Energy Expert: 'We're Getting Excited Over the Golden Calf'

Israel should not get carried away on selling gas, warns Professor Brenda Shaffer.

Professor warns Israel should not get carried away on selling gas

Gas drilling rig

Dr. Brenda Shaffer, director of the energy policy management program at the University of Haifa, hasn't been able to believe what she's been seeing from her office on the slopes of the Carmel Mountain.

Shaffer is considered one of the world's experts on the politics of energy and how it influences gas markets around the world. She has been watching from the sidelines as her country inhales the sweet scent of newly discovered natural gas, and heads down the wrong path, doing things she warned her students at Harvard against.

She also warned the governments of countries including Azerbaijan and Kazakhstan against these very moves, as she accompanied them in their first steps toward building a natural gas industry.

"We received the 10 commandments - and instead of taking advantage of them, we're getting excited over the golden calf and images of sheikhs in the Persian gulf," Shaffer told TheMarker.

"Raising the state's royalties shouldn't be on the agenda right now, but rather that the gas will be coming here and serving the local market. The natural gas companies have been throwing out excited declarations about turning Israel into a natural gas exporter, and I don't hear the politicians saying that keeping the gas here is more important than profiting from selling it.

Dr. Brenda Shaffer
Hagai Frid

"By what right does the CEO of Noble Energy come to Israel and decide that gas found at the Leviathan prospect will be sent abroad? A sovereign nation needs to worry about this more than about royalties."

This isn't common in countries that give out drilling licenses?

"There's always that delicate game between the country and the foreign companies in everything that has to do with 'national resources.' I'm happy to see that the politicians aren't trying to get involved in this game, but it's strange that no one's reporting on what's going on in the meetings between the government ministers and the Noble executives. By what right are they keeping silent?"

What can the gas companies do if they find that Leviathan contains a massive amount of gas - way more than the Israeli markets consume?

"First off, the numbers still aren't definite. Second, you need to take into account future consumption needs, and that's a matter of planning the energy economy. If the U.S. and Europe have coal-powered and nuclear power plants, why do they consume gas? It's an environmental issue. Pollution has an economic cost. It costs money due to the costs of treating disease, lost work days and income allowances. Other countries understand it's worthwhile to import natural gas because in the long term, it pays off.

"Therefore, Israel - a welfare state - clearly should consider its energy policy in economic terms. Natural gas has many advantages in terms of how it affects the public and labor productivity."

The gas discoveries give Israel an opportunity to change how it consumes its energy, she said. The current usage statistics are based on the assumption that everything will stay as it is now, but that's clearly not the case, she said. In the United States, the development of horizontal drilling changed the energy landscape, ensuring the country gas reserves for 200 years. Why should Israel keep enough gas for only 30 years and export the rest, she asked.

Simple things first

Instead of making grandiose plans, as Israel tends to do, it should be worrying about the simple things first - it's looking to sell the gas instead of using it itself, she said.

"In the end we'll find ourselves in a situation similar to that of Dubai, Venezuela or Mexico," she said. "The money was used up, and then it was gone. It's illogical. The entire advantage of natural gas is that you keep it here, and use it to improve the environment and labor productivity."

Shaffer, 46, jokes that she knows the world of natural gas better than she knows her children. A native English speaker, she also speaks Russian, Turkish and Azerbaijani, as a result of her research and work. She was born in San Francisco and came to Israel at age 18, joining the Israel Defense Forces. After completing a bachelor's and master's degrees and a doctorate, she did a post-doctorate at Harvard, on the energy relations between Iran and Russia. After seven years there, she returned to Israel to head the master's program on energy policy management at the University of Haifa.

Export plans are companies' strategy

Two weeks ago, she sent the committee reviewing Israel's natural resources fiscal policy a letter, stating, "The interest of the gas companies is to present a picture of demand beyond the Israeli market, in order to exact a higher price from the Israeli consumer."

She thinks the claims of export plans are a strategy.

"I don't see an alternative market for Israeli gas at arm's reach, beyond the Israeli market," she told TheMarker. The moment it becomes apparent that export markets aren't what the companies claim they are, the price to local consumers will drop. The burden of proving that an export market indeed exists lies with the gas companies, she said.

Unlike oil, natural gas needs a specific market, she said. The companies have said they might liquefy the natural gas and then export it - liquefied gas takes up 1/600 of the space of regular gas. However, producing liquid natural gas is so expensive that before it's produced, companies need to be certain they have a buyer - no one would invest billions in a liquefying facility without knowing that there's a market for at least 15 years that will buy billions of dollars of gas, she said.

Israel's neighbors aren't interested in Israeli gas, she added: They're already importing gas from other sources. Italy and Greece are in shaky financial states, and Turkey is saturated. They're getting gas from Russia, which won't want Israel encroaching on its turf.

Russia's biggest threat is from Iran, which has the world's second largest gas reserves. Iran is currently importing gas because it lacks facilities to mine its own resources, but it's looking eagerly toward Europe - a factor to take into account when analyzing Russian-Iranian relations.

"I've seen projects closer to Europe that were less complicated financially, weren't being developed following a recession and had U.S. support - and they still took 11 years to come to fruition," she said. "[Yitzhak] Tshuva said Israel would become a geopolitical giant, but Azerbaijan, for instance, which has reserves as large as Israel's, didn't become a giant, and the oil didn't help it in the war against Armenia. Oil doesn't necessarily solve problems; sometimes it makes problems.

"I don't see markets that are going to strike a 10-15 year agreement for Israeli gas," she said: The U.S. is canceling contracts in the wake of its advancements in producing gas from shale; Russia is providing gas to east Asia; Australia and Indonesia just started producing gas, too, and Israel has no advantage over them. Plus, there's a good chance China could produce a massive amount of gas from shale, too.

"There are two things that can have a fundamental impact on supply and demand: price and technology. If you can promise me you know what technological advances we'll have in the upcoming decades, then I'll buy your stock, because no one knows this. Regarding price, it's a function of the economies, and you can't tell me what the euro exchange rate or the state of Greece will be in another three years. Therefore, no one has a clear picture about gas markets," she said.

Not only good

In her letter to the government committee, Shaffer warned about including natural gas revenues in the natural budget. "Money that comes from oil and gas is different from money that comes from other sources, which is produced by work," she said. "Money that comes from natural resources only accelerates harmful aspects of the market."

Anyone imagining that the money from natural gas will do only good, and will go straight to education or welfare budgets, is forgetting that there's no connection between funding sources and government management, she said. "Even today Israel is rich, but it doesn't invest in education. More money doesn't promise that there'll be a change in preferences. The money won't necessarily stop going to useless sectors."

Research has shown that countries that lack natural resources tend to develop stronger economies with better human resources than countries rich in natural resources, she said.

"Look how our economy got through the global crisis. We're producing real things, not just commodities."

Regarding the large number of companies involved in gas exploration in Israel, Shaffer cautioned that it's important to hold them to strict safety standards, in order to avoid a BP-type disaster as recently seen in the Gulf of Mexico. "You have to be cautious, to bring in companies who care about their reputation," she said.