• Natural Gas News

    Has Israel Lost its Appeal?



Mr Gal Luft, co-director of the Institute for the Analysis of Global Security, explains Israel's regulatory struggles and the ways to overcome them.

by: Karen Ayat

Posted in:

Top Stories, News By Country, , Israel, East Med Focus

Has Israel Lost its Appeal?

Natural Gas Europe had to pleasure to speak with Mr Gal Luft, co-director of the Institute for the Analysis of Global Security (IAGS) a Washington based think tank focused on energy security, and senior adviser to the United States Energy Security Council. Mr Luft explains the reasons behind Noble and Delek's recent dispute with Israel's Antitrust regulator and how it may impact the development of the Leviathan and regional gas deals. 

In your article, Israel’s Gas Dream - The End is Nigh, you warn that Israel may be faced with the premature – and tragic – death of the Israeli gas dream. How likely is this scenario?

The gas dream was that Israel would not only become energy independent but also that it would be able to use its gas finds to build economic relations with its neighbors – Jordan, Egypt, the Palestinians - and this could enhance regional security. But without development of Leviathan this vision cannot be materialized. Without some near term compromise in the Noble-Delek dispute with the Israeli government the regional countries will seek other solutions to their energy crunch and the need for Israeli gas might diminish. That said, Israel has undergone a teething period in dealing with its natural resources. It still has a small window of opportunity to put its regulatory house in order in order to become more attractive to foreign players. But this will take a lot of work and should be a top priority for the next government.

How likely is the climate of regulatory uncertainty surrounding Israel’s energy sector to deter international investors from participating in the development of Israel’s offshore resources?

International investors and international energy companies have been watching the Israeli landscape for several years and have become increasingly disheartened by what is perceived to be an unstable and immature regulatory environment. Investors seek certainty and the mood swings of the Israeli government and regulators have had a chilling effect on their sentiment. It is up to the Israelis to take quick action to restore confidence and restore the broken confidence. That said, it is also important to understand the Israeli aversion to the idea of a gas monopoly. Israelis feel every day the perils of monopolies in many sectors of their economy and want to make sure regulatory fecklessness does not give rise to a similar situation in the gas sector. Both sides have valid concerns. Somehow a middle ground must be reached.

Is the situation reparable? Can Israel turn over the situation to ensure Noble - and other potential investors - do not pull out from Israel (a risk that you mention in your article Israel’s Gas Dream - The End is Nigh)?

Yes. The new government to be sworn in the spring must make it a priority to get a clear message to investors and energy companies that while mistakes have been made, Israel is reopening for business. The reserves are impressive and such findings don’t come by often. Noble is a publicly traded company which is answerable to its shareholders who need to see a clear pathway to profits in order to justify additional investments in the region. Without such pathway we are likely to see increased pressure by shareholders to shift away from Israel in pursuit of greener pastures.

What are the likely outcomes of Israel’s Antitrust Authority’s decision that is expected to be issued in the next few weeks? Are we talking about: the sale of Noble and Delek’s stakes in the Leviathan, the sale of part of their shares or the end of the Israeli-American partnership?

There are two options. First is that the Antitrust Authority will stand by its decision that Noble and Delek constitute a monopoly and therefore have to offload one of the fields – Tamar or Leviathan. In such case it is almost certain that Noble will seek international arbitration which could be a long and costly process. The second option is creative compromise. Here there are a number of ideas, all of them are imperfect. The fact that the entire political system in Israel is in election mode doesn’t help as any politician’s support for the Noble-Delek partnership will be viewed as kowtowing to special interests against the public interest. I also sense that there is a noticeable daylight between Noble and Delek. Their interests are not perfectly aligned, and this can complicate the resolution even further.  I believe that any solution that allows the Noble-Delek partnership to keep both fields will require price controls or the formation of a government entity that will buy the gas in bulk and distribute it to consumers.

What are the reasons behind Mr Gilo’s reconsideration of a previous agreement that would have allowed Delek and Noble’s continued ownership of the fields on the condition they sold the smaller Tanin and Karish fields? What could have caused the change of heart?

Mr. Gilo realized that the sale of Tanin and Karish will not solve the problem because the owners of those small fields will never be able to really compete against the Noble-Delek partnership. They will simply be too small. The change of heart was induced by public pressure as well as a number of new reports, including one by the Public Utilities Authority, Israel’s electricity market regulatory agency that raised strong concerns about the long term impact of a monopoly structure.

How patient is Noble expected to be in this environment of regulatory hostility? You talk about the Texan company’s previous preparedness to face geopolitical, financial and regulatory risks by stepping into the East Med. Was the last episode a bit too much? The Australian giant Woodside was “pushed out” last year due to a failure to agree with the Israeli authorities on regulatory terms. What is the solution here for Israel to attract and retain foreign funds and expertise in a fair, predictable and sustainable environment?

The last episode has tested Noble’s patience like never before. With a new CEO at the helm Noble will have to reassure its investors that the Israel bet was sound and that it is a good idea to stay in it despite its disagreement with the government. It would be a mistake for the Israelis to take their presence in Israel for granted. There is a long list of companies that pulled the plug on projects for a variety of reasons. Noble is not a charity organization.

When do you expect production from the Leviathan to begin in light of the recent developments? Do you fear gas from the Leviathan will never be extracted?

No doubt the recent developments will cause another delay in the development of Leviathan and I don’t anticipate production before the end of the decade. We don’t come across large fields like Leviathan very often so I doubt the industry will give up on it altogether. Eventually the field will be developed but it may take years before the regulatory environment becomes attractive to investors. Let’s remember that someone needs to commit some $8 billion to develop the field and it’s hard to see how such an amount can be secured without regulatory clarity.

What would be the repercussions on the Israeli citizen and the Israeli economy of the potential lack of development of the Leviathan? How will it impact regional deals (with Egypt, Jordan and the Palestinian Authority)? How will it affect a Europe looking to diversify its sources and routes of supply?

In terms of Israel’s own energy needs the impact will be minimal. In the coming decade Israel’s needs can be supplied by Tamar. Beyond that there could be a gas deficit in theory but let us not forget that there are several smaller fields that can be developed to augment Tamar. It is yet to be seen how the domestic market develops. Will Israel begin to use gas in the transportation sector, home heating and petrochemicals? Then there is loss of tax revenues to the tune of $3 billion a year – roughly one percent of the country’s GDP – due to delays in the development of Leviathan. But my top concern is Jordan. After losing much of the supply from Egypt, Jordan desperately needs gas, especially in light of the fact that it is now home to a million Syrian refugees. Affordable energy is important for Jordan’s stability and hence to the stability of the entire region. Therefore, the top priority should be to find a solution to alleviate Jordan’s energy crunch, even if it means reallocating some of Israel’s gas to its next door neighbor.

You say that Cyprus is likely to be the biggest winner. Can you expand on that? Is there a risk for Noble to be “turned off” by the whole East Med region instead of only Israel? Do you believe the regulatory stability in Cyprus will make up for its modest size of hydrocarbon resources - so far?

Noble has proven reserves in Cyprus, particularly Block 12 where 7tcf of gas have been discovered. Cyprus is now in a position to bounce back after years of economic disarray. While not a paragon of regulatory stability the island can position itself as an elegant alternative to Israel. I wouldn’t bet that Cyprus’s reserves are as modest as some believe. It’s all a question of exploration. Exploration activity in Israel has come to a grinding halt in 2014 in part due to the regulatory mess. If Cyprus offers a more hospitable investment climate we could see more exploration activity and new discoveries that could rival Israel’s.

Are you now pessimistic that the gas finds in the East Med will constitute a “game-changer” (an expression you used in Israel’s Zero Gas Game) for the East Med region in terms of energy security, geopolitical stability and economic prosperity?

It is too early to be pessimistic. All sides have room to maneuver and reach a sensible compromise. And while there is likely to be an additional delay in the development of the East Med blocks the opportunities are too hard to pass. I believe reason will prevail.

Do you believe Israel’s “loss of appeal” (as described in your article Israel’s Zero Gas Game) will also benefit Lebanon?

The players that are likely to enter Lebanon are different from the ones working in Israel. Operators entering Lebanon face no risk in terms of their other interests in the Arab world. I don’t see the two countries as competitors. The market is big enough to accommodate all East Med countries.

Karen Ayat is an analyst and Associate Partner at Natural Gas Europe focused on energy geopolitics. She holds an LLM in Commercial Law from City University London and a Bachelor of Laws from Université Saint Joseph in Beirut. Email Karen karen@minoils.com Follow her on Twitter: @karenayat