Bank of Israel: Gas exports may not be viable

Leviathan

The fall in global market prices and rise in LNG transport costs makes gas exports less worthwhile says the Bank of Israel.

"The fall in gas prices in the global market raises material questions about the viability of exports," Bank of Israel macroeconomics and policy division head Adi Brender wrote in a letter of response to MK Yael Cohen Paran (Zionist Union). Cohen Paran asked for the Bank of Israel's calculations of the state proceeds from natural gas.

"As a rule, when the export price falls in the present, and the assumption is that the future value of the gas and/or the cost of importing it and/or the expected return from the proceeds and the risk premium do not change, exports at the present time become less worthwhile," Brender stated. His letter was sent last month, and energy prices have since fallen even further.

According to Brender, however, the fall in global market prices was also accompanied by a significant rise in the transportation costs for liquefied natural gas (LNG), an element "important in calculating the viability of exports," he wrote.

In his answer to Paran Cohen's question about Europe's willingness to buy Israeli gas at a relatively high price at a time when the price there was declining, Brender answered that the Bank of Israel had not taken that into account.

"As we understand it, at the current stage, what is involved is export contracts through companies operating in Egypt, and the price is determined with them, not directly with the European market," he answered. "Our calculations therefore focus directly on the potential prices in contracts with these companies, while deducting the cost of transportation to Egypt."

The gas companies have signed a letter of intent with two European companies having liquefaction facilities in Egypt. As revealed by "Globes," the Leviathan partnership plans to sign binding contracts with British Gas, one of the companies, in the next two weeks.

Lower oil prices raise Israeli GDP

The plunging oil price also has a positive effect on the both the global and Israeli economies. According to Bank Hapoalim (TASE: POLI) chief economic advisor Prof. Leo Leiderman, lower oil prices reduce inflation, have a positive impact on economic activity, and improve the balance of payments.

"At the same time, there are now fewer incentives to invest in oil substitutes, such as natural gas," Leiderman argued at an energy conference last month. He added that the most significant effect of the oil prices slide was a reduction in the dollar value of Israel's energy imports. While the country spent $12.7 billion on imported energy in 2014, these expenses totaled $7.5 billion in 2015.

"This is a dramatic decrease," Leiderman stated. "The fall in prices, combined with the transition to natural gas, translates to 2% of GDP. This is a real bonanza. It boosts global wealth."

According to the Central Bureau of Statistics, the balance of payments current account, which includes the goods and services account (including defense imports), the income from investments and labor account, and the current overseas transfers account, improved in comparison with the previous year, among other things because of the plunging price of oil. The 2015 surplus totaled $14.3 billion, compared with $11.2 billion in the preceding year. The current account surplus in 2015 amounted to 4.9% of GDP, compared with 3.7% in 2014.

Published by Globes [online], Israel business news - www.globes-online.com - on January 13, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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