A Cartel We'll Have to Learn to Live With

David Gilo is right to say that the Noble-Delek combine is a cartel, but it's one we’ll have to swallow because insisting on true competition in natural gas would be too costly.

Offshore Leviathan natural gas drilling site.
Albatross

Were he around today, Charles Dickens might have found inspiration in the regulatory twists and turns of Israel’s natural-gas industry.

The latest was Antitrust Commissioner David Gilo’s decision this week to backtrack on his earlier agreement with the kingpins of Israeli energy, Delek Group and Noble Energy. No, they may not retain their near-monopoly on natural-gas production, Gilo suddenly concluded. His ruling is understandable in the context of hysterical populism in the run-up to elections. But it will be a historic mistake that will cost future generations of Israelis dearly.

One of the central elements of Dickens’ novel “Bleak House” is the case of Jarndyce v. Jarndyce being heard in the Court of Chancery. The dispute over a large inheritance has been running for decades when the story begins, and comes to its ignominious end only when the estate being fought over has been emptied of money by the legal fees used to fight over it.

Israel’s substantial natural-gas reserves are not draining away like the Jarndyce estate. But Israel has certainly been wasting time and resources in seemingly endless battles over everything, how much gas Israel should export and how much it should keep for use at home, what fees the companies exploiting the gas should pay to the state, how much they may charge their customers and more.

Then there’s the issue of have how to ensure competition, the battlefield where Gilo fired his salvo this week.

The Israeli natural gas business is a monopoly, that is inarguable. Delek and Noble own majority stakes in the Tamar and Leviathan fields, which account for more than 90% of Israeli gas output. In March Gilo decided to overlook this obvious antitrust problem in return for the two companies’ agreeing to sell control of the much smaller Carish and Tanin fields. That was supposed to create the competition the Israeli market needed.

You don’t have to be an antitrust expert to realize that the deal Gilo made with Delek and Noble wouldn’t have changed the competitive profile of the gas market. But how Gilo plans to rectify his error and break the gas monopoly, he hasn’t yet said or decided. It will likely require Delek and/or Noble selling a stake in one of the two big gas fields.

What caused Gilo to change his mind nine months later is irrelevant — he did, and we will pay the price for it at least as much as Delek and Noble will.

A gentler multinational

All of these battles over Israel’s gas reserves and the way they are framed by media outlets and by politicians resemble Jarndyce v. Jarndyce in that they look at the natural gas as an inheritance, a fortune one need only get one’s hands on to be enjoyed. Those energy riches are just sitting there at the bottom of the blue Mediterranean Sea and the only question is how to divvy it up.

In the case of Dicken’s Jarndyce fortune, the contestants at least were correct in looking at it as found treasure. But apart from their being hugely valuable, Leviathan, Tamar and the handful of smaller gas fields have little in common with the fictional estate.

Yet all the questions being asked about our gas treat it as if it were a fortune just waiting to be spent. Why aren’t energy prices lower? Why can’t we break up the gas monopoly like we did the cellphone operators’ cartel and bring down prices? Why should Yitzhak Tshuva, the owner of Delek who is already a billionaire, get to make billions more? Where did these yahoos from Texas come from and why should they get to keep so much of our energy inheritance? If they’re not going to be more generous, well, we should find a nicer, less greedy multinational energy company. Right?

Contrary to what most teenagers think, cellphones are not a strategic asset, but natural gas is.

The discovery of massive fields of natural gas in the Mediterranean Sea has already profoundly influenced the Israeli economy by sharply reducing our energy imports, which has long-term geopolitical ramifications, and by lowering the cost of natural gas to consumers and business.

The biggest fields found are called Tamar and Leviathan. Tamar is already in production and once the giant Leviathan field is in production Israel can become a regional energy powerhouse. We already have deals in the making with Jordan, the Palestinian Authority, Cyprus and even Egypt that will make Israeli natural gas critical to their economies, too.

Tamar alone supplies 60% of Israel’s energy requirements, but imagine if the field were to be knocked out for a prolonged period because of a technical malfunction, natural disaster or Hezbollah attack. The lights would go out across Israel. We had a small taste of that when Egypt, which had been supplying our natural-gas needs before Tamar came on line, cut off deliveries in 2011. Our reliance then on Egyptian gas was a lot less than it is now on Tamar, but the impact was huge, forcing us to import high-cost energy for more than a year.

Insurance policy

Getting Leviathan on line is a critical insurance policy to guarantee that Israel has excess capacity in the event of a disaster. Like the other endless energy-policy fights, Gilo’s about-face will only postpone the day the first Leviathan gas begins flowing.

One estimate says that if the new antitrust policy is implemented smoothly and Delek/Noble divest part of their gas holdings, the delay will add up to two years. But given our Jarndycian energy battles, there’s no particular reason to think it will go smoothly or quickly.

Thanks to our visionary prime minister, we are embarking on a needless election that every poll indicates will end in a deeply split vote, lengthy coalition talks and in all likelihood a weak government. The hysterical populism that has infected the public debate over economic policy-making since the 2011 social-justice protests makes reasoned and consistent decisions almost impossible.

From us in Israel, the offshore reserves look like an enormous and tempting asset to global energy companies. From a world perspective, they are not. Israel’s total energy reserves don’t even put it among the top 40 countries. In addition, Israel’s pariah status, its zigzagging energy policies and the huge geopolitical risk anyone takes developing gas fields anywhere in the Middle East won’t make the task of recruiting new energy multinationals any easier.

To date, Noble has been the only company that dared. It would be easier to send the Texans packing than it would be to find another company with the experience in deep-sea drilling and the ability to raise the billions of dollars needed to develop the field and to find export markets for the gas Israel doesn’t need.

In any event, the Delek-Noble cartel is not quite the rip-off it has been popularly portrayed as being.

Israel natural-gas prices are in fact quite low, certainly compared to Europe, and they are not much higher than the United States. Theoretically, breaking up the monopoly could make them lower still, but that is no easy task and certainly not one that can be done without endangering the country’s energy security. We are a small, relatively isolated economy sitting in a difficult part of the world and we have to live with the costs that these circumstances entail.