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Bahrain's Importance

Bahrain is a tiny island state with outsized importance.

Its religious demographics are almost a mirror image of Syria's. In Bahrain, a 70 percent Shi'a majority is ruled by a Sunni monarchy, an arrangement that stretches all the way back to 1783. As in Syria, the majority is restless.

Though only a small-time oil producer (50,000 barrels per day), Bahrain profits from its location. Lying between Saudi Arabia and Iran, geography gives it a commanding military and commercial position on the Strait of Hormuz, through which 20 percent of the world's oil passes. Its deepwater port is ideally situated to service cargo ships transiting the central and upper Persian Gulf, and it is the terminus for Saudi Arabia's only international oil pipeline.

Perhaps most important, the world's largest offshore oil loading facility, Saudi Arabia's Ras Tanura complex, is a neighbor, just 65 miles away. Seventy-five percent of Saudi oil exports leave from this port and must pass by Bahrain.

Saudi Arabia (and, by extension, its American ally) emphatically does not want Shi'a Bahrain—less than 15 miles off the Saudi coast—to come under the influence of Shi'a Iran. Thus the House of Saud has a powerful interest in ensuring that Bahrain's ruling Sunnis, minority though they may be, remain in power.

That may not be easy. There has been tension in Bahrain since the Arab Spring. In early 2011, when street protests threatened to turn into rebellion against King Hamad bin Isa Al Khalifa, the Saudis neither hesitated nor sought American support. They sent 1,500 troops to help quiet the situation. The United Arab Emirates contributed another 500.

The protests were put down the way soldiers do things. Since then, there has been a reign of censorship, jailing, torture, disappearances, house-to-house raids, and death. Some Shi'ite mosques have been destroyed.

While the United States and Saudi Arabia prop up the monarchy, Russia refuses to take sides. You can be sure that in the event of regime change, Putin will be ready to become the Shi'ites' new best friend forever. But for now, he is cozying up to the Sunni rulers. In April 2014, Bahraini Crown Prince Salman Al Khalifa paid his first visit to the Kremlin, sent by the king to develop and enhance relations with Russia. Following the meeting, a memorandum of understanding was signed between the Russian Direct Investment Fund and the Bahraini sovereign fund Mumtalakat, and arrangements were made for a Bahraini airline to operate direct flights to Moscow.

For the moment, the Bahraini monarchy is firmly in control. But the unrest—including mass marches, violent clashes with police, and Molotov cocktails—continues to this day. It isn't going away. Regime change could come suddenly.

Israel

Israel is the United States' closest ally in the Middle East. It's the region's number one recipient of U.S. foreign aid, and no U.S. presidential campaign would omit a strong commitment to the country.

Oddly, U.S. presidential visits to the country are infrequent. Among recent White House occupants, Clinton was the most frequent visitor, four times. The younger Bush went twice. Reagan and the elder Bush never did. Obama didn't go until his second term.

Putin has been there twice and has referred to Israel as a "Russian-speaking country." It's not as outlandish a notion as you might think; about half of Israelis are, or are descended from, Jewish immigrants from Russia and Eastern Europe.

Despite Russia's support for Iran, Hamas, and Syria's Assad, Israel calculates that getting along with Russia can be a net positive. There are several points of affinity.

A politically active bloc of Russian speakers make up 20 percent of Israel's population, and 10,000 Russian Jews immigrate to Israel every year. There are growing economic ties between the countries: Bilateral trade already amounts to $3 billion annually, and a proposed free-trade agreement would expand that. Russia is a big source of tourist income for Israel, second after the United States as a source of tourists, numbering over 600,000 per year. Foreign Minister Avigdor Lieberman is USSR-born and maintains a close relationship with Moscow. Perhaps most important, the two nations share a chronic threat from Islam and are unsentimental about dealing with terrorism.

Israel was deferential to Russia's sensitivities during Moscow's 2008 war with Georgia, halting its arms trade with that country. That was a big piece of deference. Georgia's defense minister at the time, Davit Kezerashvili, had cultivated Israel as a supplier; he was born in Tbilisi to Jewish parents who moved with their son to Russia and then to Israel in 1992. Before the cutoff, Israel had delivered drones and rocket launchers to Georgia, among other items.

More recently, when Moscow swallowed Crimea, the Israelis shrugged. In March 2014, the Netanyahu government declined to vote on a UN General Assembly resolution on the situation in Crimea.

For years, Israel's Achilles' heel has been energy—or, more accurately, the lack thereof. Prime Minister Benjamin Netanyahu has joked that Moses led his people through the desert for 40 years to the only place in the Middle East without oil. Until 2000, decades of drilling and digging yielded no significant hydrocarbons, leaving Israel to spend

5 percent of its gross domestic product (GDP) buying fuel from its neighbors—with which relations were uneasy at best.

All that is changing. Trillions of cubic feet of natural gas have been discovered in Israeli waters, and 250 billion barrels of shale oil have been outlined on land. Whether Israel will become a significant oil producer is still very uncertain, as the economics of those shale oil deposits are far from proven, but the nation is already gearing up for a future funded by natural gas exports.

Even more significant than the country's new source of income will be newfound political might. Israel is already receiving visits from new friends and potential business partners, some of them countries that not long ago avoided or even shunned Israel. Russia has placed itself at the front of the pack with a 20-year deal between a subsidiary of Gazprom and Levant LNG Marketing Corporation for the exclusive purchase of liquefied natural gas from Israel's Tamar offshore gas field.

Anyone wanting access to Israel's natural gas will have to navigate a treacherous international obstacle course. Syria, Lebanon, Turkey, Greece, and Cyprus are all contesting maritime borders to lay some claim to Israel's vast offshore gas fields. Even Hamas may try.

Israel's natural gas story started in 2000, when a consortium led by an American firm, Noble Energy, drilled into the Mari-B field 56 miles off the Israeli coast. Nine months and a few holes later, the group had located 1 trillion cubic feet of recoverable natural gas, and in 2004 the Mari-B field was in production. Israelis embraced their new domestic energy resource: Consumption of natural gas rose as quickly as the country could produce it.

In 2006, Noble snapped up the chance to drill in the nearby Tamar block, whose exceptionally high underground pressures had frightened off other operators. They were right to take the risk. Two wells drilled in 2009 located 6 trillion cubic feet of recoverable gas. It was the largest deepwater natural gas discovery in the world that year, and it came just in time.

Israel's natural gas revolution had pushed consumption from almost zero to beyond Mari-B's ability to satisfy it. Israel was using natural gas to produce 20 percent of its electricity. Neighboring Egypt had lots of natural gas to sell, and in 2005 it opened the East Mediterranean Gas Company pipeline to connect El Arish, an Egyptian energy hub, with the Israeli port of Ashkelon. By 2008, Egypt was sending Israel over 200 million cubic feet of gas every day.

Today, however, Mari-B is running dry, and relations with Egypt are shaky. The 1979 peace treaty between Egypt and Israel was a treaty between governments, not between peoples. Much of the Egyptian public—including Islamists, Arab nationalists, and secular leftists—have long regarded the treaty with disgust. The deal that built and filled the gas pipeline was a product of the hated peace pact, and it has been denounced since the day it was signed as a device for Israel and Hosni Mubarak to cheat Egypt.

A series of bombings disabled the pipeline in 2011, and it hasn't been repaired. The days of Israel relying on Egypt for gas—and of Egypt collecting a nice revenue stream from Israel—are over.

The timing of offshore gas discoveries has been fortunate for Israel. Just as Egypt fell into turmoil and Mari-B began to dry up, a smaller offshore field called Noa came into production, and then the first wells at Tamar began producing.

Mari-B was a big discovery and Tamar was even bigger, but both were only a prelude. Shortly after delineating 9 trillion cubic feet at Tamar, Noble Energy spudded a drill into the nearby Leviathan field and hit a 500-foot home run. The Leviathan deserves its name; it is home to at least 17 trillion cubic feet of natural gas (estimates run as high as 25 Tcf).

Adding in several other, smaller deposits near Leviathan, Noble has now discovered 35 trillion cubic feet of gas and perhaps a lot more. That far exceeds what Israel can use, and the excess is available for export. (See Figure 10.2.)

Noble and partners plan to construct a liquefied natural gas (LNG) plant so that Tamar's output can be transported to Europe and Asia. They may build a floating facility, in part because coastal land in Israel is so precious. The Noble Group is watching Royal Dutch Shell's progress in building the world's first floating LNG plant for use off Australia.

For Europeans, Israeli LNG would be an alternative to gas from Russian pipelines. Putin knows he can't prevent Israeli gas from flowing, but he can try to influence where it flows and perhaps siphon off some of the profits along the way.

Israel's Natural Gas Reserves

Figure 10.2 Israel's Natural Gas Reserves

Source: Energy Information Administration. © Casey Research 2014.

One move was to improve Russia's standing in Cyprus. Even though the country is a member of the European Union, Russia stepped up with a $3.5 billion loan to help Cyprus recover from its banking disaster.

But the real prize would be a Russian/Israeli/Cypriot partnership. Apart from the potential of supplying Europe by pipeline, it would offer Russia, already the global leader in LNG supply, a major role in exporting Mediterranean gas to those parts of the highly lucrative and burgeoning Asian market—including China, India, and Japan—where piping the gas is not an option.

Even though it will be years before any LNG is shipped from Israel, Russia is so keen to get its hands on it that in 2012 Gazprom signed a letter of intent with the Noble Group to buy LNG from the Tamar project.

Then in early 2013, Gazprom cut a 20-year marketing deal for sales from the still hypothetical Tamar floating LNG plant. Gazprom is setting up an Israeli subsidiary (Gazprom Marketing) to handle the details, in partnership with Trading Switzerland and Levant LNG Marketing Corporation.

Gazprom Marketing is also reportedly in the mix to help develop Leviathan.

When the massive Leviathan field joins Tamar in production, Israel will be able to use every natural gas export avenue it can find. To that end, the country has been cultivating its relations with Cyprus and Greece, which could provide a pipeline route to Europe. It seems that gas wealth is aligning the interests of Israel, Russia, Cyprus, and Greece.

Even as Israel emerges as a new energy power, the Arab countries will remain rich, especially because their energy is cheaper to produce than the less conventional sources being developed in Israel and elsewhere. But what the Arab countries keep in money, they may lose in clout. With so many oil and gas streams coming online, we may be heading into a time when the world won't care all that much what happens in the Persian Gulf (as long as nobody gets frisky with nukes).

And that includes Russia. If it is someday forced to choose between its alliance with Iran and a booming economic partnership with Israel, Putin may choose the latter.

OPEC countries will be first to adjust to an energy-rich Israel, which will compete for sales to the European energy market.

Turkey will have a choice to make, too. When the Islamist AK party came to power in 2002, relations with Israel hit the skids. If Turkey remains hostile while Israel develops a cozy circle with Russia, Greece, and Cyprus, it will be isolated in the politics of the eastern Mediterranean.

Egypt will also struggle with Israel's rise. As much as many Egyptians decried gas sales to Israel, the Israelis did pay for what they received. Israel's natural gas production ends any hope of that income stream reviving.

Then there's the United States, whose importance to Israel will fade if the Jewish state becomes an energy giant with a dance card full of partners. In the long run, the United States could lose the most if its best Middle Eastern friend turns toward Russia.

Of all the players in the area, it is Russia that is most likely to benefit from Israel's emergence as a gas exporter.

Israel sees a need to protect its newfound energy riches. The Israeli Defense Forces in late 2012 approved a navy request for four new warships, at a cost of about $750 million. The navy is concerned that the gas rigs being built in Israeli waters will be attractive targets for terrorists, especially if Israel were to find itself in another war.

In particular, Hezbollah has the capability to attack offshore gas operations with land-based missiles. Other terrorist groups may be able to do the same. Syria also has antiship missiles that could reach the gas fields.

With such threats looming, it's no surprise that Israel, the most pragmatic of all nations, would welcome the Russian navy as a protector— especially if the United States comes to be seen as an untrustworthy ally.

Russia would have much to gain by offering its protection. It could enlist the cooperation of Israeli intelligence in stemming the tide of radical Islam, and it could gain a say in the exploitation of another giant source of natural gas. That might be attractive enough for Putin to accept the resulting damage to Russia's alliances with Syria and Iran. Abandoning those two countries would shift the balance of power in the region toward the Sunnis and would affect every Sunni/Shi'a conflict.

Bottom line: In an area whose politics revolve around energy resources, Israel has long been at a major disadvantage, scrambling to secure needed supplies of oil and gas. But no longer. Israel's newfound natural gas wealth will bring a sea change not only for the Jewish state but for the entire Middle East and everyone involved in its affairs. Israel is gaining clout, Russia might be changing sides, Iran is feeling vulnerable, Egypt is losing a major customer, and regional and global allegiances are shifting.

 
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