Israel's energy sector eyes opportunities following normalization with UAE

London — The UAE and Israel's recent landmark deal heralds significant opportunities for trade between the two countries, including crude and oil products, that could result in new trade flows in the region.

Israel has two refineries with a combined capacity of around 300,000 b/d and relies solely on imported crude as it has no domestic production. The majority of this oil is supplied by Russia -- mainly Urals grade from the Black Sea -- and Azerbaijan, with supplementary barrels from West Africa and the US, among other suppliers.

Historically, Israel has not been able to buy crude from oil-producing Arab nations in the Persian Gulf due to various restrictions, including embargoes on the sale of goods to Israel and prohibitions on direct movements of ships between Israel and its neighbors in the region.

The Israel-UAE announcement on Aug. 13 noted that delegations between the two countries will meet in the coming weeks to sign bilateral agreements regarding various areas, including energy.

Developments are happening quickly, with Abu Dhabi and Tel Aviv last week swiftly unblocking bilateral international calls as well as lifting firewalls on previously blocked websites.

In the aviation sector, tourists and the wider business community are also awaiting direct flights to be initiated between Israel and the UAE, and also the ability of Israeli airlines to overfly the UAE, which would cut journey times for flights between Israel and Asia.

This marks the first time that Israel has fully normalized diplomatic relations with an oil-producing country in the Persian Gulf and potentially opens it to an entirely new, and possibly significant, source of crude oil, given that the UAE produces over 3 million b/d and is OPEC's fourth-largest producer.

An Israeli government source noted that the deal is "starting to make strategic implications," and was being discussed in various Israeli government departments.

"We know that the UAE have approximately 3 million b/d of production from which they are exporting 2 million b/d. We are importing 300,000 b/d, so of course we can [look at UAE crude as another option]. There is no shortage of crude in our region so we don't have a specific problem in that sense. Maybe it's a business opportunity, but we don't know yet," the source added.

An industry source in the UAE noted that senior-level discussions around how energy trade with Israel may develop have started, and that this could trickle down to bilateral trades in due course.

Opportunities

A source at one of Israel's refineries said this week they are exploring opportunities.

"They produce oil and there is a question if we can potentially buy this oil," the source said.

Coupled with the potential of crude imports is the possibility of oil products supply, especially as the UAE is a key exporter in the Middle East, with more than 1 million b/d of refining capacity. In addition crude and refined oil product storage and blending facilities in the main hub of Fujairah also present further opportunities for trading and procurement.

Israel is largely balanced in oil products, although it regularly imports small volumes of gasoil and gasoline, some of which supplement demand and some of which are used for trans-shipment.

The Europe Asia Pipeline Company operates Israel's domestic oil pipelines, including one that runs from the Red Sea port of Eilat in the south of the country to the Mediterranean port of Ashkelon on the west, bypassing the Suez Canal. It also has oil storage tanks in Ashkelon for both crude and refined products.

A source with knowledge of the matter in Israel saw potential opportunities for flows of crude oil moving into Eilat from the UAE, which could potentially expand Israel's role as a trans-shipment hub -- with more cargoes potentially moving from the Red Sea, flowing through EAPC pipelines into Israel's refineries or into storage in Ashkelon, before being sold on to other end-users in the Mediterranean.

"I think everything [in terms of movements] is possible...[it depends on] routes, prices, we have to take a look at Worldscale and [freight] rate of VLCCs," the source said.

An Israeli energy industry source noted that, while Israel does not have the same issues in securing crude that it faced in the 1970s -- like other consuming nations, it fell victim to the oil crisis -- the opportunity to broaden its crude supply sources could prove economically attractive.

"Ships can go to Eilat, maybe this will be good economics for the refineries or other traders. Even to keep them [crude in storage in Ashkelon], " the source said.

The government source added that there may be a possibility to deliver refined products through Eilat into the pipeline system, which currently receives only crude.