Bank of Israel Governor Supports Israeli Gas Plan, Despite Her Reservations

Karnit Flug calls for building of second pipeline to reduce risk to supply.

Bank of Israel governor Karnit Flug discussing Israel's natural gas plan with the Knesset's Economic Affairs Committee.
Emil Salman

The ongoing controversy about the government’s plan to regulate the country’s offshore natural gas resources returned to the Knesset Tuesday, this time at a session of the Economic Affairs Committee. On one hand, the government has been eager to eliminate business uncertainly for Noble Energy of Houston, and Israel’s Delek group, the two players in the developing of the sizeable offshore drilling sites, Tamar, which is already online, and the much large Leviathan site, which is not.

Opponents of the government framework have argued that it gives Noble and Delek monopoly control over the gas reserves, while the government has argued that early resolution of the matter is in the country’s interest and will lead ultimately to a flow of government royalties that will benefit members of the public.

“The gas framework will create certainty only in 2020, but it doesn’t resolve the energy risk in the next four years,” Bank of Israel Governor Karnit Flug told the committee. “It is therefore important for the government to act to reduce the risk by building another pipeline,” she said, referring to a second line that would run to shore and that would ensure that a malfunction of the first line would not cut off gas supplies.

The central bank governor expressed some discomfort with a clause in the plan that commits the government not to challenge or change the regulatory framework for an extended period, saying it will make it difficult for the government to manage the natural gas market “in dynamic conditions.” She acknowledged, though, that it would not have been possible to come to an agreement with the companies without such a stability clause. She called on regulatory agencies to act so that the precedent of the clause did not become a routine concession on the government’s part in the future.

The tax rates that would apply to the Leviathan project would range between 47% and 54%, Flug said, confirming other estimates projecting smaller tax revenues than the government and gas exploration firms have been predicting, but she nevertheless supported the framework approved by the cabinet.

Making reference to terms of a draft agreement that the antitrust commissioner at the time, David Gilo, had proposed but then reconsidered, Flug said the reconsideration on Gilo’s part was problematic “and therefore it is not unreasonable for the companies to demand stability.” What was lacking in the process was someone looking at the entire picture and taking all of the various considerations into account, she said. The government, she added, should also have contingency plans in case the companies do not fulfill their obligations, developing the sites and producing the gas.

Underlining the importance that she attached to the milestones provided in the development of the Leviathan site, Flug said if the owners of Leviathan don’t meet the milestones, the framework agreement will be rescinded, meaning that the government’s own commitments would no longer be in effect.

Gilo, the former antitrust chief, told the Knesset panel that he opposes the government’s gas framework because, in his opinion, it hasn’t seen to it that competition would be maintained and hasn’t protect consumers’ interests. But he added: “The government ministries made it clear to me that if I acted alone, they would bypass me or fight me in court, and then I understood that I wouldn’t have a chance of acting alone.”