Powering the Land of Milk & Honey: Israel & Energy*

By Norman Bailey
Sunday, April 12th, 2015 @ 2:18PM

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Development of the Leviathan field will be delayed unless there is a very quick resolution to the situation. It is questionable that if the companies are forced to put their stakes in Leviathan up for sale, that there will be any buyers, given the regulatory uncertainty that has been demonstrated on the part of Israel. The business reputation of Israel has been seriously compromised. Standard and Poors has suggested that Israel’s credit rating, pristine until now, could be negatively affected.

Tamar will be able to supply the domestic market eventually, but export agreements with Jordan and the Palestinian Authority will have to be fulfilled also from Tamar for the time being, and may well delay further satisfaction of the domestic market. In the meantime, the consortium is negotiating with Egypt to fulfill its required gas deliveries under the existent memorandum of understanding from Cyprus’ Aphrodite Field, instead of Leviathan. As a result, enhanced economic ties with Egypt will be lost. Jordan has announced that it also may look to Aphrodite for its gas supplies.

The Italian electric power company Edison, a subsidiary of the French giant EDF, has withdrawn from bidding on developing the smaller southern fields, citing regulatory uncertainty. Continual negotiation among the ministries of infrastructure and energy and the Public Utilities Authority, the Anti-Trust Authority and the National Economic Council resulted in an offer of settlement to the companies of such Byzantine complexity and manifest unfeasibility that a few days later the agencies involved admitted its faults after it was rejected out of hand by the companies. Among other absurdities it would have required Delek to exit the Tamar Field and reduced Noble’s holding in that field, the only one operating so far. Finally Director Gilo announced that he would delay making a final decision until after the new government is formed following the elections on March 17th.

Thus every advantage of the discovery of substantial reserves of natural gas in Israeli waters has been jeopardized by the decision of one man to rescind a signed agreement, following a long series of policy delays and regulatory changes by other authorities. In short, the decision has placed in jeopardy the reputation of Israel as a place in which to invest, after years spent in building up a sterling record in this regard, demonstrated by the eagerness of governments and companies in Europe, the U.S., Canada, India, China, Japan, South Korea, Vietnam and elsewhere to invest in Israel.

In addition to the reputational damage, it is now unclear when, if ever, an export market will be created, placing in jeopardy not only potential export earnings but a historic opportunity to forge economic ties with Egypt and Jordan. Even satisfying the domestic market is now no longer a sure thing, if the decision is made by whoever ends up controlling the Tamar Field to divert some of its production to export. If that is permitted, of course, by the hyperactive regulatory agencies.

Major Decisions Ahead – If this article had been written three months ago it would have been unequivocally optimistic, while criticizing the delays and costs involved in Israel’s learning process on how to deal with the exploitation of natural resources. But that is history now, unfortunately. The energy future of Israel is unclear and prediction is rendered impossible with any confidence. Hopefully the controversy will be resolved soon in a reasonable way, but the memory of Gilo’s action will linger for a long time. Politically speaking there must be attention given to a process by which the independent agencies are required to adhere to agreements which they have signed as well as forced to make their decisions within a reasonable time and to defend those decisions in detail.

To rub salt into the wound, the ministry of finance announced that during 2014, the first full year of production from the Tamar Field, the Israeli state earned 744 million shekels from gas royalties (about USD 186 million) and that if the development of Leviathan went ahead as planned and was not delayed by the antitrust action by 2019 earnings would be in the neighborhood of 3.2-3.4 trillion shekels (USD 820-850 million). That’s a lot of schools, hospitals, clinics, housing developments and defense and security equipment, now in question.

“We have met the enemy and he is us” Pogo is famous for having said. How true, certainly in the case of energy in Israel.

*Norman Bailey is a professor of Economics at the Center for the Study of National Security at the University of Haifa and an adjunct professor of Economic Statecraft, Institute of World Politics in Washington, D.C. The author acknowledges with thanks the contribution of Gideon Miller of InMill Israel Ltd. to the preparation of this article. 

* This article appeared in inFocus Quarterly, March 201, Vol. IX,No.2.

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