Bottom Shekel / Looking Out for the Israeli Natural Gas Companies, but Not for Us

Possible shut down of Egypt gas flow into Israel can turn a competitive sector into a monopoly - an Israeli monopoly, but a monopoly nonetheless.

MK Miri Regev (Likud ) spoke with Prime Minister Benjamin Netanyahu on Sunday. She wanted to demand that the implementation of the Sheshinski committee recommendations be deferred by two years due to the instability in Egypt.

Sinai gas pipeline - AP - 6/2/2011

That instability included an explosion over the weekend at a pipeline transporting Egyptian gas that supplies neighboring countries, which turned out (though she presumably didn't know so at the time, as that aspect of the news broke only last night) to be caused by sabotage.

The Sheshinski committee recommends that the state increase its share of the profits in the natural gas and oil exploration industry. Its recommendations remain to be enacted into law.

In a letter to the prime minister and in comments to TheMarker, Regev argued that the events in Egypt mean Israeli companies must be encouraged to develop Israeli natural gas to end the country's dependence on foreign sources. Unfortunately, the events in Egypt are enough encouragement. The exploration companies at the Tamar and Leviathan underwater sites could not have received better news than the unrest in Egypt, especially the explosion at the pipeline.

In one fell swoop, the Israeli natural gas sector was no longer an industry characterized by competition between two main suppliers, one of them Egyptian. Instead, the Egyptian supplier has been shut down for a week and a half and there are major concerns over whether it will resume supplying Israel with gas regularly. This competitive sector therefore risks becoming a monopoly - an Israeli monopoly, but a monopoly nonetheless.

Making hay while the pipeline burns

So even without Regev's help, the Israeli natural gas sector has received an extraordinary boost over the past two weeks. No doubt many Israeli customers who had considered doing deals with the Egyptian gas supplier will now think twice and opt for Israeli gas. And the Israeli supplier will witness a huge spike in demand. In addition to increased sales, the Israeli gas supplier can expect significantly higher prices for its product.

The Israeli producer is currently selling gas to the Israel Electric Corporation at about a third of the price of alternative fuels (oil and coal ). The decline to that one-third figure reflected fierce competition between the Israeli and Egyptian gas suppliers. Absent that competition, the Israeli gas supplier can hope to nearly triple its prices in the knowledge that as long as its gas remains cheaper than coal or oil, it can rest assured it will find a buyer for its product.

Contrary to Regev's sentiments, events in no way require that we encourage the production of Israeli natural gas. Thanks to Egyptian President Hosni Mubarak, the recent turmoil has done plenty to encourage such production. In light of the vast improvement at the Israeli companies, it's not at all clear why we would need to encourage them further. If under fierce competition the state thought it was possible to tax the gas exploration companies at half their profits, couldn't one assume that under conditions of no competition, and therefore rising profitability, the state would consider increasing taxes on the sector even further?

It turns out that this simple economic logic is either beyond the intelligence of Knesset members, or they are not being honest with the people. It's not the need to encourage the production of Israeli gas that they are expressing, but rather the need to surrender to the interests of Israeli gas in an era in which the Israeli supplier enjoys a monopoly and is therefore poised to make stiff demands of the state.

Of course, it's possible that the MKs are right. If Israel finds itself at the mercy of the Israeli supplier, who will be solely responsible for providing gas required for 40% of the country's electricity production, Israel will probably not have much choice but to surrender to its dictates. Such a situation, as outrageous as it might be, will force the state to compromise.

The real test, however, will be whether the state strikes a wise compromise. For example, in providing a commitment to buy gas from the Israeli supplier on a long-term basis, the state will solve all the supplier's financing problems and enable it to produce gas sooner, but the state in turn should get a reasonable price. The state probably won't be able to snag a natural gas price of one-third the oil price, but the state should be able to minimize the damage by insisting on a price not too much higher than that.

Alternatively, we could think about options that would let Israel avoid dependence on one supplier, even if that supplier is a kosher, Israeli one. These are represented by the option of importing liquefied natural gas. Facilities enabling the country to import liquefied gas also cost a bundle - $300 million to $500 million - and that may seem like unnecessary spending for a country like Israel that has just found domestic reserves that would serve its gas needs for the next 30 years. But it looks especially feasible compared to the alternatives.

Importing gas from elsewhere will not only solve the problem of dependence on unstable Egyptian supplies, it will also rid the local market of its current monopoly control. From that standpoint, gas-import facilities are a kind of insurance premium that Israel must pay to ensure that the country isn't taken advantage of in its gas supplies for either geopolitical or business reasons.

MKs who are looking out Israel's interests, the interests of the people rather than a few Israeli gas-exploration companies, should probably have been promoting gas-import legislation. Interestingly, there is no vocal lobby in the Knesset for such a bill.