What's at stake in the gas deal

Economists and analysts differ in their assessment of the situation.

June 30, 2015 04:09
3 minute read.

A man points as he stands on a tanker carrying liquified natural gas, ten miles off the coast from Hadera. (photo credit: REUTERS)

The gas hiding 7 kilometers below the surface of the sea off Israel’s coast is worth an estimated $52 billion to Israel’s economy, according to Ernst and Young – around a fifth of Israel’s annual economic output – so the way the government goes about regulating it is, to put it mildly, a pretty big deal.

The government’s vote this week to bypass the Antitrust Authority with a compromise arrangement for how Noble Energy and the Delek Group can develop and sell gas from the Leviathan field will have repercussions on Israel’s economy for years to come.

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Prime Minister Benjamin Netanyahu’s claim that the deal must go through as is if the gas is ever to be extracted somewhat strains credulity, as do accusations from the opposition that Netanyahu is acting to line corporate pockets.

Even Antitrust Commissioner David Gilo, who will resign in August in protest of the government sweeping aside his recommendations for increasing competition between the gas suppliers, believes the government is acting in order to expedite the process of getting gas online, in no small part because it hopes to bolster its geopolitical position by selling gas to neighboring countries.

How can we interpret the economic differences between Gilo’s plan, which pushed for creating more competition in the market, and that under consideration by the government, which is likely to regulate the price in some other way? Part of the problem is that economists and analysts differ in their assessment of the situation.

Take Gilo. He argues that as long as Noble Energy holds serious stakes in both the Leviathan (40 percent) and Tamar (the current plan will reduce it from 36% to 25%, which Gilo doesn’t think is enough) reservoirs, there will not be enough competition in the market. Why would Noble agree to lower prices at the demand of one buyer if the buyer’s only alternative is also largely owned by Noble? He also wants to ensure that the companies in Leviathan are competing against each other and not selling as a group – a proposal the companies rejected and which is absent from the current plan.

When there was competition from imported Egyptian gas, one expert indicated, the price of gas was 15-30% lower than it is today, when gas is flowing from only Tamar.

Without a change, Israel might be giving up that discount, and stick to the current $5.6 per unit.

That makes a big difference for Israelis.

According to the Israel Electric Corporation, which generates about 60% of its electricity from natural gas, every dollar reduction in the price of gas lops NIS 1.5b. off the national electric bill. That has implications not just to electricity consumers, but also to manufacturers, who could pass on some of that saving to their customers.

But what if imposing those ideal conditions delay when Leviathan’s gas comes online (the latest kerfuffle has already put off the goal date from 2018 to 2020).

According to Zvi Eckstein, the Dean of the IDC’s Arison School of Business and Tiomkin School of Economics, every year the introduction of new gas is postponed costs the government $3b. (about NIS 11b.).

From that point of view, it would seem that following Gilo’s recommendations would make the good the enemy of the perfect.

“I think one of the main confusions is that there was not a well-established economic analysis of what the price should be, which is probably $5-$6 per unit at the source,” Eckstein said.

Sure, it’s important where in the range it falls, but maybe not as important as getting the gas out of the ground quickly.

Eckstein also disagrees that Gilo’s plan would have increased competition.

“I think David Gilo was wrong, economically.” Eckstein said, arguing that going back and introducing competition ex-post would not help.

Other economists contend that Israel is too small an economy to foster much competition (an argument Gilo rejects), but Eckstein says that even with the highest levels of competition, the price will not go below the export price, which is not significantly different.

He also claims the high taxes on gas offer a buffer for Israelis’ welfare; with around 70% of the cost of gas being taxed, higher prices mean more government revenue, which could mean lower taxes or better services.

“It’s not clear at all that changing the cost by $1 is going to benefit the citizen, because the tax proceeds may be higher than any gain the citizen will get,” he said.

Not that Eckstein thinks the government has behaved admirably. Since the Sheshinsky committee agreed on taxation, “the government has behaved badly in every aspect,” he said.

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