U.S.-backed initiative to build an undersea natural gas pipeline between Israel and Turkey looks increasingly troubled as Turkish President Recep Tayyip Erdogan escalates his public denunciations of the Jewish state.

Israel has shifted its priorities to exporting to Egypt and other markets because of the growing discord with Turkey, according to two people familiar with the matter, who spoke on condition of anonymity because the issue is sensitive. Efforts to reach governmental understandings with Turkey continue but the pace of talks has fallen off sharply, one of them said.
 The frictions have destabilized a pillar of Israel’s gas export strategy. The U.S. brokered a rapprochement between the two countries in 2016 after a six-year rupture, primarily in an effort to reach agreements that would let Israel export to Turkey, and from there to Europe. Turkey was to receive alternative sources of gas at a time when relations with top supplier Russia were strained.
 Now Israel is focusing on other regional projects fraught with political risks or financially questionable. Noble Energy Inc. and Delek Group Ltd., the lead partners developing Israel’s largest gas find, Leviathan, signed a $10 billion deal with Jordan in 2016, but have struggled to close other regional contracts.
Delek shares fell 7.2 percent on Monday, the most since August 2015 on a closing basis. Ratio Oil Exploration 1992 LP, which owns a 15 percent stake in Leviathan, dropped 5.5 percent to 2.09 shekels as of 5:23 p.m. in Tel Aviv.

No Breakthrough

A spokeswoman for the Leviathan partners said exports to Turkey are still “a valid option” and that discussions with “the relevant players in Turkey” continue. Talks between Turkish and Israeli officials have so far yielded no results, a Turkish Ministry spokesman said.

Erdogan’s vitriol heated up after President Donald Trump’s Dec. 6 recognition of Jerusalem as Israel’s capital. Turkey “won’t leave Jerusalem to the mercy of a child-killing nation,” he vowed, calling Israel’s soldiers “terrorists.” His broadsides angered Israeli officials already critical of Turkey’s continued support for Hamas, the Islamist militant group that controls the Gaza Strip.

Trump’s Jerusalem move “triggered Turkey’s recent reaction, and it’s known that anti-Israeli rhetoric resonates with some Turkish voters” ahead of local, parliamentary and presidential elections next year, Nihat Ali Ozcan, an analyst at the Ankara-based Economic Policy Research Foundation of Turkey, said by phone on Monday. “However, Turkey’s interest in Israeli gas is genuine and while talks on the pipeline project may have slowed, it’s not over.”

Long-Term Risks

For Israeli executives, Turkey offers a relatively stable economy with large demands. But the political strains have highlighted long-term risks to gas flow.

Turkish pipeline company Botas canceled a December visit to Israel, according to one of the people familiar with the matter. Botas officials declined to comment.

And now that Turkey has reconciled with Russia, Leviathan partners suspect their negotiations with Ankara are being used as a bargaining chip against Moscow, one of the people familiar with the situation said.

Israel’s alternative focus on Egypt carries its own risks. While Egypt is geographically closer and its president, Abdel-Fattah El-Sisi, has better ties with Israel, legal wrangling over an earlier gas agreement is holding up progress on any deal. Egypt’s economy isn’t as strong as Turkey’s, either.

Israel is also exploring a third option: a pipeline that would cross Cyprus to Greece and Italy, and cost at least $6 billion. Gas executives are skeptical the project is financially viable, and Turkish control of northern Cyprus could create obstacles. But the interested countries’ leaders have signed agreements to push the idea forward, and the EU has allocated 34.5 million euros to develop a plan.

Malcolm Hoenlein, a director at Leviathan stakeholder Delek Drilling LLP, said it’s too early to rule out a deal with Turkey, even though Erdogan has “complicated progress.” Trade continued to grow even after ties soured in 2010 over Israel’s deadly storming of a Turkish ship trying to break Israel’s Gaza blockade, noted Hoenlein, the executive vice chairman of the Conference of Presidents of Major American Jewish Organizations. In the past decade, it’s jumped 33 percent to about $4 billion.

Egypt, though, is a better option at this point “because there’s a lot to be done with the existing LNG plants there,” he said in a phone interview, referring to idle liquefied natural gas facilities in Egypt’s north. The Egyptian government also wants to be involved in the development of gas deposits offshore Israel, Egypt and potentially Cyprus, he said.

While Government Officials Snipe at Each Other…

Israeli Prime Minister Benjamin Netanyahu, hasn’t counted Turkey out of the running.

“Unfortunately, we’re still hearing problematic statements against the State of Israel, and we’re also witnessing Turkey’s continued support for Hamas,” he told reporters on a recent trip to India.

But Israel has three pipeline options, and “we’re definitely looking at all three,” Netanyahu said.

Originally published in https://www.bloomberg.com/news/articles/2018-02-05/fraying-israel-turkey-ties-threaten-planned-natural-gas-venture