"Israel should keep its gas"

John Hofmeister; Photo: Bloomberg

Former Shell president John Hofmeister tells "Globes" Israel must protect its energy assets and not make too many export deals.

"For the sake of Israel's security, it should keep the natural gas it has found in the country, and convert everything it can to operate on gas," says former president of energy giant Royal Dutch Shell (RDSA) John Hofmeister. "Israel has many enemies and no oil. What will happen if an embargo imposed on it? If you think someone will come to the rescue, think again," he warns.

Hofmeister is visiting Israel next week to take part in a conference in Herzliya organized by the Institute for Policy and Strategy (IPS) at the Interdisciplinary Center Herzliya. In an exclusive "Globes" interview, he warns against global dependence on oil, and asserts that energy security will be one of the critical issues in the coming decades, and not only in Israel. He adds that natural gas can rescue the world from an otherwise inevitable economic and security crisis.

Unfortunately, the world is become a less friendly place, and every country therefore has to take care of its own interests. That's true not just for Israel, but for every country, but it's especially true for Israel," Hofmeister says. Since he resigned from Shell in 2008, he has founded Citizens for Affordable Energy in the US. "Countries must realize how they should defend themselves and preserve their interests, and one of the important ways if by safeguarding their energy resources."

"Educate the population"

"Globes": How do you safeguard energy resources?

Hofmeister: "First of all by educating the population. The US currently imports a third of the oil it consumes, which makes it dependent on other countries. Israel, on the other hand, imports 100% of its oil, almost all of it through Turkey. No one is promising you that Turkey won't close the faucet. You therefore have to educate the population towards energy efficiency, and manage it correctly. This can be done through correct treatment of waste and using it to produce gas, recycling water, and many other ways. Both the US and Israel have many technologies that can help do this.

"The second step is for each country committed to doing so to think how it can reduce its dependence on oil. As you know, OPEC controls many of the oil resources, and reducing the demand will therefore significantly weaken the cartel."

The price of oil plummeted 50% last year, from $115 a barrel in June 2014 to $60 a barrel now. The relatively low price is encouraging oil consumption.

"I believe that the price of oil will rise in the coming year, and also the year after that, because demand for oil is rising by 2-3% each year, while the supply is falling."

Isn't one of the reasons for the drop in the price of oil an increase in the supply caused by shale oil production in the US?

"The US has indeed almost doubled its oil production in recent years from five million barrels a day in 2007 to 9.2 million barrles a day in 2014, but it is important to also take into account the rate of depletion. As soon as an oil well is drilled, the amount in the reservoir decreases by 4-5% each year, regardless of actual production. As a result of the price of oil, the US cut its drilling last year by 50%, so that its production rate is less than the rate at which the reservoirs are being depleted, and supply is falling. I therefore believe that the price of oil will rise, and I also say that the best way of influencing the price of oil is through the demand for it. This is where each country's responsibility comes in."

The demand for oil in Israel is relatively inelastic, because it is the only fuel suitable for transportation. How then can this demand be cut?

"By converting vehicles to natural gas. The US is now promoting the use of natural gas as fuel for transportation. Only 2% of the vehicles there operate on natural gas, but in the next five years, the proportion will rise to 5%. I think that this is the most significant thing that Israel can do. Vehicles can currently operate using compressed natural gas (CNG), liquefied natural gas (LNG), and methanol produced using natural gas combined with gasoline. According to my calculation, the demand for oil in the US can be cut by 30% if vehicles operate on gas instead of oil. I don't know the exact percentage in Israel, but it's sure to be very significant."

Beyond transportation, almost all the industrial plants consume refined oil products, such as fuel oil and diesel oil. The gas used for home cooking is also a refined oil product.

"All of this can be converted to natural gas. Most of the plants in Europe and the US consume natural gas, and the same is true of most homes - for cooking and heating. I know what efforts Israel is making to convert all its industry to natural gas, and what it's doing to ensure that the gas will reach homes, but it has to make this a top priority (the Ministry of National Infrastructures Energy and Water Resources has considered the feasibility of laying a natural gas pipeline that would reach homes in the past, but as of now, this is an expensive and difficult project from an engineering standpoint, H.C.)."

Security is more important than money

Asked about the possibility that natural gas export contracts, such as the contracts with Jordan and Egypt, might help Israel politically, Hofmeister stuck to his argument: Gas contracts can, indeed, be good for international relations, but they can also do damage. Export agreements are for 15-20 years. And Israel cannot really promise to provide gas to these countries over such a long period of time. What will happen if a war breaks out? Will Israel continue to supply energy, or violate the agreement? In such a case, the exact opposite of what Israel wants will happen.

Revenue from gas exports is expected to bring an estimated $ 70 billion (taxes and royalties combined) into government coffers over decades (capitalized at todays values), but the only way to justify the development of Leviathan is through export contracts, because the Israeli economy is very limited in its needs.

That is my opinion exactly - that Israel must work hard to increase its demand for natural gas. We are not against export, but long before that, Israel must make sure that it migrates everything it can to gas instead of oil. Its very important to understand that energy is security, and security is more important than money. There are many countries that have not had Israels luck, and have not discovered natural gas. Now, Israel must use it right. Just like no one will help the US if it faces an energy crisis, no one will rush to help Israel either.

The US wouldnt help?

No one is promising they will, and I dont think you can trust Barack Obama. We have seen that he is very good at promising things, but less good at fulfilling them. In this respect, he has made the Middle East a less secure place, and a more dangerous one for Israel. Likewise, as I mentioned earlier, the US today must import a third of the oil it uses, so why should it export it? There are companies today that would like to do this, but the US government does not allow them to, precisely for this reason.

Will establishing a government gas company in Israel help advance these policies?

Government gas companies tend, for the most part, to be uncompetitive, bureaucracy-laden, and more subject to political influences, and therefore its not certain that they would help to advance anything at all. However, this is something that Israel should examine, and learn from other countries. There are countries that have had good experiences with government gas companies, and others that have not. In Venezuela, for example, the government gas company was more or less a puppet, controlled by President Hugo Chávez, and Nigeria also had a corrupt company. In Saudi Arabia, on the other hand, the government company was great - honest, and effective for the residents.

Today, gas in Israel costs an average of $5.45 per energy unit. There are those who claim that the price of gas reflects the monopolistic power of Delek and Noble Energy. What should the price be, in your opinion?

It all depends on what Israel plans to do with its natural gas. In other words, if it decides that it wants to reduce its dependency on oil and to consume more natural gas, then it needs to invest resources in converting industry, cars, and infrastructure to natural gas. The way to pay for all this is through consumer gas prices, and therefore the price will be higher. On the other hand, if Israel decides that its more important for it to export the gas and bring money into its coffers, then the consumer gas price should be much lower, because there will be no need to pay for all of the infrastructure.

They dont come because theres not enough gas.

For years, Israel has been trying to attract large international gas and oil companies to come and drill here, but other than Noble Energy, no ones coming. Why do you think that is?

Its not what youre thinking. Israel thinks the reason international companies dont come here is because they prefer not to cross Arab countries, but thats not the reason. This is evidenced by that fact that gas companies have in the past operated in China and in Taiwan, and they found a way to do so. Before big companies like Chevron and Exxon come to a country, they look at the potential amount of gas and oil. They look at whether they will be able to stay in the country for decades. The truth is that there is simply not enough gas in Israel to attract these companies.

Published by Globes [online], Israel business news - www.globes-online.com - on June 1, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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John Hofmeister; Photo: Bloomberg
John Hofmeister; Photo: Bloomberg
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