Middle Israel: Let the gas tycoons profit

Billionaire industrialist Yitzhak Tshuva (photo credit: Wikimedia Commons)
Billionaire industrialist Yitzhak Tshuva
(photo credit: Wikimedia Commons)
Populism is in the air again.
“The tycoons,” say the self-appointed custodians of the public interest, their noses bent as if referring to Jack the Ripper – “they are running away with the Promised Land’s riches.”
The custodians, ranging from the Zionist Union’s Shelly Yacimovich to Israel Radio’s Keren Neubach, are talking about the offshore gas fields whose potential output can add to the economy more than an annual billion dollars for a hundred years.
The Jewish state, ever ready for news of yet another terror attack, political farce or UN condemnation, was unprepared for this bounty which came its way, literally, out of the blue.
And so, in accordance with local tradition, its politicians, activists, pundits and commentators immediately got down to the urgent business of bickering, slandering and sloganeering.
Some of the outcry was legitimate, but most of it was as manipulative and ruinous as the hysteria that torpedoed last decade’s real-estate reform, which could have slashed housing prices.
Now, more than a decade’s worth of regulatory jockeying is finally coming to an end, as the security cabinet reviews a deal that will define the framework under which Israeli gas will be extracted, streamed and priced.
Unlike what you are hearing, it is a reasonable deal, and when all is said and told, the way Israel handled its gas findings is actually quite commendable.
The gas industry’s emerging regulatory formula will serve the public well, even though the way it evolved reflects the notorious Israeli tendency to improvise and inability to properly plan.
FIVE QUESTIONS surfaced with the underwater treasure’s discovery: Who will extract it; how should they be taxed; how much gas should be led to Israel; what does the government do with the new income; and how to use the findings to reduce local energy prices.
The first and last questions in this list are being resolved at this writing, as we will explain. The other three have already been resolved in three separate sagas. The most important of the three involved the expected windfall of tax returns, and we owe its prudent treatment to former Bank of Israel governor Stanley Fischer.
The danger on this front was twofold.
First, that the economy would be overwhelmed by the sudden infusion of foreign currency, making the shekel too strong, exports too cheap and hiring too expensive, thus reducing manufacturing while raising unemployment and social spending, all of which would ultimately stifle growth and stagnate the economy.
Known as the Dutch Disease, because of what happened in Holland in the 1960s after its own gas findings, in Israel’s case this dynamic would have been even more debilitating because of its special strategic problems.
The other danger was that the politicians, given sudden easy cash to spend, would waste it.
Fischer therefore imposed on the politicians the establishment of a sovereign fund of the sort that exists in other countries. Made law last year, the fund will absorb the gas industry’s royalties, invest them abroad, and annually trickle the yields into the budget, where they will be used exclusively for social and educational purposes.
This way the gas industry will nourish society rather than poison the economy.
The fund, which is expected to accrue nearly $100 billion by 2040, will serve as an emergency deposit in case of war, and even then will only be accessible through a special majority’s approval in the Knesset. Moreover, despite the Treasury’s grumbling at the time, the fund is managed by the much more impartial Bank of Israel.
That is how Israel saved itself from what economist Joseph Stiglitz calls the “Resource Curse.”
The second dilemma the regulators faced was how to tax the gas companies.
Faced with a colorful coalition that stretched from West Bank settlers to Arab politicians and demanded draconian royalties, the government ended up with a formula devised by Hebrew University economist Eitan Sheshinski: The unreasonably low 12.5-percent royalty, legislated in 1952, was multiplied to a formula whereby producers will pay 20-50%, according to output, for what they pump after returning 1.5 times their initial investment.
Like the sovereign fund, this too is an equitable arrangement, one that keeps the entrepreneurs motivated and the public enriched.
The third problem was how much gas to export, and how much to consume.
If left up to the producers, said critics, they might end up exporting everything and leaving the taxpayers’ electricity bills high even while they own gas.
Now, after Fischer and Sheshinski, a third expert, this time former Energy Ministry director-general Shaul Tzemach, emerged with the winning formula. If Israel caps exports at 53% of output, a committee he headed ruled, then it will supply its needs for at least 25 years and at the same time allow extensive sales abroad.
That too has since been agreed and the dilemma it addressed is also behind us. That is how we were left with the two outstanding issues the government is sealing right now.
FANNED BY EXCITED POLITICIANS and fueled, so to speak, by Antitrust Commissioner David Gilo’s noisy resignation last month, there is legitimate fear that Israel’s gas will be possessed by a monopoly that will not care for the public interest and in fact bilk the consumer.
Gilo, a respected Hebrew University law professor, wanted all the gas fields to be fully opened to competition. That meant that the main existing producer’s partners, billionaire Yitzhak Tshuva’s Delek and Houston-based Noble Energy, would sell much of their holdings in the most active field, Tamar, and the biggest field, Leviathan, and then stand on line with everyone else for tenders to parcel the remaining fields between competing stakes.
Gilo was doing his job, which is to ensure competition. He admitted that there may be other legitimate considerations that are beyond his mandate’s pale. Not so the demagogues. As they see it, the problem is not competition but Tshuva, who to them is the public’s enemy because he is a rich man and wants to be even richer.
That is absurd.
The gas that Tshuva is extracting had been under our sea since the Creation, but as long as it was up to the government to find it, it remained as elusive as the Monster of Loch Ness.
When Tshuva won a license to seek gas he went to the sea, drilled at his own expense, and found what now all his enemies claim as theirs. Yes, it’s theirs, and also yours and mine, but it is more so Tshuva’s.
The fact that Tshuva is a diehard Likudnik doesn’t help his struggle with his enterprise’s opponents, who are unimpressed with the fact that he is a self-made, humbly born construction worker whose spectacular success should be any Israeli’s pride, and whose gas profits will also be his defamers’, because he will pay hefty royalties and taxes.
The burgeoning deal concerning the monopoly is that it will be upheld in Leviathan, weakened in Tamar, and forced to sell its holdings in the rest of the fields. The retailer’s price, at the same time, will be capped at a ratio of average international prices.
Yes, this is not as ideal as the sovereign- fund idea. In a perfect world there would have been full competition and our electricity bills would have been sharply slashed thanks to our newly found gas. But the world isn’t perfect, least of all the world surrounding the Jewish state, and Israel’s gas can help improve its place in its unsafe neighborhood.
Supply deals already signed with Jordan and Egypt are but part of the diplomatic windfall that our maritime treasure offers. The troubled relationship with Turkey can in the future be improved thanks to gas, and a pipeline to Europe through Greece can complete the carbohydrate’s consolidation as a tool of improving Israel’s place in the world.
Yet for this to happen drillers will need regulatory clarity and commercial certainty, and the government, in turn, will need leverage in the gas industry.
Benjamin Netanyahu can’t state this publicly, but he evidently tells himself two things: First, using gas to improve Israel’s regional position is more urgent, and beneficial, than using it to slash a household’s electricity bill by one or two hundred shekels; and second, this diplomatic swinging will be easier to do if the production is dominated by an investor he can trust.
And so, years of improvisations now mature into a deal whereby Israel’s foreign relations are served and investors thrive while households and factories buy cheaper and cleaner energy and the Treasury earns billions for more than a century that will be used to build hospitals and schools.
Yes, the Swiss would have done this differently, but the Israeli way, of fusing hollers, slurs, manipulations, protestations and emotional blackmail with multiple committees and reopened resolutions has actually generated a pretty good deal.