A Disputed Middle East Natural-Gas Bonanza

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. Whether it would be a worthy investment is an open question. In the past year alone, large shale and other gas discoveries in the U.S. and elsewhere have created a glut in the market and cut the price of gas by 20 percent.

The alternative—building an underwater pipeline directly from the gas field to an importing country—is equally problematic. The nearest country to Leviathan, Cyprus, is not a big consumer and will soon be scouring its own territorial waters for gas. Egypt has its own supply, some of which it sells to Israel. National Infrastructure Minister Uzi Landau told NEWSWEEK That Italy, Greece, Bulgaria, and countries of the former Yugoslavia would all be potential clients. "Our ability to provide gas to countries in the Mediterranean will diminish their reliance … on the gas barons," he said, referring to Arab states. But building an extended pipeline would be worthwhile only if one or more countries committed to years of payment.

If the export question is eventually resolved, there's still the problem of Lebanon, which asserts that up to a third of Leviathan extends into its territory. Earlier this month Foreign Minister Ali Shami sent a letter to U.N. Secretary-General Ban Kimoon urging the international body to monitor Israel's offshore drilling and exploration. Hizbullah leader Hassan Nasrallah, as is his way, took the most aggressive line. In a speech last May he declared that the conflict with Israel was entering a new frontier: the sea. "We are able to target any vessels heading for any port on the Palestinian [Israeli] shore, from north to the farthest point south." In response, Landau said at the time that Israel would "not hesitate to use force and strength" to protect its ships.

The dispute is mostly a demarcation issue. When Israeli troops withdrew from Lebanon in 2000, the U.N.-sanctioned "blue line" became the de facto land border between the two countries. Israel unilaterally extended a line of buoys out into the sea to approximate a maritime border. But Lebanese officials claim the angle Israel took from the shore gives it more territorial water than it deserves. "Shifting this line slightly above or below can mean billions of dollars for one party or the other," says Ali Haidar, a geology instructor at the American University of Beirut, who has worked on the issue extensively. Lebanese officials have submitted maps to the U.N. and are hoping it can mediate the dispute.

Israeli law experts say that Leviathan is far from the line of demarcation and even an adjustment would leave the field well within Israel's territory. But geologists believe a broad natural-gas reef lines the Mediterranean and extends far north of Israel's shore, with enough gas for Lebanon to exploit as well. If that's the case, the two countries will eventually have to agree on a line. "This can only be done by negotiating," says Hebrew University law professor Robbie Sabel.

If only that were possible. Shaffer, the energy expert, believes the world is on the brink of what she calls "the era of natural gas," in which energy is cheaper, cleaner, and more abundant. Cooperation between Israel and its neighbors—a shared liquefied-natural-gas facility, for instance, and a joint network of pipelines—would benefit the region as a whole. But since such accord lies currently in the realm of political fantasy, Israel, she says, should focus on developing new technologies that could be powered by natural gas—not just cars, but a range of devices. "My vision for Israel is not that it becomes a natural-gas exporter but that it develops that technology niche," she says. For a small country with a big windfall, that's not bad advice at all.

With Joanna Chen