Israel becomes an Eurasian oil transit country

Ariel Cohen

Russia and Israel have formally agreed to ship oil from the Russian oil terminals in the Black Sea via the Israeli Eilat-Ashkelon pipeline, to Asian markets. This pipeline has the potential to greatly decrease the transit time for oil exports from the Mediterranean to the Far East. This development signals a new level of cooperation between Russia and Israel in the energy field, and emergence of the Jewish state as a player in Russian and Eurasian pipeline politics.

BACKGROUND: During November 3-5 summit in Russia, Israeli Prime Minister Ariel Sharon and Russian president Vladimir Putin have signed a historic agreement making Israel the first Middle Eastern transit country for Russian oil. The 158-mile (254 km) pipeline from the Red Sea port of Eilat on the Gulf of Aqaba to Ashkelon was constructed in the 1960s, to ship Iranian oil to European and U.S. markets. Thus, the direction of the pipeline was South-North. After the collapse of the Shah regime in 1979, the pipeline was used to ship small amounts of Egyptian oil from Abu Rudeis field to Israel. According to the Director General of the Ashkelon pipeline company Emmanuel Sakal, Israel has accomplished improvements to reverse the flow of the pipeline over the last two years, to accommodate shipping of the Russian and Eurasian oil to Asian markets.

Meanwhile, Russia has been experiencing an important infrastructure bottleneck while shipping its oil to the fast-growing and highly lucrative Asian markets. Russian energy officials have realized that the plans for pipelines from Siberia to China and the pacific port of Nakhodka may be years and billions of dollars away. After YUKOS oil company ran afoul of the Kremlin in Spring and summer of 2003, the Russian government has decided not to pursue a pipeline to the Northern Chinese city of Daiking – the YUKOS-preferred route. Instead, Moscow has opted for a much more expensive project – the pipeline to the Russian Pacific port of Nakhodka, from which Russian companies can ship oil not just to China, but also to Japan, Korea and the West Coast of the U.S.

IMPLICATIONS: As Russian oil exports to Europe have stagnated due to slow rates of economic growth there, Russian companies have decided that an alternative root to ship oil to China and India must be found. The oil major LUKoil, and the government-controlled Rosneft are prime candidates to ship oil via Israel as they control pipelines and terminals along the Black Sea Coast. From the ports of Novorossiisk and Tuapse, Russian tankers will pass via the Bosphorus-Straits and unload at the slip dock at the port of Ashkelon, from which it will be pumped across the Negev desert to Eilat. Mosst importantly, this significantly shortens the shipping time and decreases costs: a Very Large Tanker (VLT) with 300,000 tonnage travels for 35-30 days from the Mediterranean to China, and only around 10-14 days from Eilat to Shanghai.

The Israeli ports can accommodate tankers larger than those capable of passing through the Suez Canal. And while the tariffs in the Israeli pipeline amount to $.40 a barrel, Egyptians are charging higher rates for transit through the canal, which is a major target of terrorism.

The Israelis, as well, may worry about threats to pipeline security from radical Islamist organizations, such as Al Qaeda, Hamas, and Islamic Jihad. Today, oil routes are no longer safe. The attack on the French supertanker the Limbourg in October 2003, and the Al Qaeda attempts to penetrate the information technology department of Saudi Aramco, the national oil company, demonstrate that terrorists are targeting high ‘emotional value’ economic targets. Moreover, while Hamas and Jihad go after human-rich targets, such as buses and restaurants, they so far targeted Israeli infrastructure only occasionally and unsuccessfully. Al Qaeda does not seem to care about Israel enough to endanger its somewhat depleted force. Moreover, oil burns, but does not explode, and pipelines can be patched up relatively easily.

In this sense, the Israeli North-South pipeline from the Mediterranean to the Red Sea with a capacity of 1.1 million barrel a day offers a significant shortcut for Russian and Eurasian oil, which targets fast-growing Asian markets. It will be an ideal outlet also for the Kazakh and Azerbaijani fields, which are coming online. The pipeline’s capability may be boosted to 1.6 mbd by installing additional pumping stations. As it is aiming to provide Very Sweet Light Crude (VSLC) from the Caspian, additional supply may come from the Baku-Supsa and from Baku-Tbilisi-Ceyhan pipelines when the latter is completed around 2005-2006.

Israel has excellent relations with Azerbaijan and the administration of President Ilham Aliyev, as well as with the Government of Georgia, so that political pressure from Arab countries is unlikely to undermine Israel's oil transit role. While the immediate economic impact is modest (about $140 million a year), an increase in volume of shipping, more demand for Israel’s own needs, and provision of stock for Israel’s petrochemical industry are additional benefits. As a result, the project is likely to be sustainable and profitable.

CONCLUSIONS: Israel is likely to increase its profile in the Caspian area, and the energy politics of Russia and the Caucasus. It is likely, as it did in the past, to play a mediator’s role in conflicts between Moscow and Washington. Ariel Sharon in particular, together with the leader of Russian-speaking Israel Our Home Party Avigdor Lieberman are keen to see the project implemented. Sharon has taken time to cultivate Putin and try to balance the Russian foreign policy and security elite's traditional tilt towards the Arab world. Moreover, Sharon has championed in the past a spur to Israel of the Russian Gazprom natural gas pipeline Blue Stream to Turkey. That project was derailed in favor of an Egyptian gas pipeline which never happened. At this point, however, the Eilat-Ashkelon pipeline shows that Israel is becoming an actor in the regional energy field as well.

AUTHOR’S BIO: Ariel Cohen, Ph.D., is Research Fellow in Russian and Eurasian Studies at the Heritage Foundation. His expertise includes energy security.

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