Slashing natural gas prices is nothing less than “the key economic variable” toward catalyzing industrial productivity and easing the country’s cost of living, according to MK Avishay Braverman (Labor).
“Now we have one of the most important decisions, which has been in the government for years,” Braverman told The Jerusalem Post during an interview in Tel Aviv on Sunday. “I am going to battle for these couple of weeks. If we don’t win, the Israeli public will pay dearly. It will destroy industry.”
On November 23, the Ministerial Committee for Legislation is set to debate a bill written by Braverman, which calls for government supervision of the country’s natural gas prices. A reduction in gas prices would trickle down into other elements of society, reducing electricity prices and the cost of living, as well as offering industrialists a cheaper way to increase their productivity, he explained.
“Even [the price of] Milky will go down,” he said, referring to the popular Israeli chocolate pudding, which recently sparked controversy due to its higher cost at home versus the equivalent product in Germany.
An economist with a doctorate from Stanford University, Braverman worked for the World Bank in Washington for 14 years, after which he became the president of Ben-Gurion University of the Negev for 16 years. Known for resuscitating the university and boosting Negev development, Braverman eventually decided to enter politics in 2005.
Israel’s 282 billion-cubic meter Tamar gas reservoir, about 80 kilometers west of Haifa, began flowing to Israel’s domestic market in March 2013. Houston-based Noble Energy holds 36 percent of the Tamar basin, while the Delek Group’s Delek Drilling and Avner Oil Exploration each own 15.625%, Isramco controls 28.75% and Dor Gas has 4%.
Noble Energy and the Delek Group are also the lead stakeholders in the neighboring, 621 b.cu.m.
Leviathan reservoir, which is expected to begin flowing sometime in 2017-2018 – and will provide export opportunities.
The Israel Electric Corporation is currently purchasing natural gas from the partnership at $5.6 per mmBtu (1 million British thermal unit – the unit typically used around the globe to describe natural gas prices). This is a far cry from the prices being paid for gas in the US, which Braverman said provides an adequate example due to its engagement in export of the resource.
A fair long-run average price for Tamar gas could be as low as $2.47 per mmBtu, according to a June report prepared for a court case on the matter by Prof. James Smith, the chairman of oil and gas management at Southern Methodist University’s Cox School of Business. A $2.47 per mmBtu price tag would guarantee that the producer was fully compensated for costs of exploring, developing and delivering the product to Israeli customers, and would include a competitive return on the capital invested and risk taken, Smith writes in the report.
Citing the findings of Smith’s report, Braverman determined that a price of between $3-$3.5 per mmBtu would be more than appropriate for both Israeli consumers and the gas developers.
As an example, Braverman noted the recent case of the Arad Towels factory, which decided to close its doors after 40 years of operation at the end of October. Connecting Arad Towels to natural gas according to current price schemes could have saved the company NIS 3 million-NIS 4m., while a gas price reduction could have increased those savings to NIS 6m. The company required some NIS 12m. to stay open, so this NIS 6m. would have made the gap much easier to resolve.
Gas prices in Israel and the US are not truly comparable because unlike oil, gas does not subscribe to a globally integrated market rate. But in the US, the Henry Hub Natural Gas Spot Price was hovering at about $3.82 per mmBtu in early November, after hitting as low as $3.53 per mmBtu at the end of October.
Although he identifies the Noble Energy and Delek Group-led partnership as a monopoly, Braverman stressed he is not arguing that the monopoly should be dismantled – as it is simply “too late.”
“I say, OK, I don’t want to break them,” he said.
“I give them respect. But I would like benevolent capitalism, to give them a competitive price.”
Although he said he is “very glad that Noble Energy came” to Israel and that he favors foreign investment, Braverman warned that because the arrangement constitutes a monopoly, the partners are able to charge a much higher price for the gas than that of a competitive market.
While Anitrust Authority Commissioner David Gilo has determined that Noble Energy and the Delek Group must sell smaller neighboring reservoirs Karish and Tanin, in an effort to boost competition, these basins are insignificant in comparison to the much larger Tamar and Leviathan, he added.
Braverman declared that he is not a proponent of excessive regulation – and in fact blamed such superfluous regulation for delaying the conveyance of natural gas to many of Israel’s factories – but argued that supervising gas prices is necessary for Israel’s economic future.
“You have one price, controlled by a monopoly, for which there is no chance of any competition,” he said.
The status quo is a situation ruled by robber barons, a phenomenon challenged by US president Theodore Roosevelt – whom Prime Minister Benjamin Netanyahu claims as a hero, Braverman added.
“Teddy Roosevelt would do the same as what I recommend today,” he said.
To Braverman, the gas-pricing conundrum is an example of Israel’s greater economic troubles.
While economic growth has been impressive in Israel over the years, today it is declining and sits only in the vicinity of 2%, he said. The median income of those employed in Israel is only NIS 6,000, and the cost of living is “sky high.”
“The conversation that we are one of the best economies in the world is only true for a small segment of the population that becomes tremendously successful,” Braverman said, noting that the growth simply doesn’t trickle down. “We are in the direction of becoming oligarchical capitalism, with excessive regulation and most of the population not benefiting from growth.”
Vast amounts of money sit in what he described as “the Israeli kingdom,” and the Israeli tax system necessitates a complete overhaul, Braverman argued. At the moment, the middle class bears the burden of taxation through value-added tax and land taxes, while big corporations have long enjoyed exemptions.
Meanwhile, Israel’s excessive regulation and tax scheme is “destroying its industry,” causing young entrepreneurs to sell their start-ups to international firms rather than proceed to a second stage of development in Israel, Braverman said. While it is reasonable for, say, 95% of startups to sell their companies, there should be sufficient tax breaks and research and development investments to keep the rest here.
“We are not the ‘Start-up Nation,’” Braverman said. “We are an ‘exit nation,’ and it’s very dangerous.”
In recent weeks, the Sheshinski 2 Committee – headed by economist Eytan Sheshinski, a professor emeritus at the Hebrew University of Jerusalem – recommended more stringent taxation policies on natural resource exploitation. As a result, the main company to be affected by the changes, the Israel Corporation’s Israel Chemicals, has threatened to downsize operations in Israel and seek opportunities elsewhere.
To this situation, Braverman responded that it is important “to let benevolent capitalism flourish” but guarantee certainty to corporations at the same time. ICL need not blackmail its workers, as the financial burden the firm would encounter as a result of the changes would amount to only between NIS 5m.-NIS10m. – which “is not a cause for major alarm.”
He described the Sheshinski recommendations, which call for a graduated surtax of between 25% and 42% on excess profits, as “a fair deal.”
“I am against bashing industrialists,” Braverman said. “I am against the creation of oligarchical capitalists.”
“It’s OK to make money, but you have to do it without corruption, without manipulation.”
While critical of the country’s current taxation system, Braverman said he places his hope in the young generation. One key issue moving forward, therefore, will be education.
The education minister must improve the entire school and higher education structure, creating a new equilibrium that strengthens human capital, he said. Some third-rate colleges should be closed and bureaucracy minimized, in favor of boosting salaries and quality at stronger higher education institutions.
The social revolution of 2011 may have failed, but this revolt changed the country’s discussion, Braverman argued.
Turning back to the question of the gas monopoly, he stressed just how crucial it is to charge a competitive price for natural gas, which will be reflected in the downward chain of prices for products elsewhere in the market.
“If all the young people join this statement, I think it can be done,” Braverman said. “The public should understand the importance of this position as clearly as the Milky.
“It’s 1,000 times more important than Milky.”