The best view of the Haifa refinery is from the top of its refining tower. To reach it, the visitor enters an elevator resembling a floating cage. As it noisily grinds 75 meters skywards, one understands why people at Oil Refineries, known locally as Bazan, admit it's no hotel elevator. But the view from the top makes one forget the dizzying height and the flimsy protective railing, as well as the incessant racket and sour-burnt smell that follow the visitor throughout the vast complex.
Below lie 2,400 dunams of metal constructs, oil tanks and tens of kilometers of pipes. These installations are the industrial core of modern economies, in essence the engine of our lives.
As you read, in all likelihood there is not a product around you not produced with the help of the petroleum industry. The roads we drive on, additives in the food we eat, medications we take, cosmetics and fertilizers we use, as well as any packaging - all are made with petroleum. Even if one chooses wood products to avoid petroleum-based products, the wood is probably covered by petroleum-derived paint.
Paper wrapping, which may be used by those who don't want to use plastic, can be covered with petroleum-derived wax, which makes the paper impermeable to water.
Most troubling, however, is the petroleum product that grants us and our goods mobility - gasoline.
A trip from Tel Aviv to the Haifa refinery illustrates the problem. This trip can be done by train, at a cost of NIS 60, or by car, in which 15 liters of gas for the 200 kilometers drive will cost NIS 120.
Five years ago most people would probably have chosen to travel by car. Now they'd be much more likely to take the train. In early 2007, gasoline cost less than NIS 5.50 per liter. Now it costs NIS 8 per liter.
Given the increase in fuel costs Israelis face, TheMarker embarked on an investigation into the components that comprise the price of gasoline, starting at the refineries.
The state's take
Nearly half of what we pay at the pump goes to the government: 35.2% as excise tax, and 13.8% as value-added tax. In 2011, refineries and gasoline distributors in Israel incurred losses. The government, however, still earned money from our appetite for gasoline.
A rough calculation shows that for every NIS 1 citizens pay in tax on fuel, the government makes NIS 8 billion.
The nominal price in Israel may not be terribly high by international standards. But a recent analysis by TheMarker shows that in terms of relative purchasing power, Israelis are paying one of the highest gasoline tax rates in Europe.
The purpose of levying excise tax was to ultimately benefit consumers, by encouraging them to reduce consumption of taxed items such as cigarettes and alcohol. In the case of gasoline, the tax is intended to reduce pollution through a reduction in vehicle use.
In practice, this tax has not decreased gasoline consumption. It currently comprises a whopping 93% of indirect taxes collected by the government.
Net excise tax collected in 2005 was NIS 9.3 billion, growing to NIS 16.9 billion by 2009. In 2011 it came to more than NIS 15 billion in 2011. The increase in revenue derives from an increased number of cars on the roads and longer driving distances, as well as from rising oil prices. Most of the burden is carried by private car owners, who pay 52% of the excise tax; truck drivers pay 40%.
Most of the oil imported by Israel comes from the former Soviet Union, mainly from Azerbaijan. A small amount comes from Egypt. The price is determined by international trade. The data collection agency Platts publishes prices, set in international deals. The recent increase in prices at the pump is the result of a hike in the price of a barrel of oil, which rose from $42 a barrel at the end of 2004 to $103 in 2011. A barrel of crude contains 259 liters, translating into less than NIS 2.50 per liter. After setting base prices, companies negotiate additional premiums. These are based on various factors such as the type and quality of the oil, which is determined by its density (heavier oil being harder to refine ). Another difference between oils is the degree of their acidity or sweetness, determined by the content of oxides and sulfur, which must be removing. The final premiums are typically several dollars per barrel.
Geopolitical considerations also come into play. During the Libyan crisis, when oil supplies were halted, the premium on Azerbaijani oil increased by $5-6 per barrel. Premiums are also dependent on availability of tankers and on port fees. Crude oil can be purchased directly from the drilling companies, or from trader companies holding leases with the drilling companies. Gross profits amounting to tens of dollars per barrel are made directly by drilling companies, while refineries make $6-8 per barrel, at best. Trading companies earn tens of cents per barrel, while marketers make a few cents.
Most of the oil imported by Israel arrives at the port of Ashkelon. It is then transported to refineries by several companies, such as the Eilat Ashkelon Pipeline Company, and Petroleum and Energy Infrastructure, or its subsidiary Oil Products Pipeline. These companies control the terminals, the storage tanks and pipelines connecting tankers to the terminal.
There are also other companies that control the storage tanks, but competition is minimal due to tight price regulation of infrastructure services in Israel, as well as the fact that refineries in Israel are "captive" clients. That's because there are not many options for unloading and transporting. The Haifa refinery's oil, for example, must be unloaded in Ashkelon, because bringing tankers to Eilat would not be practical, given the origin of the oil, and using the oil terminal at Kiryat Haim, near the refinery, is impossible since that terminal can only handle small tankers; the one in Ashkelon can unload super-tankers carrying 250,000 tons.
While PEI and OPP are government companies under tight regulation, the Eilat Ashkelon Pipeline Company, which is partly privately owned, can set its own prices. Oil is transported from the Ashkelon terminal by the non-competitive PEI or OPP, using a network of underground pipes leading to the Haifa refineries. The costs of unloading, transport and storage are marginal, relative to the final price. Storage costs NIS 6-7 a month per ton, while transporting 1,000 liters costs only NIS 2.
Oil Refineries in Haifa is the largest refinery in the Middle East, capable of refining 197,000 barrels of oil every 24 hours, twice the capacity of the Ashdod refinery (which belongs to Paz Oil ).
Refining crude oil involves distillation by heating, followed by condensation at different temperatures. Heating to several hundred degrees Celsius enables fractionation of components based on their boiling points. This process is carried out in gigantic furnaces. These furnaces have to be tall, to contain the rising oil vapors.
Following the cycle of evaporation and condensation, the products undergo further refining in a process known as "cracking", based on catalysts which are also present in commonly used Brita home water filters. The control room of the Haifa refinery resembles that of NASA's mission control. The refinery is active 24 hours a day, since transitions from rest to full activity (or vice versa ) takes 2.5 days. Construction costs of refineries of this scale are estimated at billions of shekels.
In 2006, the refining industry in Israel was privatized and split in two. Oil Refineries in Haifa was sold to the Israel Corporation. Paz Oil bought the Ashdod refinery.
According to Yaron Zar, energy analyst at Clal Finance, the two refineries will be highly motivated to export over 25% of their products in the coming years, since the Companies Law would then grant them significant tax benefits. Currently, they are less motivated to increase exports since both refineries have accumulated losses recognizable for tax purposes. Once however they have reduced their tax bill thanks to these accrued losses, that will change.
Officials at both refineries do not take kindly to claims that there is a lack of competition, having just gone through two years of losses.
However, according to Zar, these losses are not typical, and things will soon change. "Refining companies lost money last year since the profit margin diminished sharply when crude oil prices skyrocketed, without a concomitant increase in the price of refined products. In addition, demand in Europe was down, with the embargo on Iran increasing crude oil prices, without parallel increases in the price of the final product. When the Iranian crisis subsides, prices will come down. In the meantime, Saudi Arabia is increasing production, and the USA is releasing some of its strategic reserves. This has already reduced the price of crude oil and will increase the profits of refineries".
Senior refinery officials claim that gasoline prices in Israel are comparable to those in Europe, thus invalidating claims of lack of competition as contributors to high prices. The fact that customers do not exercise the option of importing oil themselves attests to the competitiveness of local prices, they claim.
Prior to privatization of the refineries, the gasoline companies did import crude oil, but this has almost entirely ceased. But in March Sonol and Dor Alon imported 30,000 tons of gasoline, showing that there can be alternatives to using Oil Refineries, and that competition is possible. Sonol and Dor Alon claimed that importing the gas themselves could sometimes be cheaper because it prevents dependence on just one supplier.
The lack of competition is a result of the fixed distribution between the refineries since privatization took place. Also, Paz Oil sells most of its refined gasoline to its own chain of gas stations. One client of Oil Refineries claimed that suppliers don't compete for his business since there are no real alternatives, and importing refined products is daunting. When asked if he had asked Paz for a competitive offer, he said Paz refines to maximal capacity and sells to its own gas stations, so there was no point.
When it exits the refinery, the price of gasoline is 43% of the final price at the pump, based on prices published by Platts. These serve as the basis for negotiations between the refineries and the gasoline suppliers. Negotiations are based on the type of gasoline, the amounts involved and payment scheduling. Subsequently, the price at the pump is determined by the gasoline suppliers.