Israel's natural gas.
(photo credit: MINISTRY OF NATIONAL INFRASTRUCTURES)
When Little Red Riding Hood strayed from the path on her way to visit grandmother’s house, she gained a nice bouquet of flowers, but ultimately ended up worse off when the wolf swallowed her up.
The deal announced Thursday regarding Israel’s natural gas industry was like the caped fairytale figure’s freshly- picked flowers, which on their own were a thoughtful, fragrant and colorful gift.
For the Israeli public, the gas deal is widely seen as an improvement over the arrangement that was in place when Antitrust Commissioner David Gilo intervened in December. Gilo argued that there was simply not enough competition in the gas market, which would mean higher prices for Israeli electricity and for products manufactured using the natural gas.
The new deal introduces some level of competition, forcing Noble and Delek to sell off portions of their stakes in Israel’s gas fields and make room for other companies to come in. It adds a price ceiling and an indexing mechanism to ensure that the price of gas doesn’t go too high, an arrangement that is expected to lower the price of natural gas by anywhere from $0.80 to $1.50 per unit over time.
Given that every dollar reduction in cost saves Israel some NIS 1.5 billion in electricity costs each year, it is easy to praise the new arrangement as a coup for the economy.
But straying from the path comes with costs, as the unlikely pairing of modern economics and Little Red Riding Hood can attest.
The nine-month detour from the admittedly worse previous arrangement has done more damage than the new deal warrants.
For one, it has tarnished Israel’s image as a good place to do business.
The next time Israel needs international companies to bring their investment dollars and expertise for a major project, the companies may think twice. Such uncertainty was a factor in Australian energy firm Woodside’s decision to withdraw plans to help develop the gas fields, and will plague whatever companies are courted to buy the stakes Noble and Delek must now sell.
More crucially, the detour has postponed the development of the Leviathan field for at least two years, which has led to an ironic situation. Currently, Israel gets all of its domestic gas from one source: the already-developed Tamar reservoir.
Introducing gas from Leviathan was expected to create competition (Gilo was worried that the same companies controlling both fields would be the source of monopoly power). As a result, the delay in getting Leviathan’s gas online, which resulted from efforts to increase competition, will cause for an additional two-year period without any competition at all.
A study from the Interdisciplinary Center in Herzliya estimated that every year Leviathan is delayed would cost the economy $3b., which amounts to roughly NIS 11.5b. That figure eclipses the estimated benefits brought in by the new deal.
Indeed, the entire debate over the lack of competition zeroed in on the imperfect tail end of a process that had produced much proper regulation. For five years, the government has examined and reexamined issues ranging from export quotas to taxation, slowly sorting them out.
The attempt to fix the competition issue, though seemingly valid, made the perfect the enemy of the good, and has resulted in a situation where the costs of straying from the path have overrun the benefits gained along the way. My what big ideals you have, Mr. Gilo.
At the end of the Grimm brothers’ famous fairytale, Little Red Riding Hood is set free from the belly of the wolf who seduced her to stray from the path, and continues along her merry way, having learned her lesson.
Hopefully, Israel will move forward from this debacle in a similar fashion, and remember its error, as it enjoys the benefits the natural gas will bring.