Why Israel's Natural Gas Deal Is Good

Refuting the activists’ and opposition politicians’ lies about the pact between the government and the companies - last of a three-part series.

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

No, they aren’t anarchists. The protesters in the city square are simply people who care about the common good who take to the streets to express a stance, on their own dime and in their own time. The people demonstrating against the government’s agreement with the natural-gas producers deserve our admiration, in fact. They are an important part of the democratic process, and their engagement lends hope to greater public involvement in other issues as well. The only problem is that they’re wrong. They’re getting snookered. They’re being told that the deal is a bad one, that it’s dirty, that the taxpayers won’t get anything from it, while the exact opposite is the case. They’re being sold a truckload of lies.

Lie No. 5: “It costs 50 cents to produce one British thermal unit from Israel’s natural gas, so it’s robbery to sell it for $5.60.” How much malice and ignorance it takes to peddle that rubbish to the public! It is true that the recurring costs for payroll, materials and transport offshore-to-onshore for the Tamar field add up to around half a dollar per Btu. But what about the enormous investment in exploration, in production tests, equipment, in the drilling platform in the north, in the transportation pipelines to the south and the platforms off the coast of Ashkelon? An estimated $4.25 billion have been spent to date on developing Tamar, a figure that is expected to reach around $7 billion in all. By the same token, a restaurant charges 80 shekels for a fish dinner, while the fish itself only costs 15 shekels.

Lie No. 6: “The investment in Tamar was recovered long ago.” More nonsense. The gas from Tamar has been flowing for two and a half years now, and about $2.75 billion, or 65 percent, of the $4.25 investment has been recovered.

Lie No. 7: “Yitzhak Tshuva and Noble Energy should receive a yield of 9 percent, not more, because that’s the world average.” What a lack of understanding that demonstrates. The risk in drilling for gas in the Mediterranean Sea, in deep water, is among the highest in the world. Even British Gas, which conducted the marine survey and reported that the chances for finding gas were good, failed to find a partner to share the high cost and withdrew.

A rule of thumb in financial theory is the higher the yield, the greater the risk. So it’s preposterous to speak about “average” returns for such a high-risk project. At the same time, the return on Tamar will be around 22 percent and Leviathan will yield around 19 percent, quite solid.

Lie No. 8: “The price of gas must be government-controlled, because of the monopoly.” That is a Marxist attitude, which is super successful in North Korea: Supervise, control, demand, because the state knows best. But price supervision is bad. It would destroy the natural-gas market, as it did in Hosni Mubarak’s Egypt and in Hugo Chavez’s Venezuela. We have no lack of examples here, as well, of the damage caused by price controls. It’s good for the producer and bad for the consumer. There’s nothing easier for Delek and for Noble Energy than to deceive the price commissioner. They’ll come to him with a battery of experts, lawyers and economists and bombard him with data, and he’ll be alone, nearly defenseless, against them. It’s been done innumerable times for many items that had been price-controlled, such as Elite chocolate and coffee, the big bakeries’ standard loaf bread and Tnuva cheeses.

For these reasons, the right solution is to encourage competition and the weakening of the monopoly. The gas agreement does both. As soon as it is enacted, certainty will be created in the market and new international companies will come to Israel and find new gas reserves. That will increase the competition to Delek and to Noble Energy, and prices will come down. That is much better than price supervision.

On Friday, MK Shelly Yacimovich (Zionist Union) spoke at the annual convention of the Manufacturers Association of Israel, in Eilat. She said the gas deal was bad and Israeli industry would pay for it dearly. To her surprise, the industrialists in the audience protested and said they want the gas, under the current terms, now if not sooner, without delay. But Yacimovich was not impressed. She left the stage angry. After all, she knows how to run a business better than any manufacturer.