Can Israel quit dependence on Oil Refineries?

Oil Refineries

Environmental-economic reflections in the wake of Oil Refineries’ cooling tower collapse and the release of the McKinsey report.

Shani Ashkenazi Two weeks ago, on Friday morning, Haifa residents awoke to discover that their urban landscape - and an emblematic landmark - had changed in an instant. One of the two famous cooling towers on the Bazan Group Oil Refineries (TASE: ORL) site had collapsed. All that was left to view was a pile of concrete rubble. Many saw the collapse as a metaphor: the architectural structure that had been considered the workers’ city’s symbol, on that day also symbolized the end of those industries traditionally associated with the Haifa Bay.

That morning, Ministry of Environmental Protection Gila Gamliel, who only recently assumed her post, announced: "This is an important signal about the beginning of the end. On this occasion, the collapse was an accident. Next time will be intentional. Haifa’s residents deserve to live in a healthy environment."

But Oil Refineries' troubles were not over. A few days after the cooling tower collapse, McKinsey & Company released a report, written two years ago, "The Future of Petrochemical Industries in Haifa Bay". Although many critically important sections of the report have been censored, due to commercial and security interests, between the lines one can understand that relocating Oil Refineries from Haifa Bay to another location would cost NIS 18 billion, and would not be economically worthwhile. However, shutting down the petrochemicals refinery within a decade while concurrently implementing various alternative solutions actually would benefit the country, as the Israel Land Authority (ILA) has prepared a plan to construct 100,000 housing units on the 36,000 dunam (9,000 acre) site.

Energy and national security

The report’s authors make no recommendations to policy makers as to which option might be implemented, but rather present four scenarios and their economic advantages. The one with most economic promise is a total shutdown of the site by 2030.

Over the past 20 years, 14% of global oil refining capacity has shut down. As the world strides towards a low-carbon economy and mass electric vehicle (EV) use, demand for refined petrochemical products may plummet in the markets where Oil Refineries operates. Reducing operations is not worthwhile, as its different divisions are interconnected; shuttering a division could drag the entire company into a loss. In any case, profitability is expected to drop significantly from 2025, on the basis of forecasts for the European refining market.

For the State of Israel, closing Oil Refineries means relinquishing 60% of the nation’s refining capabilities. It also means finding an alternate source for manufacturing bitumen (asphalt), as Oil Refineries currently has a monopoly on its production. The report, therefore, also deals with the import and storage of distillates, and alternatives to the existing plant.

The net cost of dismantling Oil Refineries is forecast at NIS 1.9-2.3 billion, and it would take three to four years. The state would benefit from cancelling relocation and expansion projects, currently estimated at over NIS 1 billion, which include the "Karkaot Hazafon" project [to relocate shorefront storage tanks], expansion of national fuel and energy infrastructure corporation Petroleum & Energy Infrastructures (PEI), and plans to relocate the Haifa-Ashdod pipeline belonging to Europe Asia Pipeline Co. (EAPC) from the coastal plain to Highway 6.

Cancelling these plans would fund both oil depot construction and alternative bitumen production (at a cost of NIS 105-175 million), leaving NIS 815 million that could be used for remediation of the contaminated property. The ILA estimates that land remediation will cost NIS 1.5 billion, and will be relatively simple given the area’s geological structure.

Is this just another report destined to leave an impression only in the newspapers? Rafi Elmaliach, Senior Division Head Planning and Development at ILA, makes clear that its execution is closer than ever before. "This is not a fantasy. If Bazan thinks this report is going to stay in a drawer, then I have news for them: it's going to move ahead.

"Recently, we’ve seen more government ministers coming out in support of a staged implementation of the plan. We’re talking about transforming the northern metropolitan area."

The pollution-morbidity connection

The McKinsey report isn’t an environmental report. It does not evaluate external costs incurred by the state and its citizens due to pollution, nor does it deal with climate change or other ecological factors. It takes a narrow point of view, dealing solely with the benefits to the state, should the petrochemical plant be evacuated. But Haifa Bay environmental activists have waited a long time for its release. After a protracted battle against government officials, they’ve realized that the economic motive is the only one that could end industrial pollution in their city.

Haifa is one of Israel’s main centers of air pollution and the fight for environmental health goes back many years. 20 years ago, air pollution was killing millions of people around the world each year, and according to OECD data, some 2,200 persons in Israel. Haifa residents requested that the authorities examine the connection between morbidity and industrial pollution, plus more stringent monitoring of citizen health. Over the past two decades, a number of research projects in the area have been carried out, aimed at examining the relationship between Haifa Bay air quality, and incidences of morbidity and mortality from various diseases, but a clear link has never been identified.

However, during the past decade, the Ministry of Health has noted repeatedly the high incidence of cancer in the Haifa Bay area. Speaking at the Knesset this week, Dr. Isabella Karkis, Director of the Department of Environmental Epidemiology at the Ministry of Health said, "A periodic report on infections and morbidity, which includes data up to 2016, clearly confirms a high rate of cancer in Haifa Bay, as compared with other regions of the country." A 2017 report from the Ministry for Environmental Protection makes the case that, as of 2014, environmental damage from the Oil Refineries compound expressed in terms of external costs (medicines, sick days, hospitalization days, etc.), came to NIS 650 million, annually.

Oil Refineries doesn’t like environmental regulations

The rest of the world is transitioning from fossil fuels to clean energy. Take immediate action, the McKinsey report signaled to Israel’s decision-makers.

In its own recent quarterly report, Oil Refineries stated that significant risk factors to profitability were: changes in environmental regulations and standards, alternatives to petroleum products, plastic recycling, and the implementation of a plan announced by Minister of Energy Yuval Steinitz banning imports of gasoline and diesel vehicles by 2030.

There is a fundamental flaw in the government’s rush to implement the plan, maintains Dr. Sinaia Netanyahu, agricultural and natural resources economist and former Chief Scientist at the Israeli Ministry of Environmental Protection, as there is no guarantee that simple remediation will make the land habitable. "Meanwhile, there may be generous compensation on the horizon for a company that, in any case, has no future in a low-carbon economy world as it transitions to non-petroleum-based materials. The cost of dealing with pollution should be imposed on the polluter."

Current government uncertainty also harms the industry by issuing conflicting messages. The McKinsey report presents immediate shutdown scenarios while the government drags its feet. Meantime, on one hand, Oil Refineries expansion attempts are met with both residents' protests and the Regional District Planning and Building Committee’s refusal to submit plans for new power plants to an environmental impact review, due to "indecision about continued industrial activity in the Haifa Bay".

On the other hand, the company won the tender for establishing an environmental innovation lab at Haifa Bay, while subsidiary Carmel Olefins receives funding from the Israel Innovation Authority.

Even if a decision is made to relocate or shutdown the plant, the government will face additional challenges. Closing the petrochemical plant will not completely eliminate pollution; apart from vehicular air pollution, a survey conducted by the Ministry for Environmental Protection shows that pollution caused by ships at Haifa and Ashdod is equivalent to 6%-15% of all hazardous emissions in Israel.

In addition, the state will be required to provide energy security from alternative sources while also accelerating reduced fossil fuel use, as well as handling regional employment issues. Haifa Bay industries are the livelihood for 10,000 employees (of which 1,400 are employed directly by Oil Refineries); the state will have to create a substantial safety net for them.

Like many other countries around the world, the Ministry of the Environmental Protection recently began promoting an Israeli Green New Deal that targets solar energy as one industry which could add more than 10,000 jobs. According to United Nations data, every dollar spent on green energy in the US creates about 70% more jobs than a dollar invested in the fossil fuel industry.

Bazan Group Oil Refineries stated in response: "Bazan Group, which provides the state with energy independence, whether every day or in emergencies, is a main anchor for the northern region economy, contributing approximately 14,400 jobs in various spheres, and supplying products to 350 satellite operations in the periphery. As part of its environmental responsibility policy, over the past decade, Oil Refineries has reduced its environmental impact by tens of percentage points.

"As the Ministry of the Environment's most up-to-date reports show, Oil Refineries’ relative impact on the environment on Haifa Bay is very low compared to other sectors in the region, and continues to decline steadily. Any discussion about Haifa Bay’s future must address all relevant considerations and take into account research and facts, not general worldviews and wishful thinking."

Published by Globes, Israel business news - en.globes.co.il - on June 25, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Oil Refineries
Oil Refineries
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018