Israel's Leviathan at Sea

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Byline: Dan Ephron And Babak Dehghanpisheh; With Joanna Chen

A natural-gas bonanza is disputed by Lebanon--and Hizbullah.

Yigal Landau had been drilling for oil and gas in Israel for almost 20 years, mostly in vain. As the co-director of Ratio Oil Exploration, Landau had overseen more than a dozen explorations, onshore and in shallow waters of the Mediterranean. Though the Middle East contains some of the world's most bountiful oil and gas reserves, Israel has been frustratingly dry--so dry that its prospectors were often viewed as eccentrics. But in late 2006 Landau's company got the license to explore Leviathan, a deep-sea field in the Mediterranean about 130 kilometers from Israel's coastline. Last month Ratio and its three partners, including majority holder Noble Energy of Houston, announced the field contains 450 billion cubic meters of natural gas, making it the world's largest offshore gas find of the past decade. "We had been expecting good news," Landau, who is 50, told NEWSWEEK recently. "But hearing the actual results, understanding the findings, made us very, very happy."

For the companies involved, the breakthrough has already translated into huge wealth. Ratio's market value has gone from $1 million four years ago to $1 billion today--and it owns the smallest share in the partnership. For Israel, the picture is more complicated. Leviathan and two smaller offshore gas fields could eventually mean a bonanza in royalties and tax revenues for the government. Some cabinet ministers are even talking about a new regional power balance. But a surge in the world's reserves of natural gas in recent years will make it difficult for Israel to export its own supply. And a new boundary dispute stemming from the discovery is now brewing with Lebanon, which claims that Israel is violating Lebanon's maritime rights. "Leviathan is tremendously significant for Israel," says Brenda Shaffer, an energy expert at the University of Haifa. "But there are also perils involved."

Israel has always sought to be energy-independent. Facing an Arab boycott for decades, Israel's energy supply has been a patchwork of run-of-the-mill imports and shadowy dealings. In the 1960s and '70s crude came from Iran, but dried up when the revolution there overthrew the shah. For about a decade Israel tapped wells in the occupied Sinai desert until it returned the area to Egypt under a 1979 peace treaty. More recently, much of Israel's oil has flowed from former Soviet Union states. In a telling remark in 2004, then-minister of national infrastructure Joseph Paritzky told an academic conference in Haifa: "We don't have diplomatic relations with most of the countries from which we import oil."

For at least a decade, geologists have known that Israel's best chance of finding its own energy supply was to drill far out in the Mediterranean. But international companies feared offending Arab states by working with Israel, according to Yossi Langotzky, the Israeli geologist who initiated the deep-sea exploration. By 2009, with Noble on board, Israel discovered a midsize reserve at a site named Tamar and began drilling at Leviathan.

Together, Tamar and Leviathan contain enough gas to meet Israel's energy needs for decades, with more left over for export, the companies involved in the project say. Experts value supply at up to $90 billion. But natural gas is a complicated resource--difficult to extract and expensive to transport. Noble CEO Charles Davidson told the Houston Chronicle earlier this month that the company hopes to find partners that would build a liquefied-natural-gas facility in Israel, where ships could be loaded and sent to markets across the world. The project would likely cost billions and take years to complete. …