A simpler way to market competition

Joint marketing also undermines competition.

By NIKOS TSAFOS
Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
Israel’s Antitrust Authority is rightly concerned about how to build a well-functioning natural gas market.
But forcing companies to divest from the Leviathan field is not the answer.
Rather, the authority should make the Leviathan partners market their gas separately rather than jointly. Such an outcome involves less confrontation than a forced divestiture, and its effects would be better than a quasi-duopoly, which is what a divestiture would produce.
When multiple partners co-own a gas field, they can choose to sell gas either as a group (joint marketing) or separately based on their respective ownership shares. Projects tend to prefer joint marketing: it is simpler to negotiate and administer, and it avoids intra-partnership tensions and misalignments that can slow development or lead to arguments later.
But joint marketing also undermines competition, especially in small markets.
As such, regulatory authorities routinely weigh the costs and benefits of joint versus separate marketing.
In Western Australia, for instance, authorities have struggled with whether to allow liquefied natural gas (LNG) joint-ventures to sell gas in the domestic market jointly or separately. Two projects recently got an exemption that permits joint marketing, but only through December 2015. Interestingly, part of the reason for granting the exemption was that the market on the buyer side was concentrated as well, and so the benefits of having many sellers were somehow muted without enough buyers to compete with each other. Even so, regulators understood that how gas is marketed is an important lever in boosting competition.
In Israel, too, the market is concentrated on both the buyer and the seller side, which is typical in nascent markets based on a few discoveries on one side and a major buyer (usually a national utility) on the other. Over time, countries evolve as more buyers and sellers enter into the market and as regulators encourage mechanisms to boost liquidity and transparency (secondary markets to trade excess gas, gas storage, and so on). In the long term, getting more players involved and building institutions that enhance competition is the surest way to develop a robust marketplace.
In the interim, Israel can leverage a broad toolkit to achieve its goals – and forced divestiture is too blunt an instrument and likely unnecessary. If Israel wants competition, it can make the producers compete with each other, even though, as Western Australia found, having many sellers but few buyers can be problematic in its own right. Perhaps Israel can grant a joint marketing authorization with an expiration date or tied to phases of field development, so that the market reverts to a more competitive structure at a given time.
All these are options worth pursuing before resorting to a more radical path like a forced divestiture – and all are likely to meet many of Israel’s public policy objectives at a much lower cost.
The writer is a founding partner at enalytica, where he advises companies and sovereigns across the world on energy markets and policy, project development and strategy.