Debating Israel’s natural gas boon

Map of Mediterranean gas fields

Israel’s newly discovered natural gas finds have given a huge boost to the country, economically, politically and with positive implications on the security front too. However there is now fierce debate going on in Israel over what to do with the gas. Should it be used for domestic purposes or exported? And in what proportions?

This week we had some more good news: Significant signs of natural gas have been found at the Karish 1 Well:

Noble Energy Inc. (NYSE: NBL) and Delek Group Ltd. (TASE: DLEKG) have announced that significant signs of natural gas have been found in the target strata of the Karish 1 well in the Alon C license. The target strata are at a depth of 4,790 meters, including the depth of the water.

[…[

Noble Energy, the well operator, said that the target strata had natural gas. The companies have not yet stated how much gas has been found, as it is necessary to wait for the results of the electrical logs.

The best estimate of the Alon C reservoir by Netherland Sewell & Associates Ltd. (NSAI) previously published by Delek indicates that it contains two trillion cubic feet (TCF) of gas. However, Clal Finance analyst Yaron Zar believes that 0.9-1.5 TCF of gas will be found at the reservoir.

[…]

“This is further proof of the power of Israel’s gas industry and the great potential of the gas along Israel’s coastline, and we must keep up the momentum,” said Avner CEO and Delek Drilling chairman Gideon Tadmor. “The news from Karish follows the increase in the estimated quantities of gas at Leviathan announced just two weeks ago. Israel’s energy security strengthens with each discovery, and we must not stop the momentum towards building a thriving Israeli natural gas industry, which will generate hundreds of millions of shekels for the government in the coming decades, since the government’s take in taxes and royalties is 60%.”

The drilling of the Karish 1 well began in March, and cost $90 million. According to the prospective resources report, published in December 2012, there is a 77% chance of find gas at the well, which is located 75 kilometers northwest of Haifa. The geologic structure of the license’s target strata is Tamar sands.

“I welcome the announcement about the Karish reservoir,” said Minister Energy and Water Resources Silvan Shalom. “Increasing the natural gas supply in reservoirs will make it possible to supply more gas to the domestic market and boost the state’s revenues, which will be channeled to investment in education, welfare, health, and investments in the Negev and Galilee, for the good of Israel’s people.”

Silvan Shalom’s above statement is something of an about-turn, perhaps connected to the fact that protestors demonstrated in front of his house and surrounded Bank of Israel Governor Stanley Fisher in protest at their intention to export Israel’s natural gas rather than use it for domestic purposes.

Dozens surrounded Bank of Israel Governor Stanley Fischer, crying out “Where’s our money?” and calling against exporting gas. Police officers at the scene guarded Fischer from the crowd and helped him to his car. No one was arrested.

The protesters arrived at Tel Aviv after some 400 demonstrated in front of the Ramat Gan residence of Energy and Water Minister Silvan Shalom, against his intention to export natural gas.

[…]

Mor Gilboa, director general of the Megama Yeruka environmental group, said that “Natural gas can serve us for dozens of years and cheapen costs of living. That’s the message we would like to deliver to the minister.”

As Yisrael Hayom reports, Silvan Shalom is now supporting the idea that the natural gas resources should be primarily for domestic use:

Energy and Water Resources Minister Silvan Shalom would like to drastically cut the amount of natural gas that Israel would export.

According to a Channel 2 report Wednesday, Shalom plans to reject some of the findings of the Tzemach Commission that recommended exporting most of the gas Israel extracts from the Mediterranean Sea. The recommendations have drawn criticism from environmentalists and others who believe Israelis’ would pay less for electricity and enjoy better quality of life if Israel uses its newly found gas for domestic consumption.

The commission was named after its head, Ministry of Energy and Water Resources Director-General Shaul Zemach. In 2012, after a year of deliberations, it recommended Israel export 53 percent of the gas it produces, which would allow it to stay energy independent for 25 years. The commission said the profits of exportation would spur competition and induce more exploration.

Shalom apparently wants to allocate 39% to 43% of the gas for exportation. But government officials stress that Shalom would endorse a specific figure only after his staff reviews the matter thoroughly. “The minister has held many meetings on this matter for the past several weeks; when he decides on a figure he will ask the government to adopt his recommendations,” one official said on Wednesday.

Israel’s natural gas reservoirs have an estimated 38 trillion cubic meters (tcm) of natural gas. The Energy and Water resources Ministry believes Israel would require less than17 tcm through 2040.

“Gas gives you much more power than you had. It is something that is very helpful in the geopolitical arena and helps to narrow the gaps,” Shalom, who also serves as Israel’s minister for regional development, told Reuters in an interview.

“It is a tool we can use in a sensitive and very clever way to enable us to develop relations … and to have better relations with many other countries,” he added when asked if future gas trade could warm up chilly Israeli-Turkish ties.

[…]

Shalom, a former foreign minister and veteran member of Prime Minister Benjamin Netanyahu’s ruling Likud party, declined to discuss the issue. But he revealed that Russian President Vladimir Putin had raised the question of Israel’s gas projects only last week.

“President Putin and Prime Minister Netanyahu talked about it…[but] it is not something we are dealing with these days,” he said, giving no further details.

Russian energy group Gazprom said in February it was in exclusive talks to buy liquefied natural gas from Israel’s Tamar field and has also made clear it wants to buy from the larger, nearby Leviathan field.

Some Israeli leaders have suggested the country should adopt a “gas for peace” strategy, offering its energy resources to neighbors at discounted prices to cement peace ties.

Shalom appeared to dismiss the idea of one day selling gas to Egypt, saying its southern neighbor had more reserves than Israel, but he did not rule out deals with Jordan to the east.

The Association of oil and Gas Exploration Industries in Israel cautioned against the new move away from exportation. “Such a decision would deal a heavy blow to the Israeli consumer,” it said in a statement.

Alon Tal, in a very interesting assessment in the JPost, calls this a debate over values, not numbers:

The discovery of natural gas in the Mediterranean is a development that even the gloomiest environmentalists greet with elation. Israel’s air pollution takes a terrible toll on public health, with high asthma and cancer rates in major cities reflecting pervasive shortcomings in international air-quality standards. And while President Shimon Peres promised the world at the 2009 UN Copenhagen climate summit that Israel would soon reduce greenhouse gases by 20 percent, emissions since then actually have steadily increased.

Natural gas could dramatically transform both these pathologies.

The discovery of gas will also produce major economic dividends for Israeli citizens.

After a major public campaign, the government agreed to accept the recommendations of the Sheshinski Committee, gradually increasing a levy on oil and gas to reach 60% of excess profits. This constitutes a major new source of revenue for the public coffers. Recently, the Tamar fields went “on line,” and development of the Leviathan fields should be imminent.

And yet the Knesset corridors were filled last week with a heated debate over the question of gas exports.

The question that the Netanyahu government is pushing to resolve is this: How much of the gas that the private companies pump from Israel’s national reserves should be sold overseas as exports? Last year, another government committee, headed by Energy and Water Ministry director-general Shaul Tzemach, considered the matter. It called for allowing exports of 50% of present reserves.

Ostensibly this seems like a good thing. If Israel has excess reserves of natural gas, exporting them should bring in considerable tax dollars. Moreover, access to the world market will serve to “incentify” international corporations to expand local exploration activity and create much-needed competition for future gas concessions.

Such benefits, unfortunately, tend to be overstated while the potential downsides are understated. Approving massive exports of natural gas based on what we know about proven reserves today is poor public policy.

To start with, the Tzemach Committee’s present projections regarding gas reserves are far too optimistic. Natural-gas production is measured in units of bcm (billion cubic meters). Tzemach assumes a total reserve of 950 bcm. But verification of such massive reserves has not yet been confirmed by geological experts. The Bank of Israel, for instance, says the numbers are far lower.

[…]

Argument over “numbers” sounds like nitpicking and can quickly lead even concerned citizens’ eyes to gloss over. In fact this is an argument about values. How much gas do we want to sell today – and how much do we want to leave to our children and grandchildren so that they might enjoy energy independence? Once the Israeli economy and infrastructure makes the transition to natural gas, to run out and be forced to import would be hugely expensive.

That is precisely what has happened in the UK. After exporting huge quantities of the North Sea’s seemingly unlimited gas reserves, more and more natural gas today is imported – but for three times the cost its own gas was sold for. Even Egypt has begun to import natural gas! Over the past decades, the price of natural gas has only risen. With the ongoing increase in demand for energy from China, India and the developing world, there is no reason to think that it will not continue to do so. It is prudent to take a precautionary approach and only sell off excess reserves when we are sure they actually exist. The worst thing that can happen by delaying a decision on gas exports is to increase future revenues.

[…]  Tzemach estimates that over the next 25 years domestic demand will not exceed 450 bcm. But once a reliable supply of natural gas becomes available, the entire Israeli economy can and should change. Dror Strum, a leading local expert and president of the Israeli Institute for Economic Planning, recently released a detailed report showing that a realistic 35-year Israeli projection of demand for natural gas reaches 815 bcm.

Strum bases his projection on experience in other countries with natural-gas reserves.

Once they became available, the infrastructure transition was dramatic. For instance, some 50% of the vehicle fleet moved to natural gas as a fuel source within seven years.

Once factories realize that they can cut their energy costs in half, pragmatic Israeli industrialists will also convert their factories to utilize the cleaner, cheaper resource. New plants for industries such as ammonia and methanol (that Tzemach never considered) can and should emerge to take advantage of this inexpensive and clean source of energy.

[…]

Perhaps the central question that needs to be debated is the length of time we want to guarantee reserves. Rather than offering a range of policy options, the Tzemach Committee decided to recommend that Israel ensure domestic natural-gas supply for 25 years. But is that a long enough time? Israel has known economic boycotts and needs to make energy independence a higher priority than other, less diplomatically isolated, countries. A cautious approach would guarantee reserves for the coming 50 years and an intermediate position for 35 years.

Clearly, such a decision is a value judgment that should be made after a transparent and robust public debate – and not by a small clique of government technocrats who are subject to intensive lobbying by the very powerful and wealthy natural-gas industry.

One of the most important misconceptions that needs to be raised in that debate over present versus future sales involves the overstated expectations about tax revenues from exports. To begin with, it will take about a decade for the first taxes to arrive because first the investment in exploration and infrastructure by the gas companies is to be paid out.

[…]

While it is only fair that the international consortiums that develop Israel’s gas fields at considerable costs receive a fair return, surely the Israeli public should benefit from the higher prices available for exports! In short, advocates correctly argue that the proposed 50% export rates are a bad idea for many reasons: It would be bad for the environment, limiting the potential transition to clean fuels. It could be bad economically, as Israel in the future may well end up importing very expensive alternatives. And it could be bad socially, with poorer populations ultimately paying higher prices for electricity and fuel when local sources are exhausted, when it could enjoy the benefits of Israel’s newly discovered natural resource for generations.

A consensus position that seems to be emerging in the Knesset is twofold:

• Firstly, there is no reason why the issue of natural-gas export policy needs to be resolved immediately with such imperfect information. As more reliable data about the actual reserves become available, a more informed and responsible decision can be made. Once export contracts are signed, it will become very difficult politically (and hugely expensive) to cancel them if projections turn out to be overstated and Israel needs to cut exports back.

• Secondly, the issue needs to move from the government to the Knesset to ensure a robust debate that presumably will lead to a better decision. That at least was the lesson of the Sheshinski experience, where the Knesset’s intervention led to a far more equitable position regarding taxing gas profits.

The issue of natural-gas exports should not be framed in the tired old paradigmatic battle between Left and Right, or capitalist versus socialist values. Rather, it is a question of whether we want to err on the side of caution in considering the country’s energy future. Should we ensure that the next generation of Israelis and local industries enjoy virtually unlimited access to clean, inexpensive energy? Or should we opt to maximize profits immediately for the international corporations that stand to benefit from a policy of massive exports?

I hope our economic and political leaders have the wisdom to make the correct decision for Israel both for the present and for future generations.

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10 Responses to Debating Israel’s natural gas boon

  1. Andrea says:

    In a reasonable world ( or just normal )Israel could possibly export gas to Europe via Turkey pipeline within the frame of a joint agreement between Gerusalem and Ankara – the most vibrant economies in the Mediterranean. Turkey’s pipelines are already built to export gas from Azerbaijan and Turkmenistan but stream of gas is not enough – reason is that Moscow prevent international firms and Azerbajan from operations in disputred Caspian Sea. Not enough, sanctions against Iran have left pipes short of vital gas. Mediterranean fields would also – maybe in narrow measure – compensate Europe depandency from existing sources ( Russia and Algeria ).
    This latest point maybe explain why Moscow is so interested in keeping Mediterrannean waters troubled .
    Export or domestic use ? It is curious that Algeria is facing the same dilemma like most gas producers. Final consumers will have little benefits – that’s sure. Return of profits on export is a huge piece of cake and Europe market pays a fortune. We’ll see….
    By the way – Bibi was in Moscow weeks ago – wasnt’he ? He did not looked so worried after all.

    • anneinpt says:

      I read a report earlier exactly about what you mentioned: the Turkish pipelines. The Turks have apparently offered the use of their pipeline to the Israelis. Economics trumps all. We shall see.

      I definitely agree about Moscow being a trouble maker.

      Yes, Bibi was in Moscow about the missiles. Rumours fly that Russia has cancelled the deal with Syria, but Israel denies this. Again, time will tell.

      • Andrea says:

        Neither Turkish nor Israelis are fools and both countries – in a different way – are at the top of start up nations in the Mediterranean. Economics trump all but for once in a while we have to say thank to human selfish inclination.
        years ago when I was in my early age of comprehension I asked my Jewish teacher why so many Jews were in economy studies ( David Ricardo, Karl Marx, Milton Friedman, and now Paul Krugman and so many others ) apart from racist stereotypes. He answered in a rather philosophical way : firstly we have tried to bring peace through monoteism and devotion to one G-d but it did not work well – not only for Gentiles’ fault. Now we try to spread good sense through consideration of materialist and basic emotions (i.e. Marx and Freud ).
        Religious Jews will disagree but contribution from Jewish economist and philosophers to good sense is not less worthy than contribution of Prophets to monotheism in ancient ages.
        Just out of topic maybe
        No offence to any religion intended of course

        • anneinpt says:

          Andrea, thanks for the interesting story about your teacher. If you had asked me, I would have answered differently. The Jews have become excellent scholars of theoretical subjects like economics, philosophy etc. because knowledge is portable. Once you have an education it can’t be taken away from you, and if you are kicked out of your country, as the Jews were countless times in history, at least you have your education with you so that you can start again in a new country.

          I certainly have no argument with the success of Jewish contributions in economics, philosophy, mathematics etc . This is a well-documented fact, and we can measure the success of the Jews just by the number of Nobel prizes we have won. The Jewish religion has nothing against the study of secular subjects. On the contrary. Some of our greatest Rabbis and sages were experts in secular fields. For example, the Rambam (Maimonides) was a physician and a philosopher, Rashi was a vintner and a famous expert on wine and grapes, and the Lubavitcher Rebbe (Rabbi Schneerson of New York) was a chemist I think.

          Another point is that the study of the Talmud and Torah sharpens the mind greatly, and thus the Jews found study of other subjects much easier than the gentile population. And remember too that even in the Middle Ages and before, most Jews were literate, unlike the surrounding population, which again gave them more propensity to study other subjects too.

          The question is only whether Jews became experts in these subjects out of interest or necessity. I think it was a bit of both.

  2. An embarrassment of riches. Israel should keep its priorities in order. Of the first is its security. With thousands of missiles aimed at it from various countries, its wealth should first be directed at neutralizing these threats. Only after Israel’s security is reasonably assured – including defending its productive resources – should there be considerations of redirecting its wealth toward its domestic economy.

    • anneinpt says:

      Not sure I agree with you here. Our domestic economy is part of our security situation. If we are strong domestically it is easier to withstand security problems. And the security situation has been ongoing for 65 years. people are tired and want a decent standard of living like any other western country. If we have the resources the people should benefit as well as the state.

      • Steven says:

        Please recognize that Israel has discovered approx 31 trillion cubic feet ( not meters) of natural gas reserves , and Israel’s projected required domestic needs are not 17 trillion cubic meters. This representation on your part should be amended .

    • Leslie Greenberg says:

      I definitely disagree with you Elliott. Offering discounted energy to our enemies is a true definition of insanity…doing the same thing over and over and expecting a different outcome. Every concession and gesture Israel has offered its enemies has resulted in escalated violence towards us, as these moves are interpreted as weakness. Israelis live in constant debt and overdraft. Don’t let the technological and corporate successes fool you. Israelis can’t finish the month on their incomes. Salaries are in shkalim. Consumer products cost the same as they do in dollars. Israelis are desperate for relief, and finding energy sources to help alleviate domestic burden is a gift from the heavens meant to be shared with all Israelis.

  3. Steven says:

    The development of natural gas is ongoing , setting up fixed minimums for Israel domestic use is reasonable. Recognizing natural gas financial benefits being placed into a sovereign fund, will be similar to the country of Norway.
    However, to develop and determine how much natural gas exists in the levant basin , an export predetermined percentage amount should be accepted. Peretz and Shalom’s amount are not substantially different and will actually intersect when there is another 10% increase in the reserves either by development of the previous reserve discoveries that has seen increase in Tamar or an actual new discovery such as Karish 1.
    My personal assessment is to give the present drilling companies a taste of the export monetization of 35% of present reserves, but tie this into future discoveries being rewarded with a 50% to be allowed for export basis. Than set another target of double the present reserves, 180bcm that Israel will allow 60% of all future finds to be exported.
    Presently Israel has 900Bcm which Israel would have 315 Bcm to be exported
    From 900 to 1,800 Bcm A further 450 Bcm could be exported
    Israel would than retain based on this logic anywhere from 585 Bcm to 1,135 Bcm of domestic
    Natural gas reserves. The export market could grow to 765 Bcm which would have a gross revenue present day value 100 billion dollars if the product was exported to Asia.
    Since Woodside Energy is considering spending at least 1 billion for a percentage of leviathan , why does anyone think these previous figures be unreasonable.

    • anneinpt says:

      Thank you for your learned and informed comments Steven. I don’t know enough about Israel’s natgas industry to comment one way or another. I’m just a blogger quoting from the news, but I appreciate your input.

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