Israel’s energy market

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.

Solar Energy Development Center at Rotem Industrial Park 311 (photo credit: Courtesy Brightstar Energy / Eli Neeman)
Solar Energy Development Center at Rotem Industrial Park 311
(photo credit: Courtesy Brightstar Energy / Eli Neeman)
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.