How much would a gas export ban cost Israel?

"Globes" asked an independent energy consultant to calculate the cost to the state of banning gas exports.

When Israel's natural gas reserves will run out, whether in 2040, 2045, or 2053, is behind the important, fundamental, and soul-searching public debate on gas exports. The fields discovered so far have enough gas to meet Israel's needs through 2053 - if there are no exports.

If the Tzemach Report is scaled back and gas exports are limited to 50% of the Leviathan field, then the gas will run out in 2045. If Israel allows gas field developers to export the amounts of gas recommended by the report, the gas will run out by 2040.

What will happen here until 2040? A lot of things. It is possible that the liquefied natural gas (LNG) market will become very sophisticated and the price of imported gas will equal the price of domestic gas. It is possible that cars will be powered by hydrogen. Who knows?

But this is only a small part of the story. The bigger story is the money. The state is due to take about $0.70 for every dollar of the gas field developers' profit. The government take includes the Sheshinski tax on excess profits, 11% (net) in royalties, and the companies tax or income tax. The Sheshinski tax sets a uniform rate on gas for exports and gas for domestic consumption, but the companies tax and royalties will rise substantially if the gas is sold, say, to Turkey for 50% more than the price of domestic gas.

"Globes" sought to answer the question that no one has yet asked: How much money will the state lose if gas exports are banned?

The examination was made by Amir Foster, an independent energy consultant who does not advise the gas companies operating in Israel. He compared the government's expected revenues under a limited Tzemach scenario, i.e. limited gas exports only from the Leviathan field, with a complete ban on gas exports. The thought exercise assumes that the various risks for gas exports will not materialize. He assumes that the price of gas for export will be $12.50 per British Thermal Unit from 2019.

For the sake of balance, the assumptions underpinning the gas export ban are quite optimistic, and do not take into account the possibility that the development of the Leviathan field will be greatly delayed if gas exports are banned from it, even though the developers strongly state that this is exactly what will happen. Any delay in developing Leviathan will give Israel more years of gas, but will also greatly reduces the government's revenues from gas.

Foster found that the cumulative financial significance of preferring the position of the organizations which oppose gas exports is NIS 120 billion in government revenues, which are intended for a sovereign wealth fund and the Ministry of Finance. This huge financial loss is only part of the picture.

Another important aspect is the hope that, one day, competition in the gas industry would emerge as new companies challenge the intimidating monopoly of Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) and Noble Energy Inc. (NYSE: NBL). A ban on gas exports is liable to remove the most important incentive for new players to enter the gas market, a market which already has almost insurmountable entry barriers.

"Establishing obstacles, which will effectively prevent gas exports in Israel is dangerous gamble," concludes Foster. "We are likely to be left exposed on all sides, without energy reserves, without decentralized infrastructures and suppliers, with much less government revenues from gas, and a certain path to rising energy prices."

Published by Globes [online], Israel business news - - on May 13, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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