(WSJ) - Jordan has been holding talks to become the first country to buy natural gas from Israel, which on Sunday approved a plan to export 40% of energy reserves recently discovered beneath the Mediterranean Sea, analysts and people familiar with the talks said.
A deal would offer Jordan a cheap energy source and relieve a painful energy crisis. Two years of supply shortages from Egypt's pipeline to Jordan have spurred price increases, domestic unrest and has the government weighing brownouts.
It would also mark a major tightening of Israeli-Jordanian relations two decades after they signed a peace accord. But a deal with the Jewish state also risks exposing the monarchy to criticism in the Arab world over the normalization of ties.
Israel, which in 2009 and 2010 discovered gas fields more than 30 times the size of its existing reserves, hopes to earn tens of billions of dollars from exporting to large markets as far away as Europe or East Asia—but supply and infrastructure agreements are years off.
While Jordan's energy needs are considerably smaller, Israel has an interest in bolstering its neighbor's economy through offering gas at low prices that would be delivered relatively quickly, analysts said.
The shortfall from Egypt has forced a 50% rise in the cost of cooking gas and higher electricity rates, prompting antigovernment demonstrations in October.
"Jordan is in the most immediate need and would be the first client" for Israel, said Oded Eran, a former Israeli ambassador to Jordan familiar with the talks. Mr. Eran, a fellow at the Institute for National Security Studies, said the supply interruptions from Egypt spurred the discussions, which have lasted several months. "Stability in Jordan is of strategic significance to Israel."
Mr. Eran said a link to Jordan could be established "relatively quickly" by extending a pipeline several miles across the Dead Sea salt pools from an Israel Chemicals Ltd. ISCHY -0.49%plant powered by gas on the Israeli shore to an Arab Potash Corp. plant on the Jordanian side.
Jordan's Energy Ministry said in February that APC's largest shareholder, Canada's Potash Corp. of Saskatchewan Inc., POT.T +0.47%is eager to make the connection in order to lower production costs.
However, Mr. Eran said officials from the two governments are also discussing a deal to supply the entire Jordanian economy with gas from Israel. In that case, a separate pipeline could be established to run from the Mediterranean through the Jezerrel Valley in northern Israel to Beit Shean near the border and then into Jordan.
Potash Corp., which also holds 14% of Israel Chemicals, declined to comment.
A person familiar with Jordan's gas imports said the country would be willing to buy from any country once a liquefied-natural-gas installation begins operations at the Aqaba port next year. Gas from a pipeline across Israel would cost less than LNG.
Jordan has discussed energy-supply deals with Iraq and Qatar as well, making a deal with Israel the least attractive politically. Jordanians blame Israel for electricity blackouts in the Gaza Strip and for delaying tax revenue due to the Palestinian government in Ramallah.
"A direct bilateral deal is very scary for many people.…But if it's through a third party it might be easier to sell it to the public, said Daoud Kuttab, an Amman-based journalist and political analyst. "If the home gas would go back down, that would go a long way to lessening the opposition."
Egyptian officials familiar with the country's gas agreements said Jordan has informed them it is considering a gas deal through Potash Corp.
Attacks on Egypt's gas-export pipeline in Sinai in 2011 forced supply interruptions to Israel and Jordan. Supply to Israel was never restored and Jordan is receiving less than 40% of the volume called for in the supply deal.
"It's not a huge market, but Israelis will for sure try to sell there. It's clear that this is what we want," said Uri Aldubi, chairman of the Association of Oil and Gas Exploration Industries in Israel. "They really need the gas" in Jordan.
An Israeli foreign ministry official cautioned that a gas pipeline between the countries faces engineering hurdles: It must climb from the bottom of the rift-valley frontier between the two countries nearly one mile in elevation to Jordanian power-generation facilities in Amman and a second one, located 24 miles north.
On Sunday, Israel's cabinet endorsed a plan to export 40% of natural-gas reserves, a move Prime Minister Benjamin Netanyahu said would yield some $60 billion for state coffers over 20 years, adding an extra 1-2% a year in gross domestic product, while bolstering Israel's energy needs for 25 years.
"Israel has been greatly blessed—with gas in the Mediterranean Sea," Mr. Netanyahu said, adding that the energy supply "will fill the state coffers with billions of shekels as a result of gas exports and the taxation that we will impose."
Amid Israel's bullish expectations for export revenue, Turkey and Cyprus are vying to serve as a primary transit point for exports from Israel's gas fields. But the competition could create political squabbles. Energy experts from both countries suggested at a recent conference in Israel that they would try to block any agreements between Israel and their rival.
The draft Israeli plan brought before the cabinet Sunday would have given Mr. Netanyahu special discretion to approve sales to "bordering countries" like Jordan "for diplomatic purposes," without it being counted in the 40% export quota.
The provision was scrapped amid concern by critics about a possible supply shortage for the Israeli domestic market. Nevertheless, the cabinet's decision sets aside gas from Tamar—a field that started supplying Israel in March—as a potential reservoir for Jordan.
"The cheapest option is for Jordan to obtain natural gas from Israel," said Amit Mor, president of Eco Energy Ltd., an Israeli energy consultancy, "but Jordan has yet to make a geopolitical decision to buy gas from Israel."