Ongoing Israel-Hamas conflict threatens regional natural gas market and Europe’s LNG supply

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The persistent conflict between Israel and Hamas, the Palestinian militant group, is casting a looming shadow over the regional natural gas market. This situation raises concerns about the potential repercussions for Europe’s liquefied natural gas (LNG) supply as the winter season approaches, as reported by Rystad Energy.

Israel, which currently enjoys surplus gas production that supports the demands of Egypt and Jordan, faces significant uncertainties in the wake of the conflict’s escalation. Rystad Energy’s analysis suggests that this ongoing conflict could have far-reaching implications, including risks to upstream investments, normalization progress, and export goals, all occurring at a time when the exploration and discovery of low-cost resources have been on the rise.

Key Israeli gas development projects, namely Tamar, Leviathan, and Karish, are pivotal to the regional gas market. Leviathan, representing 44% of Israel’s current gas production, leads the way, followed by Tamar and Karish at 38% and 18%, respectively. Tamar, in particular, plays a critical role by supplying over 70% of Israel’s domestic gas demand and serving as the primary source for gas-fired electricity generation, with approximately 5% to 8% of its production exported.

Egypt, reliant on imports from the Tamar and Leviathan developments, obtains approximately seven billion cubic feet of natural gas annually, supporting domestic demand and powering liquefaction plants. This, in turn, has contributed to Egypt’s LNG exports. However, recent dynamics have seen a decline in LNG exports, partially due to increased domestic gas usage during the summer season, raising questions about the sustainability of gas exports to Egypt during the impending winter.

While Europe is currently well-prepared for the upcoming winter, with gas storage standing at over 97% capacity and consumption levels below those recorded in 2022, Rystad said the ongoing Israel-Hamas conflict presents a geopolitical risk. 

Aditya Saraswat, the Vice President of Middle East Upstream at Rystad Energy, suggests that the impact on near-term gas prices may be limited due to the existing geopolitical risk premium already reflected in oil prices. However, the possibility of escalation into a broader conflict remains, which could cause a short-term surge in energy prices.

Saraswat notes that high energy prices leading to inflation and further interest rate tightening may eventually correct down in the months ahead if the economic outlook worsens.

The Tamar gas reservoir has played a significant role in enhancing Israel’s energy independence, meeting 70% of its electricity generation needs, and reducing dependence on coal and oil. In the event of a short shutdown, Israel can resort to alternative fuels like coal and fuel oil for electricity generation. However, prolonged shutdowns may necessitate drilling additional wells, a process that could take months and would hinder the sale of gas to neighboring countries, Rystad analysis found. 

Jordan, a significant recipient of gas imports from the Leviathan field, and Egypt, a major gas export destination, are both at risk if the conflict worsens, potentially leading to the shutdown of the Leviathan field, a significant setback for the region.

Additionally, the conflict poses a considerable risk of losing approximately US$4 billion in capital investments for important upstream projects over the next three years. Rystad said that this shift in the regional landscape could undermine progress made toward normalizing the region and capitalizing on significant exploratory success and low-cost resource discoveries.


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