Gaza Aftermath May Impact Israel Oil Pipe Development

LONDON (Dow Jones Newswires), Jan. 20, 2009

Israel's offensive in Gaza will certainly have an effect on the country's status as an energy corridor, experts say. But whether it will be positive or negative depends on Israel's ability to prevent further attacks from Gaza and the country's battered relationship with Turkey.

A little-known 254-kilometer Israeli pipeline, from the Mediterranean port of Ashkelon to the Red Sea port of Eilat, could rival the Suez Canal as an oil shipment route between former Soviet Union producers and Asian consumers.

The pipeline has a capacity of 400,000 barrels a day, compared with the 600,000-barrel-a-day traffic southbound through the canal. But Ashkelon has frequently been the target of rockets launched by Palestinian militants in the Gaza strip, which has dented the port's appeal as a transshipment point.

If however, as a result of Israel's offensive on Gaza, a chastened Hamas, the Islamist party that administers the territory, is able to stop the rocket attacks, then potential clients who have previously snubbed the Trans-Israel Pipeline route may now decide to use it.

But it's not all good news. A tentative agreement to tie the route directly to a new pipeline with Turkey could now be jeopardized as relations with the Muslim nation have plummeted in the wake of Israel's three-week offensive, which killed 1,300 Palestinians.

The TIP route is significant as Russia seeks to diversify its consumer base away from the West, where demand is falling and tensions rising following a spate over Ukrainian gas transit, toward India and China. Other countries in the Caucasus are also interested in the route.

Effie Milutin, commercial manager of the Eilat-Ashkelon Pipeline Co. Ltd, the state-owned company managing the TIP, says much of the transiting oil is produced in the Caspian region, in Turkmenistan, Azerbaijan, Kazakhstan and Russia. The crude is then shipped from Black Sea ports or at the Turkish Mediterranean port of Ceyhan to Ashkelon, pumped to Eilat and re-loaded onto tankers to be shipped eastward.

Milutin was reluctant to give more details but press reports have said a large part of the oil goes to India and also to China and Taiwan. He said that, in recent years, the pipeline has operated at full capacity on several occasions.

One of the attractions of the TIP route for shippers is that the transit is 40% cheaper than the heavily tolled Suez canal and Eilat can handle tankers able to carry 2 million barrels - twice the size of the largest vessels the canal can accommodate.

But Ashkelon's vulnerability to rocket fire from Gaza has hitherto been a hindrance to development of the TIP, and some strategic experts think the recent conflict has only drawn attention to this.

Gal Luft, a former lieutenant colonel in the Israel Defense Forces, said that "overall the war highlighted the vulnerability of the south" of Israel, where Ashkelon is situated.

Already in March, the municipality of Ashkelon voiced concerns after a leak in the natural gas part of the pipeline, fearing this could lead to a devastating explosion if a rocket fell in the area.

Roy Mason, head of shipping consultancy Oil Movements, said the recent conflict could have temporarily reduced the competitiveness of the route.

Insurance for tankers coming from Eilat "should have become more expensive" due to the crisis, he said.

But Milutin said the "storage system is now fully occupied" and no ship was delayed despite the Gaza crisis, though he said there could be a "small psychological" impact on shippers.

Luft, who is now the executive director of the Institute for the Analysis of Global Security, a Washington-based energy security think tank, said, however, the ceasefire could help unlock the unrealized potential of the TIP route.

An additional 500,000 cubic meters of oil storage in Eilat is under construction and is due for completion mid-2010, Milutin said. The pipeline's design also allows for an increase in capacity from the current 400,000 barrels a day to 1.2 million barrels a day. At this volume, it would eclipse not only the Suez canal but also the Baku-Tbilisi-Ceyhan pipeline, disruptions to which during the war in Georgia last summer triggered energy security fears.

"A sustainable ceasefire agreement would make those projects more viable over the long run," Luft said.

But others experts say the Gaza attack has damaged ties with Turkey. The Muslim nation, which has been a key regional economic and military partner of Israel, signed a memorandum of understanding with the Jewish state two years ago to build a pipeline linking the two countries.

The direct route, which could have carried nearly a million barrels a day and cost up to $4.5 billion, would have ensured a continuous flow of oil in the long term between the two nations, replacing the more flexible current shipments by tanker.

Turkey's ruling party, the Islamist AKP, has, however, blamed Israel for the Gaza conflict. As a result, the 2006 agreement is now "dead in the water. (It's) not going to happen anytime soon," said Ali Koknar, head of Turkish security consultancy AMK Risk Management.

"As the AKP government sides more and more with Hamas against Israel, private Turkish companies are already canceling orders already placed with Israel and the Turkish government is considering suspending or canceling some of (its) defense contracts," he said.

Milutin, however, disagreed, saying that the pipeline project was still "at the feasibility stage" but "it will happen." He said: "I don't see a political impact" from the Gaza conflict.

"I am a businessman, not a politician. I hope people will see (the route) as an efficient system, not an Israeli one," he said.

Copyright (c) 2008 Dow Jones & Company, Inc.


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