Sheshinski: Breaking up gas monopoly won't solve anything

Eitan Sheshinski

Prof. Eytan Sheshinski sees linking the Israeli gas price to other markets as the way forward.

The solution to the problem of natural gas prices in Israel is not the break up of Delek Group Ltd. (TASE: DLEKG) and Noble Energy's monopoly; it is establishing a mechanism for linking the price to an accepted international price, according to Prof. Eytan Sheshinski. Sheshinski headed the committee that altered the state's tax revenue from the natural gas reservoirs. In a "Globes" interview, Sheshinski warned that creating a duopoly in place of the current monopoly could even worsen the consumer's plight, and admitted that there was no perfect solution for the structure of the gas industry.

Sheshinski was very careful not to be perceived as someone spoiling the "euphoria surrounding the splitting of control over the reservoirs," as he described the enthusiastic public response to Antitrust Authority director general Prof. David Gilo's decision to retract the agreement he had signed. "I support Gilo's action in the sense that his motives were reasonable. From the outset, there was no chance of generating pressure on prices by selling the two small reservoirs (Tanin and Karish, A.B.), and I can therefore understand his withdrawal from the agreement. He did not propose follow-up measures."

"Globes": Can you understand the developers' arguments?

Sheshinski: "The state has a right to change its mind under certain conditions, which are defined and precise. Stability is very important, and volatile changes are obviously undesirable, but there are other goals. If we now believe in retrospect that under the agreement with Israel Electric Corporation (IEC) (TASE: ELEC.B22) we'll pay higher prices than those prevailing around the world, the government can claim that the public interest requires some change in these agreements. That will create uncertainty for investors. It happened in the UK with North Sea oil, where investment stopped, and the government reversed itself. This is certainly a consideration. I don't want to people to think that policy here is volatile, so it's important that policy be set as soon as possible."

Do you see a problem with prices in Israel?

"As of now, there's nothing dramatic. The current price in Israel is $6.50 (per BTU, A. B.), not at the European level, and certainly not at the Far Eastern level ($8-10 in Europe and $15 or more in the Far East, A.B.). All in all, today's price is reasonable, but I understand the concern about future developments. The concern is not to be at the mercy of a monopoly selling to the entire economy. This isn't a monopoly selling a given product; it's a monopoly supplying energy to broad sectors, and any change in the price therefore will have an effect on the entire economy."

What is your opinion about Gilo's original intention to require Noble Energy and Delek Group to sell one of the two reservoirs?

"I'm worried about this euphoria surrounding a split. Forcing Noble Energy and Delek Group to sell Tamar or Leviathan through a legal battle could take 10 years, and the Antitrust commissioner said so himself. I beleive that it's worthwhile embarking on such struggles only when you know that there is a definite advantage at the end of the road. Both experience around the world and economic theory explicitly state that anyone who thinks that a duopoly will lead to perfect competition is wrong. On this question, you can rely on our experience here in Israel."

What is the minimum number of players needed for true competition?

The question is not how many players; it's what their share is. In Israeli banking, Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI) jointly control 80% of the credit in the economy, even though there are quite a few other small and medium-sized banks. The situation with gas is very similar, because we have two very large reservoirs (Leviathan and Tamar contain almost 90% of Israel's gas reserves, A.B.), and I don't see any small and medium-sized players that can arise around them and compete with them."

Do you support price controls?

"Just as I have doubts about a duopoly, I also have objections to price controls. Price controls give a lot of authority to a bureaucratic system, and experience does not justify optimism."

What do you suggest?

"I think the solutions should begin from the end, meaning that we define what goal we're trying to achieve. In my opinion, the goal is to ensure that gas prices in Israel do not differ from those prevailing in similar countries around the world. A revolution in global energy prices is taking place now. The US is becoming the world's largest oil producer, and prices are sliding - for both oil and gas. In my opinion, this trend will persist, and our goal should be not to pay more than the reasonable price in countries whose situation is similar to ours with respect to gas reservoirs.

"The solution is therefore to set a binding linkage formula of a weighted average of gas prices in various countries. That is connected to other matters that have already been discussed in the past, and which will now have to be reopened, such as export quotas. If the government now reopens the agreement, from now on, there will be a given linking formula. The formula itself will have to set a floor price, for example. The question of energy security will be reopened. They will also have to reopen the agreement between Tamar and the Spanish company - it isn't clear who will sell the gas to the Egyptians."

Published by Globes [online], Israel business news - - on December 25, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

Eitan Sheshinski
Eitan Sheshinski
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