Sheshinski: Breaking up gas monopoly won't lower prices

Eitan Sheshinski and Yuval Steinitz

Energy Minister Yuval Steinitz's new advisor also opposes price controls, saying the current price is reasonable.

Avoidance of price controls, increasing gas export quotas, and linking the gas price to a weighted average in various countries are some of the proposals made by Prof. Eitan Sheshinski to incoming Minister of National Infrastructures, Energy, and Water Resources Yuval Steinitz. They met yesterday, and Steinitz asked Sheshinski to advise him on energy-related matters. Sheshinski answered that he would be glad to volunteer his help.

Sheshinski, who is very experienced in natural resources and energy, headed a committee appointed by then-Minister of Finance Steinitz in 2010 for considering fiscal policy on oil and gas resources in Israel, among other things. The committee considered the tax rates to be applied to oil and natural gas production in Israel, and recommended an increase in the tax on gas discoveries from 33% to 64%, almost double.

The gas companies, however, might actually welcome Sheshinski's appointment as an advisor. Last December, two days before Antitrust Authority director general Prof. David Gilo's dramatic announcement of his intention to liquidate the gas monopoly, thereby revoking the understandings signed with Delek Group Ltd. (TASE: DLEKG) and Noble Energy, "Globes" interviewed Sheshinski, who said that while Gilo's step was justified ("there was never a chance of generating pressure on prices through the sale of the Tanin and Karish reservoirs, and I can therefore understand why the agreement was revoked"), he saw no current problem with gas prices in Israel, because a duopoly in the gas market would not lower prices.

"All in all, today's price is reasonable," Sheshinski said in that interview, "by the standards of Europe, and certainly at the level of the Far East." The price of gas in Europe is $8-10 per energy unit, and is about $15 in the Far East. Delek Drilling Limited Partnership (TASE: DEDR.L) and Avner Oil and Gas LP (TASE: AVNR.L) today reported that the average gas price in Israel in the first quarter of 2015 was $5.45 per energy unit.

Sheshinski also asserted that controls over natural gas prices might do more harm than good. "Controls give a lot of authority to a bureaucratic system, and experience does not justify optimism," he said, adding, "I don't see how the regulator in Israel can adapt himself to the many changes occurring worldwide in gas prices. You have to keep this as far as possible from the bureaucratic and political system."

The Ministry of Finance is interested in soft price controls. Under the compromise plan presented to the gas companies a week ago, the state proposed that the price of gas in future contracts be a weighted average of gas prices in the contracts that have already been signed in Israel.

As far as liquidating the monopoly itself, Sheshinski said that creating a duopoly in place of the current monopoly was liable to make the consumer worse off, and admitted that there was no perfect solution to the problem of the structure of the gas sector. "Both global experience and economic theory explicitly state that anyone who thinks that a duopoly will cause perfect competition is wrong. In this matter, you also can rely on our experience in Israel," Sheshinski said, adding, "In a duopoly, the controlling shareholders have a common interest… some claim that a duopoly's prices are even worse than those of a monopoly."

At the same time, Sheshinski expressed understanding for concern about future price rises, and argued that a solution for the problem of Israeli gas prices is to establish a mechanism for linkage to the prevailing international price. He believes that the solution must begin from the end, meaning the objective that we want to achieve. "In my opinion, the goal is to ensure that gas prices in Israel are not different from those prevailing in similar countries around the world. A revolution is now taking place in global energy prices. The US is becoming the world's biggest oil producer, and both oil and gas prices are on a downtrend. In my opinion, this trend will continue, and our goal should be not to pay more than the reasonable prices of countries in a similar situation with respect to gas reservoirs."

The Ministry of Finance also believes that the effect of the US Consumer Price Index on the price of gas in Israel should be restricted. While Sheshinski argues that a formula for binding linkage to the gas prices in various countries should be established, however, the state wishes to include linkage to factors such as the global price of oil and Israel Electric Corporation's (IEC) (TASE: ELEC.B22) electricity production component.

Revised thinking

According to Sheshinski, the drop in global oil and gas prices should also lead to revised thinking about matters that have already been discussed, such as export quotas. The Tzemach Committee, founded to assess government policy in the natural gas market, decided that Israel should keep reserves amounting to 450 BCM of gas and export 500 BCM. Following a public outcry, the government decided to intervene, and decided that Israel should keep 540 BCM, while allowing the gas partners to export the rest. The recommendation for the amount of exports was based on a demand forecast that the Israeli economy would consume 501 BCM of gas by 2040, a forecast that has now sunk to below 460 BCM.

Despite the recommendation by the Sheshinski Committee, the gas companies were indifferent to the appointment of its chairman as an advisor to the Minister of National Infrastructures, Energy, and Water Resources, saying that they did not regard him as a threat to them. Sources in the companies said that Sheshinski understood that the most important thing to do is to make sure that the Leviathan and other reservoirs are developed, because that is the only way that the state will see its share of the gas profits.

Published by Globes [online], Israel business news - www.globes-online.com - on May 19, 2015

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

Eitan Sheshinski and Yuval Steinitz
Eitan Sheshinski and Yuval Steinitz
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