A new study by Bank of Israel Research Department senior economist Dr. Yoav Friedman assesses the government's policy in the natural gas production sector since the discovery of the Tamar gas reservoir.
The study points to the possibility that policymakers used new information to improve the public's situation at the gas developers' expense. "Such a policy, when conducted judiciously and in accordance with the prevailing practice around the world, given the major improvement in the developers' situation, compared with the original forecast (as in the acceptance of the Sheshinski Committee recommendations, for example), is also likely to prove beneficial to Israelis in the long term," the study states. "A series of relatively short-term decisions harmful to the developers for the benefit of the consumers, however, is liable to be considered by potential developers and investors as harmful to the business environment, thereby leading to a reduction in investments in Israel and damaging the economy. Such damage is liable to outweigh the benefit that can be achieved by such decisions in the short term."
The study cites the various goals of the government and the developers in the gas sector: "While the state wishes to develop reservoirs for the local economy, among other things for the sake of creating redundancy and creating competition, the developers wish to maximize their profits, and will find it difficult to obtain financing expensive development of a natural gas reservoir that will cause a surplus in the local market, especially when they are not entitled or able to export the gas. This problem is especially acute with respect to development of the Tanin and Karish reservoirs, and makes it less likely that they will be developed in the short term. It also has consequences for exploring and developing new natural gas reservoirs at the current time."
According to the study, there is a gap in the way the value of a new natural gas reservoir discovered off Israel's coast is perceived by the developers and the way it is perceived by the government and the consumers. Friedman writes, "At a time when the local consumer is consuming expensive imported gas, discovering a local gas reservoir is of greater value than for the developer who discovered it. The developer is likely to calculate the value of the reservoir according to the export price, in other words without taking transportation expenses into account, while the government and the consumers are likely to include these expenses in the calculation, because the discovery of the reservoir saves the consumers these expenses. This gap is in itself a good reason to encourage natural gas exploration by the government at a time when a shortage of natural gas is anticipated."
Concerning the creation of a monopoly by Delek Group Ltd. (TASE: DLEKG) and Noble Energy in the sector, the study asserts, "To a great extent, this is the result of the characteristics of the industry the reliance on oil and gas exploration by private entities, the small number of players, and the difficulty in raising capital and attracting top-tier operators for deep sea exploration, as well as the absence of development in the Egyptian gas sector, whose gas could have provided a potentially competitive source of supply for the local market."
Published by Globes [online], Israel business news - www.globes-online.com - on March 15, 2016
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