Drilling into Netanyahu’s gas deal, and why some might oppose it

It was no accident that the Netanyahu government chose Tuesday as the day it would finally, after months of acrimony and criticism, make public its compromise deal with the gas consortium that holds a monopoly over Israel’s bountiful natural gas fields.

Put simply, Prime Minister Benjamin Netanyahu had run out of options.

On Monday night, as he tried to pass a procedural vote through the Knesset that would have effectively given him the power to approve the deal unimpeded, Netanyahu discovered that the public campaign against the gas deal had made it so toxic that he could no longer count even on his own Likud ministers to support it. By 11 p.m., Netanyahu realized he lacked a parliamentary majority, and so pushed off the vote for a month.

And, for good measure, he agreed to tell Israelis what the deal actually contained.

Netanyahu may have believed that keeping the deal’s contents under wraps in recent months was politically savvy, but the decision backfired badly. The fact that he was trying to push through the parliament and cabinet a massive reform dealing with the country’s largest natural resource without publicizing – not even to most MKs outside a small circle of top ministers – any of its stipulations became all the evidence his opponents needed to portray him as selling the nation’s resources to greedy corporations.

The two largest gas fields, Tamar and Leviathan, were discovered in 2009 and 2010 respectively. Five years later, only Tamar is developed and pumping gas to the Israeli shore, and that single pipe from Tamar is currently the only source of natural gas into the country.

Meanwhile, Tamar, Leviathan and the smaller fields of Tanin and Karish – effectively Israel’s entire domestic gas supply for the foreseeable future – are controlled by a narrow partnership comprising primarily just two companies, America’s Noble Energy and Israel’s Delek Group.

Israelis protest against Finance Minister Moshe Kahlon, and the US-Israeli conglomerate Noble-Delek over a plan to develop Israel’s natural gas reserves, in Tel Aviv, on May 30, 2015. (Flash90)

The debate over that duopoly, and more broadly over Israel’s wise use of its newfound natural wealth, simmered on a low flame until December 2014, when the state’s antitrust commissioner, Prof. David Gilo, ruled that a government-backed compromise that sought to reduce the control of the Noble-Delek partnership over the gas supply was itself anticompetitive. The ruling served as a catalyst, bringing sudden and intense media attention to the question of who controlled the gas supply, and what the consequences might be for Israelis.

In the months that followed, Netanyahu resolved to sidestep Gilo’s ruling and push the deal through despite the commissioner’s objections.

But that bulldozer strategy, combined with the secrecy that still shrouded the deal, have made the new policy so politically toxic that senior cabinet ministers, while not challenging Netanyahu outright, have balked at taking any responsibility for it.

It didn’t have to end this way. Under Israeli antitrust law, the economy minister, a post currently held by Shas chairman Aryeh Deri, can suspend antitrust rules if he deems a particular corporate monopoly important to Israel’s national-security or diplomatic interests. But last week, unwilling to use the power given to him under law to approve the gas deal, Deri took the remarkable step of informing the security cabinet that he wanted to be stripped of that authority entirely.

Moving that power from the economy minister to the broader cabinet required a change in law, and it was this legislation that the Knesset was preparing to vote on Monday.

In other words, the very fact that the gas deal ever reached the Knesset – the cabinet does not need the Knesset’s approval to sign contracts with foreign energy companies, even if they are monopolies – was itself a sign of how badly Netanyahu was losing the argument.

On Monday, as he worked to shore up his coalition ahead of the vote, it became clear to the prime minister that even his own cabinet could not be counted on in the plenum vote. Finance Minister Moshe Kahlon, Housing Minister Yoav Galant, Environment Minister Avi Gabai (who is not an MK, but has a vote in the cabinet), and even two Likud ministers, party number-two Gilad Erdan and Interior Minister Silvan Shalom, all sought ways to avoid voting on Monday.

Yisrael Beytenu chairman Avigdor Liberman, once a Netanyahu ally but now in the opposition, said out loud what many of Netanyahu’s coalition partners were only whispering: though he supported the deal itself, his party would vote “no” on Monday.

As he explained to reporters at his party’s faction meeting in the Knesset on Monday afternoon, he could not support transferring powers across government bodies for the sole purpose of allowing ministers “to shirk responsibility…. We’re not the coalition’s babysitter.”

Netanyahu tried everything, meeting with ministers and MKs, and even trying to make Monday’s vote on the deal a formal vote of confidence in the coalition, forcing ministers to effectively choose between a “yes” vote and the possible destabilizing of the government.

Nothing worked. He simply didn’t have the votes for the transfer of Deri’s authority to the cabinet. And so Netanyahu was left with little choice.

Minister Yuval Steinitz, center, speaks as he presents the guidelines for regulating the country’s offshore natural gas reserves at a press conference in Jerusalem on June 30, 2015. (Yonatan Sindel/Flash90)

On Tuesday afternoon, Energy Minister Yuval Steinitz, a Netanyahu loyalist (a key reason he was trusted with the ministry handling the gas negotiations), held the long-awaited press conference in which he laid out in detail the government’s compromise with the gas companies.

The government will now take public feedback for three weeks, after which the Knesset is slated to again vote on the transfer of power, and, in about a month, the cabinet will vote on the deal itself.

The government’s case

The essential criticism put forward by Gilo and others is that a single corporate partnership controls all the gas fields, and that this effective monopoly means these corporations will be able to impose exorbitant prices on Israeli consumers. Noble-Delek together hold a 67% stake in the Tamar field and 85% in the even larger Leviathan. They own 100% of Tanin and Karish.

The government’s solution, as presented by Steinitz, is twofold: forcibly dividing the gas fields among different owners, and setting some limited price controls on the domestic sale of the gas.

Under the plan, Delek and Noble will relinquish control of Tamar by 2021, and will have a July 2019 deadline for bringing Leviathan’s gas to the market – “that’s as fast as the technology will allow,” according to Steinitz.

Delek will sell its entire 31% stake in Tamar within six years, “though we think it will be sold faster, within three-four years,” Steinitz said. Noble will sell only part of its 36% stake, keeping a 25% overall stake but losing any veto power. “Noble operates [the Tamar field],” said Steinitz. “It can’t be entirely removed from it.”

The two companies will also be required to sell Karish and Tanin within 14 months of the deal’s approval by the cabinet, and to offer their Israeli customers exit clauses that allow them to end their contracts with Noble-Delek when Tanin-Karish’s gas comes on the market.

Those two stipulations are meant to ensure that Noble-Delek actually find a buyer. No third-party energy company is likely to take on the development of the Tanin-Karish fields if they believe they won’t be able to sell the gas in Israel after Noble and Delek had years in which to lock up the market in long-term contracts. At the same time, the deal also requires the new owners of Tanin-Karish to sell their gas exclusively to the Israeli market, ensuring the smaller fields actually become competitors to Tamar and Leviathan once they are developed.

The criticism of this framework is obvious, and it came quickly on Tuesday, as politicians and others poke out against the fact that the deal will let Noble-Delek continue to control the gas market, to varying degrees, for years to come.

By July 2019, Delek and Noble will be selling Leviathan’s gas, but can retain control of Tamar until 2021. The sale of Tanin and Karish is all well and good, but the two fields together hold perhaps 10% of the gas in Leviathan alone, and their development, too, will take years.

The Tamar natural gas field off the coast of Ashkelon (photo credit: Moshe Shai/FLASH90)

The deal also allows Delek and Noble to remain partners in Leviathan for 10 years after its development – roughly 15 years from today – before the government will have the right to force them to sell the field’s gas independently and in competition with one another.

In other words, the current Noble-Delek monopoly will hold through 2021, at which point they will relinquish some control over the smaller, partly-spent Tamar field in favor of the larger, still-pristine Leviathan, whose gas supply they will be able to control without internal competition until perhaps 2029.

The government swiftly offered two answers to the criticism.

First, there is the second plank of the gas deal: the price controls. While the government has refused to simply set the price of gas coming from Tamar, arguing that this was inefficient and harmful to both the market and the possibility that future prospectors would ever come drilling in Israeli territory again, it has agreed to a cap on how much the gas can sell for.

“The government used to set a price for cheese,” Netanyahu’s top economic advisor Prof. Eugene Kandel noted at Tuesday’s press conference. “When we opened it up for competition, the cost of cheese dropped 30%.” That is, governments are bad at predicting market prices, according to Kandel. When governments attempt to set prices artificially low, they often end up setting them artificially high. “We don’t know the market’s price ahead of time,” said Kandel.

Instead, the government is taking the less intrusive step of setting a price ceiling of roughly $5.40 per million BTU – mid-range in the European market but higher than the prices seen in North America, according to the government.

It is also pegging the price of domestic sales to that of exports.

“If one of the [gas] companies sells the gas cheaper overseas” – the companies can export up to 40% of the gas they draw out of the sea – “from that moment it has to offer it here for that price,” said Steinitz.

Israel Antitrust Commissioner David Gilo, March 18, 2014. (Flash 90)

In other words, while the government won’t set a price, it also won’t let Israel’s gas be sold domestically for a higher price than it fetches abroad. Any company that hopes to benefit from exporting the gas – and all the partners in the gas consortia do – will now have to offer its competitive international prices inside Israel as well.

Both the price ceiling and the export peg are “unique,” said Steinitz. “We’re the only [gas-producing state] in the OECD that places any limits” on price.

Steinitz’s second answer to the problem of the continuing monopoly was less explicit, perhaps because it is politically less palatable. Leviathan is a deep-water field, its gas lying some 1,700 meters below the surface, and is therefore expensive to develop. The cost of developing Leviathan to its full capacity is expected to reach as much as $15 billion, Steinitz claimed, “more than Israel’s entire defense budget. And those investments only start paying off four-five years later. This is not a normal business. There has to be regulatory stability to convince companies to come and invest here. We therefore reached an agreement that offers that regulatory stability, at least for the next decade.”

The chaos in Israel’s gas policy thus far has scared off further prospecting, he said.

Charles Davidson (L), chairman of Noble Energy, meets with former finance minister Yuval Steinitz (Miriam Alster/FLASH90)

“Many companies are drilling in Canada and the US, four or five international companies are drilling in Cyprus and Lebanon. In Egypt they’ve returned to drilling. But in Israel, where massive gas fields have already been found, no international company has been willing to come and drill for the past five years.”

Under the price-control regime stipulated by the deal, and with hard deadlines for development and diversification of ownership for the different fields, and considering the immense up-front costs shouldered by the gas companies, it was important to allow Noble and Delek to continue extracting the gas, and benefiting from it, in the intervening years, Steinitz was arguing. A more intrusive intervention by the government would only ensure “that no one will come and develop” in Israel’s gas fields.

No change in strategy

The publicizing of the gas deal’s contents has set wheels in motion throughout the political system.

State Comptroller Yosef Shapira announced shortly after Steinitz’s press conference the he would ask the cabinet to delay its vote on the deal (slated for roughly a month from now) because his office was preparing to publish its own report on the issue.

Zionist Union MK Eitan Cabel, who chairs the Knesset Economy Committee, promised to consider what he termed “the proposed framework.”

“In the next few days I’ll convene the Economy Committee for its first discussion of the proposed framework. The prime minister, the energy minister and Yitzhak Tshuva [who owns Delek Group] will be the first to present their views to the committee.”

Zionist Union MK Eitan Cabel. (Miriam Alster/Flash90)

Deri, whose refusal to overrule Gilo set off the chain of events that ended with Tuesday’s press conference, wasn’t shy about his own relief. “I’m glad the decision was made to present the gas framework to the public, and of course to members of Knesset as well, in its entirely and with complete transparency,” he said.

But for all the excitement, the new strategy of openness is ultimately a public-relations move. Netanyahu remains determined to push the deal through the cabinet as quickly and efficiently as possible.

“This framework breaks the gas monopoly and will bring hundreds of billions of shekels to the state coffers, to welfare and health and education, and many other needs of Israel’s citizens,” Netanyahu said after a meeting with Italian Foreign Minister Paolo Gentiloni on Tuesday, just hours before Steinitz’s press conference.

Prime Minister Benjamin Netanyahu at the weekly cabinet meeting in Jerusalem, June 28, 2015. (Flash90/Alex Kolomoisky)

He went on to rail against the “growing populism” of his critics. “No one [among them] has actually examined the framework,” he noted, but did not dwell on his own role in preventing them from doing so.

“I never surrender to populism,” he went on. Once the deal’s contents are public, “I trust in the common sense of Israel’s citizens and I expect responsibility from the public’s representatives. We will do everything to get that gas out of the water.”

Steinitz himself went further. Asked by a reporter what the government would do if the Knesset failed to approve the transfer of Deri’s antitrust powers to the cabinet, Steinitz refused to rule out the possibility that the government would bury the measure in the omnibus Arrangements Bill as part of the state budget process.

“By hook or crook,” he said, switching to English for the adage, the deal would pass. “This issue is so big, so significant, so important, that I can’t accept that while I’m energy minister the gas will stay in the ocean. We will look out for the interests of Israel and its citizens, their real interests, with every legal means at our disposal.”