It is a truth universally acknowledged, that the European Union observing the dispute between Ukraine and Russia over gas prices must be in want of an alternative source of energy. Lucky for Europe, the recent boom in liquefied natural gas (LNG) development around the world is set to satisfy demand while reducing the region's reliance on imports from Russia. From North Dakota to the Black Sea, untapped reserves are being harnessed by energy companies with state of the art technology. In particular, there is a source being developed close to European homewaters in the Levant Basin of the Eastern Mediterranean with plans for exports to Europe via Turkey.        

A game-changer
The companies that have the most to gain from this development are Israel's Delek Group (with Delek US Holdings (DK -2.16%) representing its U.S. operations) and Noble Energy (NBL), a Houston-based exploration and production firm. Noble has been credited with discovering most of the hydrocarbon reserves in the Levant Basin where a probable oil reserve of 1.7 billion barrels and 122 trillion cubic feet (Tcf) of natural gas lie offshore. Together with Delek Drilling, Noble has already developed the Tamar gas field, which holds an estimated reserve of 10 Tcf, and is looking to expand to the Leviathan gas field where a larger reserve between 18 and 19 Tcf awaits exploitation.

With eyes set on the European market, a pipeline connecting Israel's newly explored offshore gas fields to Turkey is under consideration. From there, the natural gas could easily transit to Europe through regional pipelines along with supplies from the Caucasus. One of the key obstacles stalling this pipeline deal is the spillover from the dispute between Greek and Turkish Cypriots. Turkey has hinted at its unwillingness to coordinate with Israel if Delek and Noble cooperate with the government in Nicosia to develop the 7 Tcf-Aphrodite field in Cypriot waters, another field explored by Noble Energy.

However, Bini Zomer, director of corporate energy for Noble, noted that the consortium developing the basin was considering not only onshore facilities but also floating LNG plants. This could very well minimize the interaction between Israel and Cyprus to a threshold that Turkey will find acceptable for cooperation in the pipeline deal.

Waiting for a green light
More than these diplomatic wranglings, the key obstacle to a major push in developing the reserve in Leviathan appears to be the domestic dispute within Israel over the details of how much of the gas should be exported. In June, Prime Minister Benjamin Netanyahu decided to set aside 40% of the gas for exports without consulting the legislature. Since then, opposition parties and civil society groups have petitioned the supreme court, questioning the legality of the government's unilateral and opaque decision. 

These internal issues increase risk and prevent companies from moving forward. As Yossi Abu from Delek Drilling noted, regulatory certainty, which assures stability in tax and export, is a must before the consortium can begin developing the Leviathan field.

At the same time, there is little chance that the government will not get its way. The gas from the Tamar field is said to have already boosted Israel's GDP by 1% and a further $60 billion in export revenue is expected over the next twenty years. Furthermore, Israel has plans to export the natural gas not only to Europe but also to Jordan and Egypt, which the Netanyahu government hopes will improve relations with the country's two key Arab neighbors. The argument for exports leading to a knock-on effect in the diplomatic arena has received greater appreciation and consideration as Egypt's domestic natural gas production capacity remains depressed due to political instability.

For now, Israel's supreme court has rejected the petition questioning the legality of the government's 40% export plan. Alongside this decision, the court approved gas exports to Jordan, paving the path for further exports to follow. Although opposition leaders have vowed to continue challenging the government's decision, given the aforementioned benefits to the country, it will become increasingly difficult to extricate the government's decision as time goes by.

The Russians around the corner
All this is extremely bad news for Russia and Gazprom (OGZPY). Recently, development of the South Stream pipeline, which will bypass Ukraine while supplying Europe with natural gas from Western Siberia, has been put on a speed track. In fact, Serbia announced that it will start construction of its section of the gas pipeline on November 24, ahead of the European Union's third Eastern Partnership Summit in Vilnius.

With such a large investment in the pipeline project and political objectives in Eastern Europe tied to keeping the region dependent on gas from Siberia and the Arctic, Russia would greatly benefit if alternative sources of natural gas did not enter the European market and weaken Gazprom's leverage. For both Gazprom and Moscow, the potential pipeline connecting the gas from the Levant Basin to the regional pipeline in Turkey is a major hindrance to their financial and political objectives.

Accusations have been made that Russia had offered to stop shipments of sophisticated weaponry to Syria if Israel would promise not to export gas to Europe. Although Prime Minister Netanyahu admitted to having discussed matters related to gas exports with Russia, he denied that this specific condition was brought up.  Even if the unlikely offer was brought up by Moscow, the lucrative export to Europe would be too good for Israel to pass up.

Gazprom had shown interest in both the Tamar and Leviathan fields since their respective discoveries in 2009 and 2010. The Russian energy giant even went as far as singing a letter of intent, offering to acquire 30% of the rights in the Leviathan gas field. However, the company never made a financial offer after facing strong objections from the United States.

Now the fuel coming from the Levant Basin will add to the company's growing headache over falling revenues as the natural gas boom in the United States and elsewhere diminish the value of natural gas from fields in Western Siberia.

Meanwhile, both Noble and Delek can expect to ride the waves of Israel's ascent as a major hydrocarbon exporter.