The recent off-shore gas discoveries in Israel are game changing. Said
discoveries can raise Israel’s Gross Domestic Product, help to reduce national
fiscal deficit, position Israel as an independent energy producer and exporter,
and improve the country’s geo-strategic status. Yet, this great potential raises
significant policy, economic, and political concerns. The
Jerusalem Post’s
annual conference in New York (April 28) hosted a dedicated panel discussion of
Israel’s energy potential, which I had the honor to lead.
Adopting a
coherent and consistent national energy policy is a challenge for large energy
players, let alone for incumbents. The US government has been at it for decades.
But this is exactly what Israel needs if you listen carefully to the
message.
First, large multinational energy players are not part of
Israel’s energy story currently. While politics do matter, foreign investments
in energy projects are not merely influenced by the anti-Israel Arab countries’
boycott and their global energy partners. Although a recent energy auction in
Lebanon attracted mainly the traditional energy companies that work within the
Arab world, consistent and clear foreign investment policy is necessary to
attract long-term capital investments.
Delek Drilling and Noble Energy’s
executives have experienced that, talking to other global energy
companies.
The various changes to the tax regime and inconsistent
statements on natural gas-export by various government officials have been
perceived by many potential investors as indications of unstable and populist
energy policy.
Attracting additional foreign investors to the Israeli
market is necessary in order to both increase capital investment in this
capitalintensive industry and diversify its financial sources, as well as to
bring unique know-how that many local companies seek.
Thus, for example,
Delek’s discussions with Woodside, the Australian company, are understood as a
way to improve LNG capabilities and access to future Asian markets.
Also,
Israel needs to focus strategically on brining North American and European
institutional investors to the industry to keep existing projects alive and make
new ones possible.
Israel does not have a foreign investment screening
body, similar to the American CFIUS, which screens potential foreign investors
in sensitive industries. Since energy investments tend to involve strategic
buyers in strategic projects, Israel has to adopt a clear policy on foreign
investment in strategic industries, including natural resources. Otherwise,
foreign investors will face significant delays and ambiguous decisionmaking
processes that can be long and costly.
Second, prioritizing natural gas
as part of any national energy policy should take into account gas distribution.
Gabi Ashkenazi, former heard of the IDF and currently the chairman of Shemen, an
energy company, shared this concern explicitly. The current infrastructure does
not support an efficient distribution of natural gas to consumers across the
country, both in terms of time and costs.
Third, since the energy
industry is a new development in Israel, it lacks adequate human resources and
equipment. Currently, energy companies explore and produce natural gas using
foreign expertise.
It makes exploration and production complicated and
creates more jobs abroad. Creating an ecosystem that supports the industry is a
critical component, including customized educational programs, such as the new
program in the Technion, to create a talent pipeline. It will help to create
Israeli jobs and to reduce the costs associated with such energy
projects.
The services providers, such as lawyers and bankers, will
follow.
As Meir Dagan, former head of the Mossad, put it, “you need to
convince people that this industry has a future.”
While many projects are
too early to judge, recent discoveries showed us that the industry is here to
stay.
Fourth, in the “Start-up nation” world you cannot speak about
energy policy without mentioning renewable energy. The Israeli government
already invested tremendously in renewable energy both directly through
subsidies and indirectly via supporting the clean-tech industry. Those concerned
about this strategic shift should see these two worlds as
supplementary.
In Brazil, for example, the country has fostered the
successful and sophisticated IT industry by building R&D centers on islands
by the oil and gas exploration sites off the coast of Sao Paolo in order to take
advantage of the existing know-how and connect the old and new energy
industries.
Fifth, how to secure various energy projects seems to be one
of the questions that most executives and policy makers prefer to avoid. The
“national security” nature of this issue makes it hard to debate
publicly.
Yet, any clear and consistent energy policy should take it into
account to provide investors with both physical security and borders
certainty.
More importantly, energy independence is not only about
securing energy resources and being an engine for economic growth but it is also
a foreign policy tool. Energy has always been an important part of Israel’s
neighbors’ strategic positioning.
Experts can disagree on the scope of
the impact on the strategic relations but there is no doubt that Israel’s new
energy resources will change the rules of the game, as Uzi Arad, former head of
the National Security Council, confirmed.
In addition to local
consumption, integration into regional energy markets and export to remote
markets in the Far East can strengthen our political ties with strategic allies,
such as Jordan and China. We will also be able to provide the Palestinian
Authority with more energy and improve the economic interconnectedness. Indeed,
we had some bad experiences with the Egyptian pipeline in recent years, but this
should not prevent Israel and its private companies trying to sign strategic
deals with countries striving for oil and gas.
The execution may be
easier in comparison to adventurous transportation to Europe via Turkey, for
example.
If in real estate it’s “location, location, location,” in the
energy market it’s “government” that keeps repeating itself. Companies and
investors will not be able to do it themselves without a coordinated policy and
support by the various government ministries. There seems to be a consensus
around the timing and potential of this new industry. We should not miss this
opportunity for the future growth and security of the country.
The writer
is an international economic law professor and adviser, working with governments
and corporations on trade, investment, national security and energy projects and
policies.
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