The Battle Over Natural Gas: Four Things the Government Must Insist On

Splitting up the ownership of Tamar and Leviathan and selling Tanin and Karish are no guarantee of future competition.

Off Haifa coast, oil rig at enormous Leviathan natural gas field.
Albatross

We are in the final stretch of the struggle over Israel’s natural gas reserves, and the Israeli public finds its most important gatekeepers have no teeth.

The Antitrust Commissioner, Prof. David Gilo, quit his post over the government’s intentions to bypass him and decide on a framework which in his assessment would not bring competition to the industry. And Finance Minister Moshe Kahlon, whose party won the treasury on the basis of promises to act against monopolies, has withdrawn from the issue of natural gas because one of the partners in the Tamar field, Kobi Maimon, is a close friend. (The very same Maimon who completely denies he is one of the owners of Tamar.)

That leaves the Israeli public with a number of actors in the gas affair for now: The Prime Minister’s Office and the chairman of the National Economic Council, Prof. Eugene Kandel; National Infrastructure Minister Yuval Steinitz; the Finance Ministry’s budgets director Amir Levy; deputy attorney general Avi Licht; and Economy Minister Arye Dery, who can force a decision on the Antitrust Commissioner based on his authority under section 52 of the Restrictive Trade Practices Law (when there are considerations of foreign policy.)

Each one of them is facing the gas partnerships in an attempt to find solutions that will regulate competition in the industry and accelerate the development of the Leviathan offshore field.

The Israeli consumer has not reached this final stretch in good shape. The price of gas has risen in recent years by tens of percent (56% since 2009,) and without strict regulation of the market we will continue to see prices climb. That is why we must consider the fact that Yitzhak Tshuva’s Delek Group and America’s Noble Energy are the only two companies that have discovered gas here in six different reserves: Tethys Sea, the pumping of gas from which has ended; Tamar, which today provides Israel’s natural gas; as well as Leviathan, Tanin and Karish – none of which is producing gas yet.

The government’s considerations include many and sundry elements, with competition and lowering the cost of living not topping the list. The Finance Ministry budget division is the only body that has a tradition of promoting competition in the Israeli economy, but lacking a minister to back them up, it will be hard to expect a radical arrangement from them.

Prime Minister Benjamin Netanyahu has demonstrated an assertive approach over the past two weeks, declaring that he intends to close the matter of the gas sector quickly. There is no reason to delay such an arrangement, the economy needs the gas and there is a business opportunity for gas exports. But what is really the motivation behind Netanyahu’s actions on this issue?

A close associate of Netanyahu says that “Netanyahu is a capitalist,” by which he means that the prime minister is not sensitive to questions about the cost of living, being more interested in having the gas flow and the owners make a profit – the bigger the better. But it is possible that this is not the only reason that Netanyahu has entered into the thickets of the matter and that there are also other considerations involved, political and diplomatic. For example, Netanyahu is identified in the region and the world as a diplomatic nay-sayer. His handling of the gas issue could somewhat soften this rejectionist image and present other sides of him, more liberal, certainly to his Republican friends in the United States.

In the regional arena, control of the gas provides Netanyahu with a position of economic power vis-a-vis Jordan, Egypt and the Palestinians. He cannot, or does not want to, supply the goods of diplomatic moderation, but he can proudly wave the banner of the economic benefits that Israel is capable of providing through its export of natural gas.

Basic requirements

None of these have the slightest connection to what matters to Israeli consumers and industry. As far as they are concerned, an agreement with the natural gas partnerships must meet four basic requirements:

1. Drilling and fast: Bringing about accelerated development of the gas fields in order for there to be regular gas supplies from a variety of sources and different owners, and maybe even competition will develop.

This means that we need to sell the Karish and Tanin fields as quickly as possible so their development will start, and also to have Delek sell off its share of Tamar – since the greatest amount of competition will come from Leviathan. It is important for the competitive alternatives to be relevant at the exit points of the existing contracts that were signed by a number of large organizations with the Tamar partners.

2. Taking care of the private citizen. Making sure Israeli consumers enjoy these gas discoveries and feel the economic benefit of Israel’s natural resources in their electric bills. A 10% reduction in electricity rates is too small, and will most likely be erased in coming years by a rising gas price. It is important to ensure that low energy costs do not trickle down into higher salaries for the employees of the Israel Electric Corporation, but instead into the bills of the company’s customers.

3. Taking care of Israeli industry. Making sure Israeli industry, business and government customers, such as hotels, hospitals and, in the future, the transportation sector, all benefit from the availability of cheap natural gas and promote economic growth. This means building the infrastructure needed to do so.

4. Blocking the monopoly. Reining in the power of the natural gas monopoly and supervising it, so it cannot endanger the freedom of the political leadership in decision-making.

No nationalization

We must take ideas such as nationalizing the gas fields off the agenda. These are inappropriate solutions that will not help the economy. We do not trust the government to know how to manage energy companies, develop gas fields and sell their products at the right price. Gas deals need professionalism and expertise, the ability to manage operations and finance at a high level – and that is not a job we would leave to the members of the Likud Central Committee or their coalition partners.

We also don’t need to tell the international business community that Israel is driving entrepreneurs away. The opposite. The government must draw in new entrepreneurs. It can do so by broadcasting to them that it is sanctifying and promoting values of competition and worrying about its consumers and business sector, all at the same time. What better way could there be to serve the business community than providing energy at a fair price? After all, hundreds of factories and businesses are dying for a gas hookup.

Government may have to invoke its authority

Multinational corporations and investors understand all this quite well, too. The solution being formalized of splitting the ownership of the Delek Group and Noble Energy in the Tamar and Leviathan offshore fields and the sale of Tanin and Karish to a new third-party does not guarantee a future of aggressive competition. If this solution does not deliver the goods, the government will have to invoke its authority. It is therefore impossible to guarantee regulatory certainty and 40 years of quiet for the gas partnerships.

These are not normal businesses but energy inputs, whose prices can be carried over into almost every product manufactured here – and of course they can play an essential role in managing Israel’s relations with its neighbors. Given the circumstances, the gas partnerships must not expect the country to let go of the gas industry completely.

Until competition is created (after the sale of Tanin and Karish and the splitting up of the ownership of Tamar,) a mechanism is needed that will know how to handle the monopolistic power of the gas partnerships. Without that, it will be impossible to guarantee the Israeli consumer and local industry a reduction in the cost of electricity and energy.

The problem is that the government has not undertaken any analysis that would indicate the implications of a natural gas price of $4, $5 or even $6 per BTU on the local economy. Every price reflects a different contribution to the economy and a different profit level for the gas owners. What is the price point at which this contribution to the economy is optimal – in other words where it helps the most to create jobs and lower the cost of living?

This is the sort of discussion that needs to be carried out in the Knesset Finance Committee, when the agreement with the gas partnerships is brought there for debate. It is also the sort of discussion that the government and cabinet need to have in order for the Israeli public to be reassured that its interests in lowering the cost of living and creating jobs have not been pushed aside in favor of political, diplomatic and budgetary interests – or just because of a surrender to the monopoly.