In Israel’s explosive natural gas debate, US interests may win out

The debate over the future of Israel’s natural gas fields has been a visceral one.

On one side, lawmakers like Zionist Union MK Shelly Yachimovich and much of the national media have called the key companies working in the two largest offshore fields, America’s Noble Energy and Israel’s Delek Group, “piggish” and “liars.”

The companies, for their part, have all but threatened a war of legal attrition in the form of endless debilitating lawsuits that would stymie production of the gas, if the government changes the arrangements under which the companies agreed to pursue gas speculation in the first place.

The stakes are extraordinarily high.

Currently, only the Tamar field is actually pumping gas to Israel’s shores, a dependency that will only continue as Leviathan — the largest of the offshore gas fields — sees repeated delays in its development.

Critics have argued that the delays in Leviathan are intentional, their purpose to demonstrate to Israeli leaders that Noble and Delek can stymie future development if their demands are not met. Whether or not that is the intention, it certainly serves to highlight the extent to which the Noble-Delek partnership has a hold on nearly all of Israel’s future domestic gas production, a fact that all but ensures there won’t be any competition between them.

It is this concern that led Israel’s Antitrust Commissioner David Gilo to pronounce the companies’ shared controlling stakes in Tamar (67 percent together) and Leviathan (85%) a de facto monopoly last December, and to cancel a government deal that would let them retain that control in exchange for the sale of two smaller fields, Tanin and Karish, to a third party.

Critics in the Finance Ministry, Knesset and the media have demanded a wide range of solutions to the cartelization of Israel’s gas supply, including a government-set price for gas, or at least a price ceiling pegged to foreign indices such as the American consumer price index. But the government has largely backed away from demanding such a ceiling, instead seeking ways to gently reduce the duopolistic nature of the Delek-Noble partnership by demanding reductions of each company’s share in one of the fields, and forcing them to take the already agreed-upon step of selling off Tanin and Karish.

This halfhearted splitting of the gas fields is meant to turn each into a competitor with the others, ensuring a more natural, market-driven downward pressure on prices. But in only slightly reducing each ownership stake, and not actually breaking the partners’ control of both fields, it effectively overrides Gilo’s ruling – a fact that led to his resignation from the Antitrust Authority in May.

Indeed, Gilo’s December decision has brought into sharp relief the Gordian knot the government faces. After the decision, the Italian company Edison, which was negotiating the purchase of Tanin and Karish from Noble and Delek last year, broke off those talks and now says it will only buy the fields if it can do so in the coming months – before the Delek-Noble partnership is able to lock up all the available natural gas consumers in the Israeli market while enjoying control over the only current source of gas into the country. Under their latest agreement with the government, Delek and Noble have agreed to sell the smaller fields within 18 months, possibly too long of a window for Edison, since it may be long enough for the Israeli and American firms to sign contracts with all the major available Israeli factories and corporations that could make use of the gas in the near term.

And the continued high cost of gas under the current duopolistic regime ensures that few new companies that might benefit from conversion to natural gas, such as those with large fleets of heavy vehicles, will find it a lucrative option. In other words, if Noble-Delek’s control isn’t meaningfully addressed soon, it may become self-sustaining.

While the government struggles to articulate a coherent and consistent policy, while politicians shout across the Knesset plenum for the benefit of the evening news – and while Israeli consumers pay higher-than-average prices for their gas compared to the rest of the world – time is running out to deal effectively with the dangers of the de facto Delek-Noble duopoly in a way that doesn’t lock up in the nation’s gas supply in years of courtroom proceedings, or scare off future prospectors and investors. And through the thicket of complex contracts and arm-twisting, the key interest of the Israeli consumer – that the gas fields compete with each other so as to lower the cost of the gas supply – appears to have been lost.

The bottom line for Israeli politicians is this: the roughly $5- to $7-per-million-BTU cost of natural gas in Israel (that’s the range Israeli companies are currently paying for Tamar’s gas) is unlikely to end up lowering the cost of living for ordinary Israelis, even as Israel’s high cost of living has taken center stage in national politics.

The empty seat

The security cabinet met on Thursday – its first actual meeting since the formation of the current government last month – to discuss this trillion-shekel (the estimated value of the natural gas reserves at current prices) quandary.

But at least one key minister among the 10 members of the cabinet committee was missing from the debate, and his identity is especially revealing – it was none other than the finance minister himself, Moshe Kahlon.

“As soon as I took the post of finance minister,” Kahlon said late last month, just one day after Gilo resigned, “I notified the relevant people on the gas issue, including the Finance Ministry’s legal adviser, and David Gilo in a meeting last week, that because of my many-year acquaintance [with businessman and reported Tamar stakeholder Koby Maimon], and in order to prevent the appearance [of a conflict of interest], I have decided to turn the issue over to the prime minister, and that he should decide which minister should handle it.”

Maimon, a long-time friend of Kahlon – the latter reportedly even served as a witness in the former’s favor in a domestic dispute – is said to control a nearly 29% stake in the Tamar gas field through his stake in the Isramco Negev 2 partnership, a junior partner to Tamar and Delek.

But Kahlon’s decision to avoid the gas issue due to “the appearance” of a conflict of interest has not won him the clean-governance plaudits he may have expected.

Here’s why: In a January interview with Channel 2’s Yonit Levy, conducted in the middle of an election campaign, Kahlon was asked explicitly about whether his ties to Maimon would make him unable to deal with the gas cartel.

“When I left the government I received offers to be a director, an adviser, a lobbyist, everything you can imagine, for [a salary of] hundreds of thousands of shekels each month. Each month. And I said no,” said Kahlon, who had just come out of a two-year hiatus from government. As finance minister, he would not be in the pocket of billionaire investors like Maimon, he was telling Israelis.

But Levy pushed him on his years-long friendship with Maimon.

“What’s the connection?” Kahlon demanded.

“That you won’t deal with this issue” once elected, Levy suggested.

“I’m going to deal with this,” Kahlon assured her. “This has nothing to do with who has [an ownership stake] and who doesn’t, and I don’t even know who has and who doesn’t. And it doesn’t interest me, it’s really irrelevant. A monopoly must be dismantled.”

The saga of Kahlon’s withdrawal is thus doubly confusing. Instead of reinforcing the image he has painstakingly built as the self-proclaimed paladin of the overburdened Israeli taxpayer, he has effectively informed Israelis that his closeness to the very tycoons they believe are robbing them blind prevents him from fighting for their interests. Indeed, he has only reaffirmed the basic narrative that has come to dominate the public debate over the gas supply: that Israel’s politicians are too close to the tycoons who control so much of our small economy to enable even the cleanest and most earnest of them to act in the public’s interest when the chips are down.

Why would Kahlon sidestep the gas debate despite his fervent and explicit election promise? And why would he use his friendship with a billionaire as the excuse for doing so?

One hint at the answer may lie in Maimon’s own denial that he actually controls the Isramco share, which he only owns through his stake in a different company altogether – a denial that undermines Kahlon’s only stated reason for withdrawing. More to the point, it is hard to see why the friendship between the two men, once it is made public and reported to antitrust and legal authorities, is reason enough for a finance minister to forgo any dealings with so vast and important an issue.

Kahlon is a smart politician, and it is likely that his real reason for avoiding the gas debate is simpler: He knows the battle is lost. He knows the government’s mind is made up to pursue only a very limited improvement of the deal already struck with Noble Energy and Delek Group. Prime Minister Benjamin Netanyahu has said his top priority is to get the gas flowing, not to bicker with the gas companies over the price. So Kahlon is simply unwilling to stake his reputation and political capital as a successful reformer on a battle he is sure to lose. Better to bow out with a show of doing so in the name of clean government than to take his reputation along for that quixotic crusade.

The big picture

The larger question, then, has to do with the government’s reasons for effectively surrendering to the gas companies. It is perhaps the most troubling fact of this debate that the motives of Netanyahu, Energy Minister Yuval Steinitz and Economy Minister Aryeh Deri, all of whom have significant authority over the economics of the gas supply, remain unclear, despite reams of speculation published about them in recent weeks.

One obvious fear, already noted, is Noble Energy’s reported threat to dry up the gas supply through years of litigation if the government backtracks on its contracts.

This fear has led to discussion in Israel’s business journals about the supposed threat the Delek-Noble duopoly poses to no less than “the sovereignty of the Israeli state.”

But this fear hardly explains Netanyahu’s obvious urgency in pushing the government’s latest deal with Delek-Noble through to fruition. Despite being armed with Gilo’s ruling, Netanyahu does not appear to have even examined the government’s options to forestall such legal obstacles. Instead, he seems to consider Gilo himself as the major obstacle to government policy.

Another fear is more vague, but looms larger in the public debate: the pressure from the US government to stick to the standing agreement with Noble, which is, after all, an American company.

All of Israel’s business journals on Thursday morning – in a move clearly timed for the security cabinet meeting – carried a blaring headline: Secretary of State John Kerry personally owns hundreds of thousands of dollars in Noble Energy stock, according to his 2014 financial disclosures.

The headlines claimed to explain much. Kerry has been a remarkably energetic presence in the Israeli gas debate, albeit not a public one. When Gilo challenged the Noble-Delek duopoly in Tamar and Leviathan in December, Kerry himself went to the trouble of personally calling Netanyahu and asking him to get involved in settling the issue – which Netanyahu proceeded to do with gusto. Kerry also helped shepherd the September 2014 agreement between Noble, Delek and the government of Jordan to supply gas to Israel’s eastern neighbor from the Leviathan field, and the secretary was even scheduled to attend a ceremony marking the deal’s signing in January, a ceremony canceled after Gilo’s decision called the entire architecture of the gas supply into question.

Did Kerry, a multi-millionaire married to a billionaire, do all that out of concern for his stock portfolio? One thing is clear. The media’s sudden fascination with Kerry’s finances misses the forest for one single tree.

Kerry isn’t alone among top US officials showing interest in the gas deal, a senior Israeli official noted on Thursday. “It’s been raised in conversations between us and the US government. It came up also with senators.”

And the reason is clear: “The whole issue of the gas is a national security issue. There are huge implications on our relations with regional powers — Jordanians, Cypriots, the Greeks.”

That the gas supply is a “national security issue” is an important claim for the government for procedural reasons. Once Gilo ruled the current Noble-Delek arrangement an unwarranted duopoly, under law the cabinet could only override the ruling on national-security grounds.

But there is more to it, an added dimension that speaks to the very bedrock of the US-Israel relationship. What, precisely, is the United States purchasing with its billions of dollars in defense aid for Israel each year? No matter how bitter the acrimony between Netanyahu and US President Barack Obama has grown, that assistance has only risen, and security cooperation only deepened.

American support for Israel is not rooted merely in sentiment. For the US, Israel is an indispensable force for stability in a region that offers few other stable allies. One of the overriding reasons for American pressure on Israel over the years to achieve peace with the Palestinians is not connected to any particular president’s idealistic hopes or hunger for a legacy, but to the simple sense among American policymakers that Israel, with its robust and free economy, its social and political stability and its unmitigated commitment to the American alliance, is one of the few actually reliable variables in America’s Mideast policy. Clearing the Palestinian issue off the agenda, Americans believe, would enhance Israel’s relations with the region, and thus bolster its role as one of its few stable and stabilizing forces.

So the discovery of massive gas reserves – Tamar’s discovery marked Noble Energy’s largest-ever organic gas find in the $17-billion company’s history, and Leviathan is even larger – only heightens Israel’s usefulness to the United States. It enables Israel to provide a reliable supply of energy, and the economic and political stability that go with it, to US allies such as Jordan and Egypt.

It’s no coincidence that Tamar’s stakeholders signed a contract earlier this year with a private Egyptian concern to sell as much as five billion cubic meters of gas to Egyptian companies over the next three years, a private deal on both sides, but one that enjoys the blessing of officialdom in both countries. And it is a sign of Israel’s new place in the regional energy economy that this gas will be flowing through an old pipeline that once transported gas in the opposite direction, from Egypt to Israel.

These sales to energy-starved Egypt and pro-America Jordan mean more than mere profits for a single American corporation. They are a strategic bulwark propping up America’s threatened web of alliances in a collapsing region.

Netanyahu’s case to Israelis has centered on the threat of delays, whether from lawsuits, investor flight or overregulation. “While we bicker, the gas will stay in the ground. It happened in other countries,” he has said dozens of times in public.

But his actions, along with the public and not-so-public interventions of American officials, suggest it is also something more.

Netanyahu has something of a grand strategy for Israel that sees the Jewish state transforming into a military and economic anchor for an anti-Iranian regional alliance. Higher electric bills are a very small price to pay for Israel becoming a major regional energy supplier to as many allies as possible, as quickly as possible. In the Jordanian case, for example, such a role buttresses a relationship that helps stabilize the West Bank and maintain Jordan as a buffer to the east. With Greece, it helps solidify the interest of both nations to unite in their shared desire to counter an increasingly antagonistic Turkey. And it hardly hurts that this new role also emphasizes in Washington, still Israel’s major source for both sophisticated military hardware and international backing, the Jewish state’s increasing indispensability in a region marked by the fragility of other allies and past arrangements.

It says a lot about the sheer novelty of Israel’s new status as a budding energy power that this part of the equation, which is both the most obvious and the most significant benefit Israel stands to gain from the gas finds, is largely missing in the national debate.