Natural-gas exports: A debate over values, not numbers

Approving massive exports of natural gas based on what we know about proven reserves today is poor public policy.

By BY ALON TAL
Tamar natural gas rig 370 (photo credit: Albatross)
Tamar natural gas rig 370
(photo credit: Albatross)
The discovery of natural gas in the Mediterranean is a development that even the gloomiest environmentalists greet with elation. Israel’s air pollution takes a terrible toll on public health, with high asthma and cancer rates in major cities reflecting pervasive shortcomings in international air-quality standards. And while President Shimon Peres promised the world at the 2009 UN Copenhagen climate summit that Israel would soon reduce greenhouse gases by 20 percent, emissions since then actually have steadily increased.
Natural gas could dramatically transform both these pathologies.
The discovery of gas will also produce major economic dividends for Israeli citizens.
After a major public campaign, the government agreed to accept the recommendations of the Sheshinski Committee, gradually increasing a levy on oil and gas to reach 60% of excess profits. This constitutes a major new source of revenue for the public coffers. Recently, the Tamar fields went “on line,” and development of the Leviathan fields should be imminent.
And yet the Knesset corridors were filled last week with a heated debate over the question of gas exports.
The question that the Netanyahu government is pushing to resolve is this: How much of the gas that the private companies pump from Israel’s national reserves should be sold overseas as exports? Last year, another government committee, headed by Energy and Water Ministry director-general Shaul Tzemach, considered the matter. It called for allowing exports of 50% of present reserves.
Ostensibly this seems like a good thing. If Israel has excess reserves of natural gas, exporting them should bring in considerable tax dollars. Moreover, access to the world market will serve to “incentify” international corporations to expand local exploration activity and create much-needed competition for future gas concessions.
Such benefits, unfortunately, tend to be overstated while the potential downsides are understated. Approving massive exports of natural gas based on what we know about proven reserves today is poor public policy.
To start with, the Tzemach Committee’s present projections regarding gas reserves are far too optimistic. Natural-gas production is measured in units of bcm (billion cubic meters). Tzemach assumes a total reserve of 950 bcm. But verification of such massive reserves has not yet been confirmed by geological experts. The Bank of Israel, for instance, says the numbers are far lower.
According to Dr. Sinaia Netanyahu, the Environmental Protection Ministry’s chief scientist and a highly regarded naturalresource economist, based on the existing Tamar fields, there is a 90% certainty that 285 bcm are now available, but only a 50% certainty that a 533-bcm reserve exists in the larger Leviathan fields. Regarding other possible sources, there is a 10% likelihood of an additional 438 bcm in sundry other fields where exploration has just begun. A 950-bcm estimate is simply premature.
Argument over “numbers” sounds like nitpicking and can quickly lead even concerned citizens’ eyes to gloss over. In fact this is an argument about values. How much gas do we want to sell today – and how much do we want to leave to our children and grandchildren so that they might enjoy energy independence? Once the Israeli economy and infrastructure makes the transition to natural gas, to run out and be forced to import would be hugely expensive.
That is precisely what has happened in the UK. After exporting huge quantities of the North Sea’s seemingly unlimited gas reserves, more and more natural gas today is imported – but for three times the cost its own gas was sold for. Even Egypt has begun to import natural gas! Over the past decades, the price of natural gas has only risen. With the ongoing increase in demand for energy from China, India and the developing world, there is no reason to think that it will not continue to do so. It is prudent to take a precautionary approach and only sell off excess reserves when we are sure they actually exist. The worst thing that can happen by delaying a decision on gas exports is to increase future revenues.
Overly optimistic Not only is the Tzemach report challenged for being optimistic about available reserves, it appears to be far too pessimistic about future Israeli demand. Tzemach estimates that over the next 25 years domestic demand will not exceed 450 bcm. But once a reliable supply of natural gas becomes available, the entire Israeli economy can and should change. Dror Strum, a leading local expert and president of the Israeli Institute for Economic Planning, recently released a detailed report showing that a realistic 35-year Israeli projection of demand for natural gas reaches 815 bcm.
Strum bases his projection on experience in other countries with natural-gas reserves.
Once they became available, the infrastructure transition was dramatic. For instance, some 50% of the vehicle fleet moved to natural gas as a fuel source within seven years.
Once factories realize that they can cut their energy costs in half, pragmatic Israeli industrialists will also convert their factories to utilize the cleaner, cheaper resource. New plants for industries such as ammonia and methanol (that Tzemach never considered) can and should emerge to take advantage of this inexpensive and clean source of energy.
But if we assume a static demand, and export the lion’s share of the fuel now, this won’t happen.
Perhaps the central question that needs to be debated is the length of time we want to guarantee reserves. Rather than offering a range of policy options, the Tzemach Committee decided to recommend that Israel ensure domestic natural-gas supply for 25 years. But is that a long enough time? Israel has known economic boycotts and needs to make energy independence a higher priority than other, less diplomatically isolated, countries. A cautious approach would guarantee reserves for the coming 50 years and an intermediate position for 35 years.
Clearly, such a decision is a value judgment that should be made after a transparent and robust public debate – and not by a small clique of government technocrats who are subject to intensive lobbying by the very powerful and wealthy natural-gas industry.
One of the most important misconceptions that needs to be raised in that debate over present versus future sales involves the overstated expectations about tax revenues from exports. To begin with, it will take about a decade for the first taxes to arrive because first the investment in exploration and infrastructure by the gas companies is to be paid out.
Furthermore, according to the Sheshinski formula, the gas corporations are to pay the high levy on the modest $6 dollars per mmbtu (million metric British thermal units) sale price for gas in Israel. Setting the price for domestic consumption at an artificially low level makes sense because we all want to encourage the use of cleaner fuel and ultimately the resource belongs to the public.
Why should they pay more? But the Sheshinski tax windfall only applies to the domestic price of natural gas even if it is sold overseas for a far higher price. Instead of receiving 60% of the present international market rate for natural gas (which in Japan has already reached as high as 21 dollars per mmbtu), the Israeli government will only receive taxes on a fraction of these sales.
While it is only fair that the international consortiums that develop Israel’s gas fields at considerable costs receive a fair return, surely the Israeli public should benefit from the higher prices available for exports! In short, advocates correctly argue that the proposed 50% export rates are a bad idea for many reasons: It would be bad for the environment, limiting the potential transition to clean fuels. It could be bad economically, as Israel in the future may well end up importing very expensive alternatives. And it could be bad socially, with poorer populations ultimately paying higher prices for electricity and fuel when local sources are exhausted, when it could enjoy the benefits of Israel’s newly discovered natural resource for generations.
A consensus position that seems to be emerging in the Knesset is twofold:
• Firstly, there is no reason why the issue of natural-gas export policy needs to be resolved immediately with such imperfect information. As more reliable data about the actual reserves become available, a more informed and responsible decision can be made. Once export contracts are signed, it will become very difficult politically (and hugely expensive) to cancel them if projections turn out to be overstated and Israel needs to cut exports back.
• Secondly, the issue needs to move from the government to the Knesset to ensure a robust debate that presumably will lead to a better decision. That at least was the lesson of the Sheshinski experience, where the Knesset’s intervention led to a far more equitable position regarding taxing gas profits.
The issue of natural-gas exports should not be framed in the tired old paradigmatic battle between Left and Right, or capitalist versus socialist values. Rather, it is a question of whether we want to err on the side of caution in considering the country’s energy future. Should we ensure that the next generation of Israelis and local industries enjoy virtually unlimited access to clean, inexpensive energy? Or should we opt to maximize profits immediately for the international corporations that stand to benefit from a policy of massive exports?
Professor Alon Tal from Ben-Gurion University of the Negev is chairman of the Green Movement.