Once victim to the vicissitudes of the oil marketplace, Israel is now — conventional wisdom has it — on the road to energy independence thanks to recent natural gas discoveries in the Mediterranean. Tamar and Leviathan, fields where large deposits of natural gas have been found, will, it is sometimes claimed, supply Israel with all the energy it needs for decades to come. A claim frequently cited in the media, for example, predicts that the fields have “enough gas to supply the country for 150 years.”
Energy problem solved, or so it would seem. But the truth is more nuanced, according to Ariella Berger, head of Oil Alternatives & Energy Research at the Israel Institute for Economic Planning. When examined closely, the gas forecast for Israel isn’t as bright as most people believe.
“In May 2013, 284 billion cubic meters of natural gas were ‘proven’ and ‘probable’ which means there is a high probability that they are actually there.” said Berger, “Another 587 BCM of gas are considered as contingent reserve status, meaning development plans are still pending. The dominant narrative, which considers 950 BCM as the reserves base, appears to embrace a degree of speculative risk, since contingent reserves and even undiscovered reserves are added onto proven reserves. Assuming that 950 BCM is the correct figure is actually a nuanced starting point which, along with other assumptions, may lead to negative and irremediable long-term consequences for the Israeli energy economy.”
Israel is in a much better position now than it was in 2008, before drilling projects the following year uncovered the reservoirs of gas off its shores. But, say Berger and others opposed to massive gas exports, it’s important to keep perspective; based on proven reserves, Israel has a lot less gas than other countries that are by no means considered major natural gas powers. Israel’s 284 BCM of proven gas reserves is a princely figure, but not a kingly one, putting the country at No. 41 on the list of nations with the most proven gas reserves. It’s bested in that regard by countries large and small, e.g., Russia, the US and China – and even the Netherlands. Even if all contingent reserves become proven, Israel would still come in at No. 29 on the list, after Ukraine.
‘Assuming that 950 billion cubic meters is the correct figure… may lead to negative and irremediable long-term consequences for the Israeli energy economy’
Those figures do not include gas that may exist in the Karish 1 well. Last week, Noble Energy announced that it had discovered a large field about 20 miles northeast of the Tamar field. The findings will be vetted by engineers over the next several months, but the site is likely to hold 80 to 100 BCM of gas, Noble Energy said in a statement. If the find does become part of Israel’s proven reserves (along with contingent reserve portions of the previous finds), Karish 1 will bump Israel up over the 1,000 BCM mark, ahead of Ukraine, but still behind the Netherlands. As we went to press, it had not been announced what proportion of the Karish 1 well would be proven or probable.
That discovery notwithstanding, Israel must stop seeing itself as a country with very substantial gas reserves which are sufficient to justify the large scale exports of gas and should focus instead on the demand, said Berger. “The current findings are conservative about the amount of gas Israel will need, and arguably too generous in their forecasts of how much is available. That’s leading to an unhealthy situation, where interests are pushing for extensive exports, when we should be using gas for the long-term benefit of the country,” said Berger.
“Current gas consumption in Israel is 7 BCM per year,” Berger elaborated. “But Israel is very new to gas, and new consumer markets for gas in Israel will grow rapidly and non-linearly. Also, Israel’s population is set to grow 50% to 12 million in 2050. Only if the current, immature gas usage is considered could anyone suggest Israel has over 100 years of gas. Even with a 950 BCM starting point of reserves, Israel has 36 years of gas according to our demand forecast and 45 years according to the inter-ministerial committee’s forecast, extended by population growth. This is less than the global average of 60 years, and that is without considering exports at all. If there are extensive exports and if the reserves are less than 950 BCM we could have far less than 36 years of gas.”
What to do with Israel’s gas reserves has been the subject of lengthy deliberations by a committee headed by Shaul Tzemach, the former director general of the Water and Energy Ministry. In late 2011, Tzemach was appointed to head an interministerial committee to hammer out a policy on how best to use Israel’s new-found natural gas wealth. The committee included members of the Finance, Environment, Economics, Defense, and other ministries.
The committee was faced with conflicting pressures: to allow the companies that found the gas — including Noble Energy, Delek Drilling, Avner Oil Exploration, and Isramco — freedom to export large amounts, versus keeping most of it for local needs. It worked out a compromise: The first 450 BCM would be held for Israel’s use, and companies could export up to half of any greater amount in proven reserves. That would enable the drilling companies to recoup their investment while still providing Israel with up to 25 years of gas reserves.
The Tzemach recommendations are still pending, at least officially, but if the government adopts them that could be a costly mistake, said Berger. “The committee seemed concerned with just 25 years of demand forecasts, but Israel’s energy economy extends beyond that. Twenty-five years is a standard time period for gas export contracts. [But] the Israel Electric Corporation is the biggest gas user and it plans further ahead. The Ministry of Energy also plans out further — for example, Israel’s water is planned to 2050. Why should Israel’s gas demand forecasts be inconsistent? It is significant, because had the committee considered the 2040-2050 period when consumption levels are mature, calculations would have indicated Israelis will need about 300 to 400 BCM more of gas, not just for electricity but also for transport and industry. Where -with certainty – would that 300 BCM come from?”
The folly of benchmarking Israel’s reserves at 950 BCM instead of at the proven reserves of 284 BCM was underscored by revisions to the estimates of gas in several offshore drilling sites, including the Sara, Ishay, Mira and Shimshon wells, that were expected to supply substantial amounts of gas. It turned out that the sites were either “dry” (empty), or could supply substantially less gas than had been expected. The resulting downward revision of the reserve level knocked about 130 BCM from Israel’s previous gas balance, according to Bank Leumi. The reality, say some experts, is that Israel probably has something in the region of 650-680 BCM of reserves, Berger added.
Yet Israel really has no choice but to allow large-scale gas sales, say export advocates. The Tzemach Committee noted that the companies doing the drilling invested a great deal of time and effort in finding the gas, and they needed incentives to continue exploring. “The Government of Israel, as the public’s trustee, must determine the optimal allocation of these resources in the economy, while guaranteeing effective operation of the natural gas and energy industry in general, encouraging and giving incentives for developing new fields, and ensuring competition between suppliers in the market,” the final report said, adding that allowing the sale of 50% or more of gas finds beyond the 450 BCM level was a good way to do this.
Exporting the gas isn’t just an incentive issue, according to the heads of the drilling companies. Delek Group CEO Yitzchak Tshuva said at a recent conference that gas exports could net Israel $100 billion over the next 20 years. At the conference, sponsored by Israel’s Mizrachi-Tefahot bank on May 18, Tshuva said, “The government needs to incentivize the groups searching for gas in Israel, and encourage more companies to get involved in the search. The more companies involved, the stronger Israel’s position as a serious player in the industry.”
Tshuva was echoed by Delek Drilling head Gideon Tadmor. “The interests of the exploration companies and the state are identical,” he said in a recent Channel 2 interview. “If we do not export gas as the Tzemach Commissions prescribes, the state will lose out on income of $100 billion.” The income would consist of direct taxes on the gas sold, as well as payments to the government based on royalties from sales and the investments the drilling companies would make in further exploration, based on the success of the previous exploration efforts.
Actually, it’s quite the opposite, said Dror Strum, the former head of the Antitrust Authority, who is vociferously opposed to an extensive gas export quota. “If we export all the gas the Israeli public will lose over NIS 450 billion ($110 billion), at our conservative estimate.” Far from having identical interests, Strum said, “there are actually two opposing sides in this story — the gas monopolies, and the Israeli public.”
‘If we export all the gas the Israeli public will lose over NIS 450 billion ($110 billion), at our conservative estimate’
The losses to Israel would be in money spent on energy for electricity production and transport, in addition to missed added value from new industries and positive economic effects that would filter to the wider economy. The net result – Israelis would be prevented from enjoying the reduced cost of living the gas would have brought to the economy as the country would have been able to dispense with large amounts of energy imports.
But doesn’t the government have to supply incentives to convince companies to search for gas? Not necessarily, said Noam Segal, policy director of the Israel Energy Forum, another group that believes allowing large gas exports will hurt the Israeli economy. “Actually, the costs of exploration are much lower than the drilling companies have made them out to be,” Segal told The Times of Israel. “There is much less risk in exploration today because of high-tech techniques that indicate the best places to drill.
“Tshuva says that if not for the incentives of selling the gas he might not have bothered to search, but I am sure that even if he did not, someone else would have done the exploring,” said Segal. “Nowhere in the world has government policy ever stood in the way of gas and oil exploration. Someone always undertook searches in any area that showed potential.”
The government failed, he said, in not working out a better deal with the drilling companies, such as charging them more for the licenses to drill.
Tshuva could not be reached for comment.
The Tzemach Committee, Segal added, has failed in its mission as well. “They were supposed to come up with a policy on how to best use the gas, but instead they made their main objective ways to increase competition in the gas business. That’s not what they were established for.”
Committee members, along with the companies, “are trying to play the role of government in deciding what to do with the gas. Touting Israel’s gas wealth makes them feel important, even though Israel has a lot less gas than they think.”
Tshuva and his partners want to make money, and thus their interests are not the same as those of Israelis, who would be better served by keeping the gas for local use long-term.
Berger agrees that maximizing local uses makes sense. “The gas business is not like the oil business. Gas is not as fungible, it’s harder to transport, and it costs 5 to 10 times more to transport than oil. That’s why in the global gas market around two thirds of all produced gas is consumed by the country the gas belongs to. Of the minority of produced gas which is exported, the overwhelming destination is to local markets, delivered by pipe.”
After a period of quiet, public protests against gas exports have returned in full force, with demonstrators holding numerous rallies over the past few weeks. On Saturday night, hundreds of protesters blocked roads in central Tel Aviv and demonstrated outside the home of Energy and Water Resources Minister Silvan Shalom, demanding that he intercede to prevent adoption of the Tzemach guidelines on exports. Protesters told Israel Radio that Israel needed to keep the gas, if only to keep the cost of living down.
“The gas reserves can provide sufficient supply to Israelis for decades to come, and help reduce the cost of living by making energy costs lower,” said environmental activist Mor Gilboa. Other protesters said they wanted to ensure that all Israelis, not just wealthy ones like Tshuva, could benefit from the “gas bonus.”
A stormy session at the Economics Committee in the Knesset last week chaired by MK Avishay Braverman resulted in calls for the Knesset to decide what to do with Israel’s gas, rather than having the government adopt the Tzemach Committee’s recommendations as the final word on export policy. Bills sponsored by opposition MKs Dov Khenin (Hadash) and Shelly Yachimovich (Labor) were introduced in the Knesset last year to support that. Khenin said he planned to introduce his bill again this year.
The government has responded in recent days, but only to a degree. Shalom announced last week that he would reduce the export quota to 39%-43%, down from the 50%-53% recommended by Tzemach. Reacting to accusations of lack of transparency, Shalom also said that the minutes from Tzemach Committee meetings will be released in the coming days. Protests groups said Saturday night that they would keep the pressure up; as far as they are concerned, Shalom’s proposal is too little, if not yet too late.
In the end, Israel needs to reconsider its position on gas exports, said Strum, the former antitrust head. The decision to allow any exports at all is a very risky one, “considering the fact that barely a quarter of the gas reserves Israel is thought to have has been proven. It’s hard to believe, but that fact is that three quarters of the gas reserves that have been so talked about have not been proven yet.”
Until they are, say those opposed to exports, Israel should hold on to as much of its gas as it can, for as long as it can.