How much do the gas developers really earn?

Tamar

"Globes" examines how the price of gas is calculated, and how much of it is profit for the gas companies.

"Tshuva is making a 600%, 700%, and even a 1,000% profit on sales of natural gas," the opponents of the gas industry plan assert, and explain their calculation: "It costs $0.50 to produce 1 mmbtu, and the price of gas in Israel is $5.60." On the other hand the gas producers say, "The lies… are inconceivable.. we're left with $0.80 or $0.90 profit per mmbtu."

Where does the truth lie? "Globes" examined what exactly the price of gas is composed of, how much of it is profit for the gas companies, whether the price can be lowered, and whether it is worthwhile doing so.

1. The price of gas

The average price of gas in Israel is $5.60 per mmbtu, lower than in the rest of the world. Before the cabinet meeting, Minister of National Infrastructure, Energy, and Water Yuval Steinitz showed a graph displaying the price of natural gas for electricity producers and industry in 34 Organization for Economic Cooperation and Development (OECD) member countries. Based on figures from the IHS International consultant firm, the graph shows that only three of the 34 have lower gas prices than Israel. While the price of gas for electricity producers is $18 per mmbtu in Switzerland and $6.13 in Iceland, the price in Israel is $5.80 per mmbtu.

The figures for gas prices for industry in OECD countries also show that prices in Israel are lower than in the rest of the world. While industry pays $21.60 per mmbtu in Switzerland and $13.60 in Norway, Israeli industry pays only $6.40 per mmbtu.

Does the relatively low price mean that consumers in Israel should thank their lucky stars and keep their peace? From the gas companies' perspective, the answer is yes. "When considering which countries to operate in, one of the main things that international gas companies look at is the price they can get for the gas," a senior gas company executive told "Globes." "Obviously, they also look at the gas reserves, their quality, and the regional geopolitics, but if a company can get $14 in France and $19 in Japan, why should it come to Israel?"

At the same time, the fact that the price of gas in Israel is lower than in the rest of the world is certainly not due to patriotism on the part of Yitzhak Tshuva; it is simply because gas was found in Israel. While Europe and Japan have to import gas and pay the cost of transporting it (and sometimes also liquefying and gassifying it), all Israel has to do is pipe it a few dozen kilometers from the Tamar reservoir to shore and consume it. The right question is therefore whether the state is getting its fair share of the gas profits.

2. Regular costs and development costs

According to the gas companies' reports, the average regular production cost is $0.50 per mmbtu. This is the cost referred to by those claiming that Tshuva is producing for $0.50 and selling for $5.60. This cost, however, does not include the cost of developing the Tamar reservoir included in the price paid by the gas consumer. The development costs for the Tamar reservoir to date have totaled $4 billion, and future investments in development are expected to total $2 billion more. If you divide the total cost by the total number of mmbtu in Tamar, the cost of development per mmbtu is $0.60. What does this mean?

3. The state's share

The same people who claim that Tshuva is making a 1,000% profit also say that the state's share of the gas profits is 40%. Tadmor, on the other hand, says, "The state's share of the proceeds after Sheshinski is unprecedented - over 60%."

The truth is probably in the middle. The state's share of the gas profits is derived from three elements: 12% royalties on revenue from the sale of gas at the wellhead, an excess profits tax (Sheshinski), which they gas companies pay after they have made back 150% of their expenses (in order to encourage rapid development of the Tamar reservoir, the Sheshinski Committee recommended that the partners in this reservoir pay the Sheshinski tax only after they make back 200% of their expenses), and a 26% corporate tax, also on profits.

According to the Sheshinski Committee report, the state's share of gas profits in OECD countries is 52-55%. The Committee therefore recommended that the state's share of the profits from Tamar should be 52-62% (compared with 30% before the Committee was established). Today, 55% of the oil and gas profits go to the state (plus-minus 3%, depending on the price and discounts on sales).

4. What the developers are left with

If you deduct the total operating and development cost and the state's share from the gas price, the developers are left with $2 per mmbtu. It is not $5, but nor is it less than $1. As in any estimate, here, too, the calculation can move 10% in either direction. Is the distribution reasonable? If you look at Egypt, it appears that the answer is yes. In the new gas contracts signed by Egypt with gas companies ENI, BG, and Edison in recent months, it was willing to recognize a price of $5.88 per mmbtu. $1 of this price is considered the gas companies' expenses. The $4.88 profit is divided between the private gas companies (40%) and Egyptian national gas company Egas (60%). The private gas companies do not pay taxes in Egypt; Egas pays the tax for them. In the end, the developers are left with $1.95 per mmbtu.

5. Whether the gas price can be reduced

"The gas price cannot be lowered to $3, because the state is a 55% partner in the gas profits, and cannot afford such a price cut. It can, however, lower it to $4-4.50," asserts Van Leer Institute researcher Amnon Portugali.

"The best indication of this is that the price agreed in the letter of intent signed by the Tamar partners with Israel Electric Corporation (IEC) (TASE: ELEC.B22), at a time when Egyptian gas was still flowing into Israel, was $4.50-4.70 per mmbtu," Portugali argues. "After gas stopped flowing from Egypt, the Tamar partners sent IEC a letter asking to reopen the discussions, and to raise the price to $6.50. In the end, a price of $5.03 was agreed with unreasonable linkage (the gas price in the contract with IEC is linked to the US Consumer Price Index plus 1% until 2020, and minus 1% from 2020, H. C.)."

A senior global energy sector source says that it is not right to look at the money the developers are getting now from one project; you have to look at a company's portfolio over decades. "The money that the gas companies are seeing now is also the money for 3-4 unprofitable projects in the past and for future unprofitable projects. Furthermore, the $2 that the developers will get in the future should be discounted into current values, and we're obviously talking about much lower numbers. Finally, if Israel nevertheless decides to look at only one project, no one really knows what will happen over the reservoir's 20-year lifespan. Things happen. One example of this is oil prices, which have been slashed over the past six months. The only thing that the gas companies can be sure of is the billions of dollars they are now investing in the development of the reservoir.

"Also, Noble Energy didn't oppose price controls for no reason, and it's hard for me to believe that it will agree to lowering the price now. Noble Energy is saying to itself, 'If we let them push us around in Israel, the other countries will see it, and think that they can do the same thing.' That's something that gas companies are unwilling to go along with."

"From newspaper stories and listening to interviews with MKs and economic commentators, it seems that everyone wants the good of the people. The problem is that not everyone is familiar with gas industry data," says Meitav DS Holdings Ltd. (TASE:MTDS) analyst Eran Yunger. According to him, the direct tax burden from the Tamar reservoir amounts to 70%. The direct tax burden from the reservoir is 60%, according to the Sheshinski formula, but that's not all. If you also include the corporate tax and the tax paid by owners of participation units, or tax on individuals, the total tax paid on the gas reservoirs is 70%. In other words, for every $1 produced and sold, $0.70 goes to the Israel Tax Authority. He adds, "The conclusion from all this is that the state is the main partner in the oil and gas profits, and therefore, if the price falls, the state will get less tax. According to our calculation, a $1 cut in the gas price means $2 billion less in state tax revenues and royalties. $2 billion is the cost of building 8,000 classrooms or adding 17,000 teachers.

"Globes": Won't a $1 price cut lower the cost of living?

Yunger: "Not as much as you'd think. The price of electricity will fall by a few cents. Food prices won't fall, nor will the price of housing, cars, gasoline, clothing, furniture, communications, or the cost of education and kindergartens. According to our estimates, the total contribution to a household won't exceed NIS 1,000-1,500 per family per year, at the very most NIS 2,000. More income for households won't build schools, employ more teachers, or build infrastructure, roads and railways. It will only encourage consumption. Distributing money to households is doing like Robin Hood; it absolves the government of responsibility for channeling the money to the right places, and there are plenty of those."

Published by Globes [online], Israel business news - www.globes-online.com - on July 7, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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