For many decades a joke has made the rounds in the Jewish world: “Hashem gave the land of milk and honey to the descendants of Isaac, but he gave the oil and gas to the descendants of Ishmael”.
The humor, of course, resides in the fact that, as commodities, oil and gas are much more valuable than milk and honey. In recent years, however, the joke has lost its sting because large quantities of natural gas have been discovered offshore in Israel’s economic zone in the Mediterranean. As a result, with the appropriate development of the resource, many problems could be resolved, making Israel’s economic and geopolitical future brighter:
- Israel’s need for natural gas could be covered from domestic sources, thus saving importation costs, improving Israel’s competitiveness in the international marketplace and reducing Israel’s dependence on potentially unfriendly oil and gas exporting countries.
- Supplies exceeding Israel’s needs could be exported, thus bringing in substantial amounts of trade earnings and providing the wherewithal to fund not only expanded production of other products, but to make it possible to expand its assets abroad through investment.
- Enhance the geopolitical position of Israel in the Near and Middle East by serving as an energy source for neighbors such as Egypt and Jordan.
The operative phrase however is “…with the appropriate development of the resources….” Unfortunately Israel has displayed its lack of experience with raw materials exploitation by committing a series of serious blunders which have jeopardized all of the potential advantages listed above.
Background
In the production of energy Israel uses primarily coal, fuel oil, and natural gas. Transportation is powered primarily by gasoline and diesel, with a small portion covered by natural gas. Until 2013 Israel imported most of its fossil fuels.
Environmental groups backed by the courts have effectively blocked onshore exploration for oil. However, a consortium of Israeli and foreign companies began to explore for oil and/or gas offshore in the Mediterranean. Between 2009 and 2010, four deposits were discovered, two very large fields in the north, named Tamar and Leviathan, and two smaller ones in the south, named Karish and Tanin. Another field, called Aphrodite, was discovered in the offshore economic zone of Cyprus.
Exploration and development were hampered by a phantasmagoric maze of governmental ministries and agencies, all of which claimed authority over one aspect or another of the project. The ministries of interior, environment, finance, economy, water and energy as well as the independent energy, environmental, and anti-trust agencies, among others, in a completely uncoordinated fashion, demanded that the companies constituting the consortium, Israeli enterprises Delek and Ratio and Noble Energy of the United States, conform to a long series of requirements, sometimes contradictory.
Production finally began from the Tamar field in 2013 to supply the domestic market, but again because of bureaucratic requirements and delays as well as problems in the distribution network plan only a very small number of the potential industrial users have begun to use the gas. As of February 2015, eight plants out of a potential market of 2000 had converted to natural gas. No progress has been made in converting the bus or truck fleets to gas.
In the meantime in March of 2014, the Anti-Trust Authority, headed by Professor David Gilo, reached a formal agreement with the consortium in which the companies agreed to sell their rights in the southern fields while retaining ownership in Tamar and Leviathan. Nine months later, Gilo announced that he had changed his mind and that the consortium companies would have to sell their rights in either Tamar or Leviathan.
This decision means in effect that the Leviathan Field, the largest, will have to be sold, since Tamar is already in production. In the meantime, billions of dollars have been spent in exploration and development, not to mention more billions spent by Israel itself in maritime and other security measures and naval procurement to protect the fields from terrorist or other threats.
The Current Situation
Due to this bombshell on the part of the Anti-Trust Authority and the inability of the government to demand that the Authority honor its original agreement due to its independent status, the current gas, and therefore energy, situation in Israel is totally unclear.
Development of the Leviathan field will be delayed unless there is a very quick resolution to the situation. It is questionable that if the companies are forced to put their stakes in Leviathan up for sale, that there will be any buyers, given the regulatory uncertainty that has been demonstrated on the part of Israel. The business reputation of Israel has been seriously compromised. Standard and Poors has suggested that Israel’s credit rating, pristine until now, could be negatively affected.
Tamar will be able to supply the domestic market eventually, but export agreements with Jordan and the Palestinian Authority will have to be fulfilled also from Tamar for the time being, and may well delay further satisfaction of the domestic market. In the meantime, the consortium is negotiating with Egypt to fulfill its required gas deliveries under the existent memorandum of understanding from Cyprus’ Aphrodite Field, instead of Leviathan. As a result, enhanced economic ties with Egypt will be lost. Jordan has announced that it also may look to Aphrodite for its gas supplies.
The Italian electric power company Edison, a subsidiary of the French giant EDF, has withdrawn from bidding on developing the smaller southern fields, citing regulatory uncertainty. Continual negotiation among the ministries of infrastructure and energy and the Public Utilities Authority, the Anti-Trust Authority and the National Economic Council resulted in an offer of settlement to the companies of such Byzantine complexity and manifest unfeasibility that a few days later the agencies involved admitted its faults after it was rejected out of hand by the companies. Among other absurdities it would have required Delek to exit the Tamar Field and reduced Noble’s holding in that field, the only one operating so far. Finally Director Gilo announced that he would delay making a final decision until after the new government is formed following the elections on March 17th.
Thus every advantage of the discovery of substantial reserves of natural gas in Israeli waters has been jeopardized by the decision of one man to rescind a signed agreement, following a long series of policy delays and regulatory changes by other authorities. In short, the decision has placed in jeopardy the reputation of Israel as a place in which to invest, after years spent in building up a sterling record in this regard, demonstrated by the eagerness of governments and companies in Europe, the U.S., Canada, India, China, Japan, South Korea, Vietnam and elsewhere to invest in Israel.
In addition to the reputational damage, it is now unclear when, if ever, an export market will be created, placing in jeopardy not only potential export earnings but a historic opportunity to forge economic ties with Egypt and Jordan. Even satisfying the domestic market is now no longer a sure thing, if the decision is made by whoever ends up controlling the Tamar Field to divert some of its production to export. If that is permitted, of course, by the hyperactive regulatory agencies.
Major Decisions Ahead
If this article had been written three months ago it would have been unequivocally optimistic, while criticizing the delays and costs involved in Israel’s learning process on how to deal with the exploitation of natural resources. But that is history now, unfortunately. The energy future of Israel is unclear and prediction is rendered impossible with any confidence. Hopefully the controversy will be resolved soon in a reasonable way, but the memory of Gilo’s action will linger for a long time. Politically speaking there must be attention given to a process by which the independent agencies are required to adhere to agreements which they have signed as well as forced to make their decisions within a reasonable time and to defend those decisions in detail.
To rub salt into the wound, the ministry of finance announced that during 2014, the first full year of production from the Tamar Field, the Israeli state earned 744 million shekels from gas royalties (about USD 186 million) and that if the development of Leviathan went ahead as planned and was not delayed by the antitrust action by 2019 earnings would be in the neighborhood of 3.2-3.4 trillion shekels (USD 820-850 million). That’s a lot of schools, hospitals, clinics, housing developments and defense and security equipment, now in question.
“We have met the enemy and he is us” Pogo is famous for having said. How true, certainly in the case of energy in Israel.
Norman Bailey is a professor of Economics at the Center for the Study of National Security at the University of Haifa and an adjunct professor of Economic Statecraft, Institute of World Politics in Washington, D.C. The author acknowledges with thanks the contribution of Gideon Miller of InMill Israel Ltd. to the preparation of this article.
