Flug: Despite faults, gas outline is best chance to develop Israel's reservoirs

Former antitrust commissioner: Monopoly may be overpowering policymakers

Karnit Flug
Although the terms of the country’s natural gas outline may not all be ideal, activating the deal is critical to the development of the Leviathan reservoir and creating supply redundancy, Bank of Israel Governor Karnit Flug said Tuesday.
“Under the existing circumstances, and in view of the need to move forward in developing the natural gas reservoirs, the Bank of Israel supports the adoption of the outline plan approved by the government,” she said, in remarks made to the Knesset Economic Affairs Committee.
Flug was addressing the committee during the fifth in a series of final advisory discussions that are a prerequisite to implementing the long-disputed outline.
Although the deal in question received both required cabinet approval in August and additional Knesset backing in September, fully activating the outline now requires that the economy minister invoke a legal clause to sidestep the Antitrust Authority’s objections – Article 52 of the 1988 Restrictive Trade Practices Law (The Antitrust Law).
While the article has never before been implemented in Israel’s history, an economy minister can do so by citing national security or foreign policy interests. After former economy minister Arye Deri resigned from his position last month, it became Prime Minister Benjamin Netanyahu’s duty in that role to consult with the Economic Affairs Committee prior to activating Article 52.
“It is important to recognize the fact that, as with arrangements achieved through negotiation, the final outline plan is a result of compromise and, therefore, does not bring the utmost achievement to both sides, but from the standpoint of the government and the public, it leads to a better result than the existing alternatives in terms of exploitation of the reservoirs, advancing redundancy of supply and prices,” Flug said in her Tuesday remarks.
Among the main terms of the deal is a requirement that the Delek Group and Noble Energy sell their two smaller reservoirs Karish and Tanin within 14 months, with Delek completely exiting the Tamar basin in six years and Noble diluting its assets there. The outline also provides new gas pricing schemes and focuses on export regulations and ensuring contract stability.
Developing the larger Leviathan reservoir rapidly will create an alternative to the already flowing Tamar, which currently singlehandedly supplies Israel’s gas through a solitary pipeline, Flug explained.
One particular advantage of the approved outline is the regulation of export taxation, as exports will help the companies finance Leviathan’s development and thereby improve conditions for competition over gas prices to domestic consumers, according to Flug.
Realizing potential export contracts with Egypt and Jordan, specifically, could have positive economic and diplomatic implications, she added.
Another positive feature of the gas outline cited by Flug is its mechanism of regulating several options for setting gas prices and providing domestic consumers with some choice in the matter.
The pricing schemes proposed both limit the companies in their ability to discriminate against specific consumers and require them to offer export prices to the domestic market as well, she said.
Nonetheless, Flug also pinpointed two points of the outline she finds particularly weak, the first being that the it creates redundancy in supply only in 2020, when Leviathan is developed, An additional flaw she said was the government’s declaration that it intends to create a stable regulatory environment for the next 10 years – a declaration Flug said may complicate the government’s ability to manage the gas sector under changing conditions.
Such a situation could be prevented in the future with greater coordination among the relevant regulatory bodies, she added.
Addressing concerns that domestic and export contracts will not generate sufficient financing to develop Leviathan, Karish and Tanin – and thereby maintain the monopolistic status of Tamar – Flug said the milestones set for Leviathan would reduce the risk of such a situation.
She stressed, however, the importance of formulating an alternative plan in case there is no progress.
“It is important to understand that in the absence of redundancy, there is a concern that the price-setting mechanism will not operate in the optimal way since some of the options that it provides are conditioned on the availability of supply capability,” she said. “An alternative price mechanism should, therefore, be developed, that will operate in a situation where supply capability does not increase.”
Providing a much different perspective from that of Flug on Tuesday morning was former antitrust commissioner David Gilo – the man responsible for launching the nearly eight months of negotiations that resulted in an outline he vehemently opposes.
Last December, Gilo declared that he intended to review whether the market dominance of the Delek Group and Noble Energy in Israel’s gas sector constituted an illegal “restrictive agreement.”
As negotiations with the companies ensued, he ultimately refused to support the compromise outline government officials formulated, saying its terms would fail to foster sufficient competition.
Gilo ultimately resigned over the issue on August 31, and the acting antitrust commissioner Uri Schwartz likewise did not offer support.
As a result, and despite the government’s approval of the plan, the only way to fully activate the outline is with an economy minister’s activation of the Article 52 clause.
“There are limits to how much can be sacrificed,” he said. “In this outline, there will neither be competition nor supervision that will protect the welfare of the consumer.”
Explaining that it became clear to him that the government bodies would either bypass his authority or work against him in court, Gilo explained that he had no choice but to resign from his position.
“The monopoly said: choose gas or competition, and I think the consumer deserves gas as well as a competitive price,” he continued.
“I am concerned about the power that the monopoly has over policymakers – this is a clear example of such power.”