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    A Short History of the Regulatory Natural Gas Framework in Israel

Summary

After three committees, one public hearing, a Knesset committee hearing and an economic minister signature, Israel's natural gas framework is almost complete

by: Ya'acov Zalel

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Featured Articles, East Med Focus, East Med, Israel

A Short History of the Regulatory Natural Gas Framework in Israel

Last week Israeli Prime Minister Benjamin Netanyahu signed Article 52 to the Israeli anti-trust law, enacting an article that enables the government to abolish competition in the Israeli natural gas market in order to improve Israel's energy security, security, and foreign relations interests. In doing so Mr. Netanyahu set a precedent; it was the first time Article 52 was enacted since the law was passed.

In recent times, the regulatory framework, known in Hebrew as the Mitveh Hagaz, became the most talked about topic in Israel. In certain circles of the Israeli public, mainly in the civil society, the framework has provoked outrage. For the last few weeks, rallies and demonstration have been held against its implementation in many cities and town around the country. The organisers, including NGOs and civil associations, tried to distance themselves from any political affiliation and identification. Politicians, although a few of them attended rallies and supported the framework's opponents, were not allowed to address the public from the podiums.

But what is this framework all about, how did it come into the world, and is it going to solve the stalemate in the Israeli natural gas industry?

Technically the framework paper is a list of amendments to government resolution 442 from the 23rd of June 2013. That government resolution in itself is the adoption of the Zemach Committee's recommendations, which were published in 2012. The Zemach Committee mission was for the "examination of the policy of the government of Israel on the natural gas issue."

In 2010, the Zemach Committee was preceded by the Sheshinski Committee, which examined the fiscal policy concerning oil and natural gas resources in Israel. The committee, which was initiated due to public pressure, by the then Finance Minister Yuval Steinitz, was harshly attacked by the energy companies and their lobbyists. Prof. Eitan Sheshinski, the committee's chairman, had complained to the police that his telephone was tapped and he was threatened. Later, in 2011, after the committee concluded its work, he also complained to the police that his life was threatened. Despite the negative atmosphere surrounding the proceedings, the committee recommended raising the taxes on oil and gas from a level of 12%, as was stated in a 1952 oil and gas law, to a level of between 50%-70% of government take (the exact figure depends on who you ask.)

Both the Sheshinski Committee and Zemach Committee were set up following a public uproar concerning the Israeli government's treatment of the emerging natural gas industry in general and the growth of a monstrous monopoly in particular. Although Israel's economy is very centralised, the power of the energy monopoly was unique. It was a phenomenon that had never occurred in the country before. Israel is a country that considers itself part of the western world, with a capitalist economy system well entrenched (although not very streamlined). It prides itself as being "the only democracy in the Middle East"; such a powerful monopoly didn't fit that image.

Unfortunately for the natural gas companies, the committees continued to operate under an atmosphere of civil unrest that engulfed Israel in 2011 and lead to the establishment of the Committee for Social and Economic Change, led by the then head of the National Economic Council. Even before that, another committee was established in order to increase competitiveness in the economy, reduce concentration, dismantle holding companies that controlled the economy, and to separate financial institutions from real-world companies.

But the committees were not completely successful in their recommendations. The Zemach Committee recommendations, for example, were not fully accepted by the government. One demand, due to public pressure, was for the local market gas quota to be increased from 450 billion cubic metres (bcm) to 540 bcm, or from 50% to 60% of the p2 reserves in the Tamar, Leviathan, and other, smaller gas fields. Another demand was for the construction of a second undersea pipeline from Tamar gas field to the shore by December 2016, a demand that will not be met.

A Leviathan in the Room

In parallel to the discussions in the two committees mentioned above, the antitrust commissioner was involved in lengthy talks with the gas monopoly partners in order to reach an agreement that would have exempted the monopoly from the anti-trust law. The commissioner, Prof. David Gilo, was adamant that the only solution to the monopoly is competition in the natural gas marketplace. That was a flawed idea since there was never a real chance nor a necessity for competition in the small Israeli market.

For three years the two sides negotiated and, towards the end of 2014, were on the threshold of singing and an anti-trust decree. Then, just before signing the exemption, in December 2014, the antitrust commissioner recanted. The move meant all hell broke loose. Although he wouldn’t admit it, the anti-trust commissioner was alleged to have been influenced by a letter, written by Israel's Deputy Attorney General , Avi Licht. The letter, written on 16 December 2014 and immediately leaked to the media, was titled "A Leviathan in the Room – a suggestion for a renewed thinking on regulating the natural gas sector". A few days after the document's leak Prof. Gilo, the antitrust commissioner, performed his U-turn and recanted on the anti-trust decree. That decision threw the government bureaucracy, regulators, politicians, lawmakers, and the prime minister (most of the other ministers refrained from expressing their opinions on the subject) into a turmoil that lasted 12 months and still hasn't ended.

In his letter, Mr. Licht warned against the power and the influence the monopoly would exert over Israel economy. "There isn't any other critical infrastructure sector in Israel, with such influence, controlled by a single private entity," wrote Mr. Licht in the paper. "The market force that is concentrated by the group raises concern for the sectorial competitiveness and its implication on prices to the consumers. However, the problem is much wider. To the sectorial competitiveness problem, one has to add the concern from a concentration of power in [Israel's] economy wide level. It is a concern that extends from the question of price and competition towards other domains, of the ability of to influence [by the monopoly] decision making in the wider [Israel] economy."

Twelve months later, Mr. Licht, in his attempt to become the Attorney General himself, tried to placate Mr. Netanyahu when he watered down the paper's significance in his testimony at the Knesset Economic Affairs Committee. (That hasn't helped his case yet, since another, closer associate of Mr. Netanyahu has been recommended for the job.)

The publication of the paper created an uproar in the media and among opponents of the monopoly's exemption from the antitrust law. That uproar, it seemed at the time, had a significant impact on the antitrust commissioner, who as mentioned before, recanted on his decision. He later resigned his post, saying that he is not willing to promote the natural gas framework since it will not create competition in the market. Analysts concluded that Mr. Gilo became a victim of Mr. Netanyahu's determination to pass the framework.

The Kandel task force

Following Mr. Gilo's U-turn, which was taken three months before the elections, the PM nominated the head of the National Economic Council, Prof. Eugene Kandel, to head a special task force, formed by various regulatory agencies and government ministries but excluded the antitrust commissioner, to propose a way out of the impasse. That task force never got an appointment letter, was never officially acknowledged by the authorities, and didn't manage protocols. Its members discussed ideas among themselves and met numerous times with representatives of the natural gas companies. A few of them even travelled to the Netherlands to learn the secrets of a proper regulatory regime for the energy industry, a course they should have taken a few years earlier.

Following the Sheshinski Committee and the Zemach Committee, the Kandel task force was the third entity in four years to tackle issues stemming from natural gas regulation. It highlighted a lack of experience among Israeli regulators on natural gas issues and their professional inferiority when it dealt with experienced professional executives who represented the energy companies. However, while the first two committees were created due to public uproar and their final reports and recommendation improved the public revenues and have been made in a transparent way (though neither solved the monopoly problem and the gas pricing), the unofficial Kandel task force operated opaquely and never earned the public's trust.

The Kandel task force issued what became known as the "natural gas regulatory framework," a set of amendments to government resolution 442. And this time, according to opponents, it was biased in favour of the gas companies. Following the publication, and the fact that none of the opponents was invited to air their views in front of the task force during its five-month activity, a public uproar erupted once again. The opponents to the monopoly demanded their voice to be heard by the task force and they got their wish fulfilled during a two-day public hearing that took place last July. In front of the Kandel task force, representatives of the gas companies and private sector executives appeared, as well as civil organization representatives, most of whom opposed the framework. That opposition hasn't changed the Kendal task force recommendations.

No pledge for rapid development

The natural gas regulatory framework is a lengthy, tedious document. For anyone who is not an expert or enthusiast on the legalities of unless natural gas, it is difficult to read past its second paragraph. The document deals with various subjects, including local natural gas pricing vis-à-vis export pricing; taxation (which is yet to be legislated); development of the gas fields; export quotas; and more.

Opponents are most worried about a certain few issues, which are either found in or absent from the recommendations: particularly that gas companies haven't pledged to develop the natural gas fields in the shortest possible time frame and that there are no sanctions against them if the Leviathan field isn't developed rapidly. They also fear that Israel's energy security will remain fragile.

Opponents also pointed out that the gas companies were allowed to expand Tamar for export purposes but will not be required to construct a second pipeline to the Israeli shore even if the Leviathan field's development is delayed; another major flaw, they said, was maintaining a high price for natural gas in Israel's domestic market, despite the price collapse in the global markets and despite the fact that the gas is transmitted no more than 200 kilometres as opposed to thousands of kilometres in other parts of the world.

Opponents also opposed "the stability clause," in which the government commits to the gas companies not to change laws and regulations and not to impose price controls for the next 10-15 years. The government will also oppose any bill that has as its purpose a change to natural gas legislation and regulation. Opponents said this article contravenes democracy.

Despite those issues, the main concern among activists is the expected rapid depletion of gas reservoirs in the case that massive gas export materialises. The Zemach committee estimated that 29 years of local gas supply is good enough; the activists demand that as long as no further reservoirs have been discovered, no large-scale export should be permitted and the natural gas will be kept for local consumption for the next few decades. They point out that American administration has allowed LNG exports only after it became clear that natural gas reserves in America are enough for almost 100 years, not just 30. However proponents of the framework claim that without the development of Leviathan and the expansion of Tamar, Israel's energy security won't be improved. They also claim that the natural gas price in Israel, at about $5.50 MMbtu, is one of the lowest among OECD members; that a second pipeline from Tamar will be built; and that Leviathan will be developed since this is in the interest of partners and democracy will not be harmed.

Those last arguments were not persuasive enough for many. Although the framework is quite a technical paper, not the kind of paper that would excite and bring out people to the streets for rallies and demonstration, its more tangible implications, such as natural gas pricing, future natural gas shortages and the blow it would inflict on the democracy, brought thousands of people out to the streets in protest.

No Firm Commitment

Opponents also stressed that despite the urgent need to develop Leviathan, as stressed by the PM and the Energy Minister, there isn't a firm commitment from the gas companies to do so. The energy companies just have to fulfil dubious milestones in the far future and there are no financial sanctions against them in the event that the gas fields are not developed. By the end of 2017, the gas companies would have to show that they have invested $1.5 billion in Leviathan development and up to 2020, when the gas field is assumed to start production, they have to present a $4-billion investment.

Another article in the framework states that 50% of the cost of a third pipeline from Tamar's wells to the Tamar rig (an undersea pipeline of about 150 kilometres, the longest in the world of its kind) will be regarded as a "construction investment," a status with a tax benefit. Since that pipeline is supposed to serve mainly gas export, opponents claim it should not have received this benefit that amounts to a few hundreds of millions of dollars.

The framework set terms and deadlines for the sale of the two small gas fields Karish and Tanin, obliged Delek Group to sell its stake holding in Tamar; and obligated Noble Energy to reduce its stake holdings from 36.9% to 25%.

The government also set a new payment mechanism for natural gas in the domestic market in the case that natural gas for export would fetch lower prices than gas sold in Israel. In that case, the companies will have to offer similar prices to new Israeli customers. However, older customers will still pay a higher price.

The framework also gives the companies a full insurance cover if the facilities will be damaged from either hostilities or wars, according to Israeli law.

Another bonus to the gas producers is the ruling that gas that will be supplied to a new ammonia factory, a factory that will export most of its products and which will consume huge gas quantities which will not be considered as part of the export quota, as previously was intended.

Following the completion of the Kandel task force work, the framework was presented to the Economic Minister at the time, Arie Deri, who refused to sign article 52. In a political manoeuvre, he resigned from his post and was replaced by the PM, Benjamin Netanyahu. According to the law, Mr. Netanyahu had to ask for the advice of the Knesset Economic Affairs Committee before he was to sign article 52 but wasn't obliged to accept its recommendation. And so last Thursday (17th of December), Mr. Netanyahu signed article 52 and pulled off another one of his successes (though the decision still has to be defended in front of the Supreme Court).

Conclusion

Overall the natural gas regulatory framework leaves Israel as the only western country in which a private natural gas monopoly, controlled by a foreign company, is practically in control over most of the country's energy reserves, a situation that diminishes the democratic regime. And on top of that, the monopoly is allowed to charge its customers exorbitant prices, at a time when energy prices are in free fall worldwide.

Ya'acov Zalel