy Commission to expand cooperation on nuclear non-proliferation and arms control issues.
Oil:
Israel produces almost no oil and imports nearly all its oil needs (major sources traditionally have included Egypt, the North Sea, West Africa, and Mexico).
In September 2000, Israeli truck drivers staged a "go-slow" in response to rising fuel prices, caused mainly by higher world oil prices (although diesel in Israel remains far less expensive than in Europe, where far more serious protests have occurred recently).
Although oil exploration in Israel has not proven successful in the past (current output is less than 1,000 barrels per day), drilling is being stepped up.
Israel's Petroleum Commission has estimated that the country could contain 5 billion barrels of oil reserves, most likely located underneath gas reserves, and that offshore gas potentially could supply Israel's short-term energy needs.
Geologically, Israel appears to be connected to the oil-rich Paleozoic petroleum system stretching from Saudi Arabia through Iraq to Syria.
Overall, around 410 oil wells have been drilled in Israel since the 1940s, with little success. In early 1998, the Jerusalem Post reported that several Israeli oil companies intended to explore for oil in waters offshore Israel's coast, and several foreign oil companies have expressed interest recently in this area.
In late September 2000, for instance, 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 1994, Enserch Corp.of Dallas signed an agreement with two Israeli companies to examine a 1,500 square mile area on the Mediterranean coast.
In another development, Isramco (a private company which absorbed the Israel National Oil Company when it was privatized in 1997), Delek, and Naphtha Israel Petroleum Corp. are partners in the Gevim 1 oil well being drilled near Sderot in the Negev desert.
Isramco has stated that it is optimistic that the Gevim field will yield significant amounts of oil. Meanwhile, oil was discovered near the Dead Sea town of Arad in August 1996, and is currently flowing at the rate of about 600 barrels per day.
A contract for construction of the 100,000-bbl/d, Egyptian-Israeli joint venture MIDOR (Middle East Oil Refinery Ltd.) refinery in Alexandria entered into effect in July 1997.
The ultra-modern, environmentally-advanced facility is expected to cost about $1.3 billion and will include a 25,000-bbl/d hydrocracker.
The original plan was for the facility to be mainly export oriented, with only 20 percent of production sold in Egypt, but recent reports indicate plans for 50 percent or more of the products to be sold locally.
The project represents the largest Arab-Israeli joint venture to date. In January 1997, EGPC acquired an additional 20 percent equity from Israel's Merhav and from the local Hussein K. Salem Group to push its share in the venture to 60 percent.
Each of the private investors retains a 20 percent share in the project. Spain's Repsol is set to manage the plant when it comes online in 2001.
In November 1999, Israel's ministerial committee on privatization proposed splitting up state-controlled (74 percent) Oil Refineries Ltd. and selling off one of the company's two refining facilities (a relatively small plant in Ashdod). Workers and management of the company have expressed their opposition to such a sale.
Although Israel itself produces almost no oil, a comprehensive settlement of the Arab-Israeli conflict could affect Middle East oil flows significantly.
Israel's 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 (capacity 1-1.2 MMBD), or via the Sumed (Suez-Mediterranean) Pipeline (capacity 2.5 MMBD).
Utilization of the Trans-Arabian Pipeline (Tapline) could offer another potentially economic alternative. The Tapline was originally constructed in the 1940s with a capacity of 500,000 bbl/d, and intended as the main means of exporting Saudi oil to the West (via Jordan to the port of Haifa, then part of Palestine, now a major Israeli port city).
The establishment of the state of Israel resulted in diversion of the Tapline's terminus from Haifa to Sidon, Lebanon (through Syria and Lebanon).
Partly as a result of turmoil in Lebanon, and partly for economic reasons, oil exports via the Tapline were halted in 1975. In 1983, the Tapline's Lebanese section was closed altogether.
Since then, the Tapline has been used exclusively to supply oil to Jordan, although Saudi Arabia terminated this arrangement to display displeasure with perceived Jordanian support for Iraq in the 1990/1 Gulf War.
Despite these problems, the Tapline remains an attractive export route for Persian Gulf oil exports to Europe and the United States.
At least one analysis indicates that oil exports via the Tapline through Haifa to Europe would cost as much as 40 percent less than shipping by tanker through the Suez Canal.
Source: United States Energy Information Administration.
© 2001 Mena Report (www.menareport.com)
