Don't Export Gas, Think Tank Urges Israeli Leaders

Israel shouldn't export its natural gas, says a key economic institute, a conclusion that will dismay the businesses exploring for hydrocarbons in the Mediterranean seabed.

Israel needs the gas to replace petroleum used in transportation, and it must keep down the cost of desalinating seawater for drinking and agriculture, says the Israeli Institute for Economic Planning in a working paper presented last Thursday at the annual Herzliya Conference.

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"It is axiomatic that there is value, and even a necessity, in allowing the export of natural gas," writes Yossie Hollander, the institute's chairman. "But like other axioms in their day, it seems this is nothing but an untested, even shaky, assumption."

Hollander says the current discourse suffers from a "cognitive bias" since the gas companies only sell and export and don't know how to push gas a substitute for oil. He says the government mustn't get dragged into the question of whether to export natural gas; rather, it should adopt a "different approach" that would include strategic considerations.

The Prime Minister's Office and the Energy and Water Resources Ministry set up an interministerial committee two months ago to examine gas policy, including exports. The gas and infrastructure companies took the podium at hearings organized by the committee. Unsurprisingly, they supported exporting Israeli gas.

One argument was that this would facilitate Israel's drilling operations and open the market to competition. But Hollander says exporting gas would endanger both Israel's economy and security. Though he understands gas producers' preference for exports, this would require extremely expensive infrastructure and great risks, he warns.

"Haifa would be in danger of going up in flames even if the gas liquefaction facility is located out by the Leviathan field," he says. "Some people claim that LNG [liquefied natural gas] ships are like two atomic bombs."

Exporting lacks business logic, Hollander says. The gas market is developing quickly around the world, and global gas prices are at risk of collapsing and eroding the profitability of Israeli gas. This, the paper says, could stem from the fierce competition expected in Europe from Russian gas, or competition for LNG exports to Asia from Australia and Indonesia.

Hollander also maintains that producing gas in Israel is relatively expensive because the stuff is deep under the sea. These costs come on top of the security costs unique to Israel.

Therefore, Israel will have a tough time competing in the global gas market, Hollander says. "Even if Israel becomes a competing player in this market, its revenues and profit expectations will be low," he writes.

"It is important to differentiate between the gas companies' optimistic forecasts and the reality. Many companies obviously have a vested interest in presenting economic expectations from an LNG export project in rosy terms. But even now it can be seen, amid clear trends of growing gas supply and the increasing number of large competitors, that Israel's added value is small and the profitability of LNG from Israel would be low."

Dividing up the spoils

Israel hasn't developed an energy policy despite the gas finds of the past few years, says Hollander. Discussion on the subject has been limited to dividing the spoils, he says, rather than trying to put together a national energy policy that takes into account the gas discoveries and the region's geopolitical changes.

Hollander says the state should require gas producers to direct their output to local use, making sure gas suppliers and investors are guaranteed certainty regarding local demand. This, he says, can be done by adjusting laws and regulations to require the use of gas and opening the market to competition between the various fuels.

Decisions need to made in three areas, says Hollander. First, Israel must decide on the economic feasibility of each energy source in terms of costs and benefits. Second, it must determine which energy sources will compete, considering worldwide success in managing energy policy.

Hollander warns against reliance on a single energy source, which he calls "a strategic mistake for generations to come." The third area concerns factors that aren't "purely economic," as Hollander puts it - environmental and geopolitical factors, for example.

Hollander lists four possible uses for natural gas: Greater use in the electricity market, use for water desalination, production of oil substitutes - mainly for transportation - and exports. He disputes the Energy and Water Resources Ministry's forecast of annual natural gas demand reaching 17 billion cubic meters in 2030, saying gas consumption could approach 25 BCM if its uses are broadened.

Replacing petroleum products used in surface transportation with natural gas or its derivatives could, for instance, save the economy $2.65 billion a year just in raw material costs based on 2010 figures, Hollander says. He adds that the savings to the Israeli economy in 2025 would amount to $8.47 billion.

Hollander notes that natural gas has replaced oil products in electricity production, but warns against replacing coal with gas at Israel Electric Corporation power stations. He recommends that Israel continue using coal to generate electricity, at a higher rate than that mentioned by various experts in the economy. This would be for competitive and cost-savings reasons, despite the damage to the environment.

"Preventing competition between electricity production sources and basing the electricity economy on just one raw material is highly likely to prove a terrible and unnecessary strategic mistake," Hollander writes.

"Considering the significant price differentials and security risks involved in relying on gas, it seems the objective of using gas for as much as 80% of electricity production is both uneconomical and too dangerous for the country," he adds, referring to a target mentioned by the IEC's heads.

Meanwhile, Hollander says natural gas reserves can provide cheap electricity for desalinating seawater and, since electricity accounts for about one-third of desalination costs, this could slash the cost of desalinated water. He says this process could even become more economical than delivering water through the national water carrier - which consumes 10% of all electricity generated in Israel.

Large-scale desalination, says Hollander, could have other geopolitical advantages - for example; if Israel sells water to Jordan, or even Syria.