Where are the oil majors?
Unlike neighbor Cyprus, Israel has failed to attract top league companies to its burgeoning energy industry. Why?
It was not just Western and European companies that dropped anchor by the shores of the Greek-speaking island, but also emerging market companies such as Petronas of Malaysia, Kogas of South Korea, as well as Australia's Woodside. One can guess that if one of these companies were to announce that it was entering the Israeli market, Prime Minister Benjamin Netanyahu would be sounding off with declarations about the attractiveness of the Israeli oil and gas discovery industry.
But that isn't happening. By comparison with the foreign line-up in Cyprus, the one in Israel looks ridiculous. All the foreign companies operating here, apart from one, have market caps below $1 billion, and some of them are in the tens of millions. Some do have high professional reputations, but all are dwarves by international standards. The exception is Noble Energy, which has a market cap of $14.5 billion, the Gulliver in the Israeli Lilliput, but a medium to small player internationally. But is there any significance to the absence of the international giants from Israel, beyond image?
Too much for Noble
"I have no doubt that if we had another four-five companies like Noble, the gas reserves would be developed at a faster rate," says Dr. Amit Mor, CEO of economic strategy consulting firm Eco Energy Ltd., and an international expert on natural gas energy. "The Israeli gas industry is still a sort of New Frontier, and stands in great need of companies with know-how and capital. This need will only grow as we enter the world of gas exports, which obliges us to construct liquefaction facilities. There is a handful of companies in the world that have the know-how and expertise required to build liquefaction plants. We are talking about massive sums of investment, of $8-15 billion for a plant, involving capital investment by the owners of 20-30%. Noble is the pioneer of the development of the gas industry in Israel and in Cyprus, but projects of that magnitude will be too big for it."
Noble is a company that has grown with the Israeli market. It came here in 1998, when it was still called Samedan, and its market cap was below $1 billion. That year, the only serious international company that has ever operated here entered the Israeli market: British Gas. However, unlike Noble Energy, British Gas got out after ten years, and sold its investments at knock-down prices: it sold its rights in the Matan license, later known as the Tamar reserve, which eventually turned out to be worth billions, to Gidon Tadmor's Avner Oil and Gas LP (TASE: AVNR.L) for one dollar. "Undoubtedly, BG must be eating its hat today," says Mor, "I think they are still waiting for a phone call from the Israeli government and the Palestinian Authority to renew negotiations on development of the Gaza Marine reserve."
What made BG leave? The view in the energy market is that the reasons that it went are the same as those that deter international companies from entering the Israeli market today: the Arab boycott, and the conditions of extreme uncertainty arising from Israeli regulation.
An Israeli who recently met a senior manager from a large international company heard that as a condition for the company investing in a Persian Gulf country, it was required to sign an undertaking that it would not invest in Israel. "The boycott may have been formally cancelled years ago," says Mor, "but it still exists and has an effect, not just on companies active in the Arab and Islamic worlds, but also on those considering entering those markets in the future." "We have the problem of our leper status," says former Petroleum Supervisor Dr. Yaakov Mimran. "The Arab countries are closed to anyone who does business with us."
But those who went into Cyprus also ran a risk, of confrontation with the Turks.
"Apparently they take the Turks less seriously. They are more and more perceived as crazy."
"The boycott is a weighty consideration," says Gina Cohen, who advises overseas companies, "but if Israel had 'extenuating circumstances', such as a developed transport and distribution infrastructure, customers with high credit ratings, skilled and available manpower, the big companies would take the risk and come here. But in practice, not only are there no extenuating circumstances, there are even 'aggravating circumstances'."
"Israel is not considered attractive because of the uncertainty generated by all the committees that have arisen in the past two years and the various regulators trying to create competition artificially, among other things through intervention in prices set in agreements. Excessive intervention to protect the consumer often leads to the opposite result from what you are trying to achieve. In addition, there's a severe NIMBY problem here when it comes to constructing infrastructure installations. In Mozambique, they discovered gas only this year, and they are already starting to set up an LNG infrastructure there."
Impossible to export
Dr. Amit Mor believes that the oil majors would change their minds about Israel if oil were discovered here in significant quantities. "Gas for local consumption, unlike oil, is not a commodity. As long as Israel does not set clear guidelines for the export of gas from Israel, and does not allow exports via Cyprus, it's impossible to expect international companies to come here. What's the point of discovering gas here if you can't export it? In my view, it will take the government several more years until it knows whether and when an export facility with a high output will be constructed here, but if it is decided to set up an LNG project in Israel with an annual output of 10-15 million tonnes (each tonne takes 1.35 BCM), I think we will also see international companies of the first rank here, companies like Exxon and Royal Dutch Shell, as well as Chinese and Indian companies."
And what about the local market?
"The Israeli market has undergone the fastest transition process in history to use of natural gas, but it is still limited in scope."
A somewhat different view is put forward by Dr. Brenda Shaffer, an international energy expert from the University of Haifa. "Growing local demand such as exists in the Israeli market is an asset, and not a liability," Shaffer says. "The energy companies are happy at the fact that it's possible to sell to the local market."
So why don't they come?
"Israeli gas was discovered during a period considered rich in discoveries around the world. What's more, technological development now makes it possible to extract gas from shale, and that's a completely new field in which the international companies are showing great interest." In Shaffer's opinion, one of the weaknesses of Israeli gas is that it is concentrated in deep water reserves, making production and transport of the gas to shore very expensive. "Every company would first of all prefer to develop onshore gas reserves or reserves in shallow waters," she says.
Published by Globes [online], Israel business news - www.globes-online.com - on June 4, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012
- Tel Aviv market report
- Tel Aviv Stock Exchange
- Israeli stocks in NY
- Arbitrage gaps for dual-listed stocks
- Israeli stocks in Europe
- Israeli stocks on other markets
- Tel Aviv 25 options
- Mutual funds
- Current representative shekel rates
- Historical representative shekel rates
- Bank shekel rates
- Shekel/dollar options