Bank of Israel Chief Calls for Changes to Natural Gas Framework

Karnit Flug says she supports general terms, but seeks safeguards over possible Leviathan delays.

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Bank of Israel Governor Karnit Flug.
Bank of Israel Governor Karnit Flug.Credit: Olivier Fitoussi

Bank of Israel Governor Karnit Flug ended a long silence on one of the most contentious issues in Israel today, saying she backs the government’s framework plan for the natural gas industry but urges it to make some amendments.

“The outline does not achieve the ideal result, but it does contain many advantages for the economy,” Flug said in an address at the Supreme Court on Monday devoted mainly to other economic subjects. “The Bank of Israel supports the main points of the outline and progress toward its implementation.”

Flug said the government should set milestones which the companies must meet in developing the giant Leviathan field, and that government must have safeguards in place in case of delays in developing Leviathan.

In particular, she called for unspecified mechanisms to prevent “monopolistic pricing,” although she stopped short of saying what those measures should be.

“It is important that ... alternative steps be defined that will advance the connection of the gas reservoirs to the Israeli economy in the most rapid possible manner, alongside a mechanism that will protect Israeli consumers from monopolistic pricing,” she said.

The two points Flug brought up are among the most contentious in the debate over the framework agreement.

Offshore Leviathan natural gas drilling site.Credit: Albatross

Shares of two key gas companies were down in an otherwise sharply higher Tel Aviv Stock Exchange on Monday. Delek Drilling ended 0.45% lower at 15.27 shekels (77 cents) and Avner edged down 0.07% to 2.94 shekels. Both are units of Delek Group, which is controlled by Yitzhak Tshuva.

In expressing reservations about the framework, Flug joins Finance Minister Moshe Kahlon, who said Sunday that the framework “needs to be improved,” and State Comptroller Joseph Shapira.

Prime Minister Benjamin Netanyahu has been struggling to muster enough support in the Knesset to win approval for the agreement, which was negotiated in secret with companies that control most of Israel’s gas reserves, and only revealed after a first attempt to get lawmakers’ to pass the measure collapsed.

Under the framework terms, Texas-based Noble Energy and Israel’s Delek Group will be able to retain control of the still undeveloped Leviathan reserve. They will be required to sell off the Tamar field – currently Israel’s biggest – but can wait six years, and to tiny fields called Karish and Tanin. The framework sets a price ceiling, but one critics say is generously high.

Critics, most notably Antitrust Commissioner David Gilo, assert that the framework gives Noble and Delek with too much control over the market. But the companies insist they will not agree to any more revisions and have frozen investment in Leviathan until the matter is settled.

Leviathan, with estimated reserves of 22 trillion cubic feet, is supposed to go online by August 2019 and supply billions of dollars worth of gas to Egypt and Jordan as well as to the domestic market. But the gas companies have hinted they may not be able to meet the deadline, leaving Israel dangerously dependent on the single Tamar field and risking contracts with neighboring countries.

On Monday, Flug said that she saw benefits from the framework because it would speed up development of Leviathan and other, smaller fields, and would bring “more stable regulation of the natural gas economy,” making it easier to progress with financing and development.

This in turn will lead to greater competition and more diversified supply sources.

“The outline also supports the achievement of the government’s target to enable the realization of export contracts with Egypt and Jordan for both economic and diplomatic considerations,” she said.

Flug noted the importance of natural gas for influencing Israelis’ standard of living as well as the government’s fiscal situation. However, she did not address the controversial issue of the price of the gas, which has been set at a ceiling of $5.40 per million British thermal units, or that the framework would end up reducing the government’s take of gas profits in the form of taxes and royalties.

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