By: David M. Weinberg
Mar 28, 2016
Published in Israel Hayom, March 28, 2016.
If the natural gas bonanza is botched because of extreme over-regulation and court interference, the long-term cost to Israel will dwarf the damage of ten thousand BDS campaigns.
The unnecessary Supreme Court decision yesterday may visit upon Israel more damage than ten thousand possible BDS campaigns. If Noble Energy and its partners walk away from the gas deal now, Israel will not only lose the direct economic benefits of having natural gas, but also forfeit what might have been an exceedingly valuable tool of Israeli foreign and defense policy.
The 1,400 billion cubic meters (bcm) of natural gas that lie offshore in the Tamar, Leviathan, Tanin and Karish fields constitute one of Israel’s most important geo-political assets for the future. The gas fields are of critical strategic value. They were about to revolutionize Israel’s standing in the region and transform our relations with neighboring countries.
Handled wisely, these exports were supposed to be an exceedingly valuable tool of Israeli foreign and defense policy. Handled shrewdly, Israel could have solidified its centrality in the region via stable regional partnerships for gas production and supply.
But the Supreme Court’s refusal to leave good-enough alone; its decision to cancel the ten-year price stability clause in the gas deal – is mangling the gas bonanza. In one fell swoop, the Court gave substance to fears that Israel isn’t a stable regulatory environment for big business. The Court may scare away, once and for all, most potential investors. And without very big investors, the gas will remain buried uselessly underwater and underground; or it will be so expensive as to be unattractive and ineffectual.
Remember how we got here. Between 2003 and 2009, Noble Energy, alone among the major offshore drilling companies of the world, responded positively to an Israeli government invitation to search for natural gas in Israel’s territorial waters and exclusive economic zone.
It invested $200 million in discovering Tamar (taking a 70% chance of failure), and it has invested a whopping $4 billion so far to develop the larger and much farther-offshore Leviathan field. Today, 40% of Israel’s electricity production is fueled by natural gas from Tamar.
The complications began with environmental groups that blocked construction of a main natural gas receiving facility near Furadis and forcing its relocation; delays that cost Noble $1.8 billion, and cost the State of Israel much more.
Then the Israeli government changed the rules of the game in terms of taxation and profit-sharing on the gas sector, via a Finance Ministry committee head by Eitan Sheshinsky.
That is when the global gas giant Woodside of Australia withdrew its interest in partnering with Israel or with Noble to develop our gas deposits. Israel is an unstable regulatory environment, the company said.
Under growing public pressure to wrest an even better deal, the government then re-negotiated the terms of business again with Noble, for a 60% government; 40% company split of the profits. Noble would still have to pay the multi-billion-dollar development costs, and the heightened insurance costs (– in a situation where Iranian hegemony is on the ascendance alongside Iranian threats against Israel’s gas facilities at sea).
Yet even that iteration of the government-corporate partnership was unacceptable to critics on the left-wing of the political spectrum. They sought to cap the amount of gas that can be exported to low levels, and cap the price of gas to Israelis at even more ridiculously low levels. That would have nearly-nationalized the gas fields and make the venture far from viable.
Now the Supreme Court has weighed-in by striking-down the “stability clause,” a key part of the framework that commits the Israeli government not to impose any regulatory changes on the gas industry for at least 10 years. This was inserted because the gas companies contended that the cost-benefits calculations required to make the $6 billion or more needed to develop Leviathan would be too risky otherwise. A government in the future could opt to change tax policy and other regulations that would affect the return on their investment.
Seems logical, no? Well, the court says that the government can’t do this without new legislation.
My main concern here isn’t the public-corporate-constitutional side of the dispute. Perhaps Noble and the government can yet work things out, again; although it won’t be easy with an emboldened Knesset opposition nipping at Netanyahu’s heels.
What is of even greater concern is international perceptions of Israel as a stable business environment. At stake is Israel’s global reputation as a reliable place to make money. Without that, foreign direct investment (FDI) in Israel will crash. Investors are scared away from places afflicted by extreme over-regulation, confused policymaking, constantly-changing tax rules, splenetic politicians, and over-ambitious judges.
Furthermore, if this country continues to muck around in internal disputes over the gas sector, Israel will fritter way the diplomatic and strategic opportunities offered by the gas finds.
Gas must be considered a fundamental security issue. Israel already has agreements to sell Jordan enough gas for almost all of its electricity production; a diplomatic coup that helps solidify a vital security partnership with the Hashemite Kingdom.
Cyprus wants to partner with Israel in selling massive amounts of gas to the Egyptians; something that would help stabilize the Sisi regime. Greece, and even Turkey, want Israeli natural gas pipelines or liquid natural gas shipments to run through their countries. Russia’s national giant, Gazprom, is also seeking partnership with Israel.
In other words, Israel’s natural gas sector presents a unique opportunity for partnership between local and foreign companies, between government and the corporate sector, between Israel and its Arab and Mediterranean neighbors, between Israel and Europe, and even between Israel and Asia. Natural gas can be an Israeli strategic geopolitical tool of the highest order.
But not if Israel acts with inconsistency, short-sightedness and never-ending legal wrangling.