Israelis are a debating people and even grand good fortune provokes controversy among them. So it has been with the discovery of large natural gas reserves within Israel’s Mediterranean exclusive economic zone. The bonanza has given rise to a protracted series of political, regulatory and judicial disputes.
The quarrels revealed important misunderstandings about energy production and sale. That’s not surprising, because Israel has for years been an energy-importing country. It now needs to change its perspective.
The authors recently served on a US-Israeli commission on the Eastern Mediterranean that focused on energy and security issues. Cosponsored by Hudson Institute and the University of Haifa, the commission was politically and professionally diverse. It included former Senator Mary Landrieu (Democrat, Louisiana), who chaired the US Senate’s Energy Committee; Charles Davidson, the former chief executive of Noble Energy Inc. (NYSE: NBL), the main developer of Israeli offshore gas; and Eytan Sheshinski, the Hebrew University economist who was instrumental in devising Israel’s tax scheme for that gas. It also included former chiefs of the US and Israeli navies: Admirals Gary Roughead and Ami Ayalon, former Israeli Ambassador to the United Nations Ron Prosor, former US Navy official Seth Cropsey and historian Arthur Herman.
Below are some of the commission’s key points.
Over the next 30 years, Israel’s gas could generate more than $270 billion in revenues, over half of which would go to the public through royalties and taxes. It would allow Israel to reduce oil imports and cut its use of relatively high-polluting coal. Israel could become an important energy-exporter. Building a domestic energy industry creates jobs and business opportunities for Israelis.
Geological studies say that Israel may have additional large oil or gas deposits underneath the existing gas fields. This is an important point that has not received enough attention. Whether there will be investor interest in those additional resources will depend on whether the known resources can be brought promptly into production and whether Israel’s business environment is seen as hospitable and stable.
The Tamar gas field, found in 2009, already supplies more than half the needs of Israel Electric Corporation (IEC) (TASE: ELEC.B22) (to provide power to Israel and to the Palestinian Authority). The Leviathan gas field is estimated to be more than twice the size of Tamar. Before its production can start, the developers need a completely final agreement with the government. The parties revised their agreement in May 2016 after the Israeli Supreme Court struck down their previous agreement over the government’s promise not to make future regulatory changes, but major questions remain: Will the government ask the Knesset for approval? And will the revised agreement be challenged in court? Meanwhile, Israel’s Energy Minister has approved the Leviathan plan of development. Legal finality on the framework agreement is required before the developers can obtain financing.
Not all countries with large resources manage to benefit from them. The key is being able to attract investment continually. Where laws and policies make resource development too hard, the resources, however valuable, remain undeveloped.
However justified the regulatory concerns, delays in developing Israel’s gas have spawned higher project costs and risks. The discovery of a large offshore gas field in Egyptian territory and falling global energy prices exemplify those risks. Meanwhile, the gas producers’ financial strength has diminished. Those producers will have more difficulty selling the two small offshore fields that Israeli regulators have required them to sell. Lower world natural gas prices have made export projects less attractive for investment. Access to project financing for energy projects has been substantially reduced and has become more costly.
How energy revenues should serve the citizens’ wellbeing is a key question. But only if its resources are found, developed and marketed will a country face the welcome challenge of deciding how to spend such revenues.
Aspects of Israel’s offshore energy development have been topics of intense public debate: anti-monopoly laws, taxation, exports, environmental concerns, regulatory stability, and how the government should manage and spend the gas revenues.
Each of these issues has public importance and multiple interest groups advance divergent opinions about the best ways to proceed. None of the issues can be handled properly as a stand-alone policy question. Optimal stewardship of natural resources aims to balance a number of goals: making use of known energy supplies, laying the foundation for finding more, safeguarding the country’s reputation as a fair and reliable place for foreign investment, protecting environmental interests, capitalizing on diplomatic openings, taking advantage of domestic job and business opportunities, collecting taxes and using the revenues in society’s best interest.
Some of these concerns are in tension with others. Pursuing higher taxes, for example, could discourage investment. And excessive accommodation of developers could compromise national fiscal or environmental interests. No single consideration is paramount, though each interest group tends to insist that its particular interest deserves priority over the others.
Israel can benefit from its resources only if private parties choose to invest. Israel’s energy challenge is to make the country attractive for capable and reliable firms willing to risk billions of dollars to find, develop and market these resources. Only private sources can efficiently cover the costs, manage the risks and supply the necessary technical expertise. The alternative model is that of Russia and Venezuela, notorious for mismanagement, corruption, and failure.
Natural gas development can be good for the environment in countries, like Israel, where gas replaces high-polluting coal or gasoline. Though damage to an offshore gas rig caused by accident or attack could do substantial harm, offshore gas production is less environmentally risky than offshore production of oil. Israel can use gas revenues to finance study of the marine environment to identify and mitigate risks.
A key lesson of recent history is that Israel should make its oil and gas regulations transparent and apply them consistently. Changing the rules in the middle of the game hurts Israel’s reputation as a country that respects business contracts. Israel has assimilated this lesson by building flexibility into its tax laws.
The way may now be clear for Leviathan’s development. Further delay could endanger the project fatally. The longer it takes Leviathan to start producing, the greater the danger that key export markets could be captured by other large gas suppliers - possibly Australia, Egypt, Mozambique, Iran (with sanctions now lifted), or the US (with shale gas exports).
Historically, energy resources have been found and exploited through multiple phases of exploration and development. This has been true for offshore resources in the North Sea, the Gulf of Mexico and elsewhere. It has also been true for inland resources in the United States, Russia, the Arabian Peninsula and elsewhere. No one finds everything all at once. As new companies and new ideas emerge and new technologies are tried, new discoveries are made and new ways are found to make resources usable economically.
Israel may have additional energy resources, perhaps even larger than Leviathan. There have been indications to this effect. The existence of energy resources is providential, of course. But whether any now-hidden Israeli energy resources can be found and used is a question that hinges on Israeli policies.
Shaul Chorev, former head of Israel’s atomic energy agency, directs the Maritime Strategy Research Center at the University of Haifa. Douglas J. Feith, former US Under Secretary of Defense for Policy in the George W. Bush administration, is a senior fellow at Hudson Institute.
Published by Globes [online], Israel business news - www.globes-online.com - on September 5, 2016
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