In February, "Globes" reported the plan for liquidating the natural gas monopoly, calling it a bluff. Three months have gone by, and the plan has now been given a facelift - another plan, another solution for the "monopoly", all in the public interest of course. After the saga comes to an end, assuming that, with God's help, it does end, the State Comptroller will write a small book about what was obvious from the outset in one of Israel's major regulatory scandals: too many regulators, too many slogans, too much negative energy between the regulators (you wouldn't believe how they briefed the press and public against each other, to what levels they descended, and how they used journalists to portray themselves as defenders of the public interest and their fellow regulators as corrupt figures supposedly in the services of the tycoons).
When a delegation of regulators traveled to the Netherlands a while ago to study the natural gas market there, we should have all asked why they did it in 2015, many years after the gas reservoirs were discovered. "Globes" reporter Amiram Barkat hit the nail on the head this week when he said that this plan was a bad decision, but worse ones were possible. He described how every band of self-righteous purists and loudmouths purportedly defending the public interest had chased away Australian company Woodside, a company with knowhow, capabilities, and serious DNA, thereby missing at least a theoretical opportunity to generate competition in the gas market.
In general, the word "competition" has become a catchy slogan designed to solve price problems in every market and in every situation. If you ask Antitrust commissioner David Gilo whether one or another plan for creating competition in the gas market will really lower prices, he will say honestly that he does not know, that there is a definitely logical scenario in which liquidating the monopoly or duopoly and introducing several more competitors into this market will not necessarily lead to lower prices.
This could be the biggest problem of the whole natural gas market imbroglio: the illusory quest for competition at any price and in every market, even though there are markets in which splitting up monopolies and duopolies does not necessarily lead to the theoretical results projected by the economics faculties, and sometimes causes more damage than benefit (yes, to the consumer, the same consumer that the purists talk about in such lofty tones).
It is sometimes necessary to stop, think, and accept the situation - to admit that the various contorted efforts to liquidate the monopoly have failed. There is no reason to be shocked by this. Instead of continuing to mislead the public by garnering headlines about dissolving the monopoly, the state should introduce effective price supervision, oblige the developers to settle for lower profits, while foregoing some of its profits (the state receives royalties, corporate tax, and the Sheshinski tax), or decide to go the way of Norway by managing the gas reservoirs itself, with a foreign company to operate them. The problem is that the Ministry of Finance officials and all the high priests of competition are incapable of admitting this and turning their backs on their holy books. Their hair stands on end every time price controls or government ownership of natural resources is mentioned.
For them, and for all the purists, here is a headline about an old-new plan to be devised for the nth time - today, tomorrow, in a week, two weeks, two months, until the end of time. Under the "plan," Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) and Noble Energy will have to give up their holdings in the Tamar reservoir (Delek Group completely, Noble Energy part of its holding), with 42% of the shares in the reservoir passing to a "new player," in the fantasies of the plan's designers.
So we are gambling here on the future headline, and if the arrangement is really implemented, we will be delighted to eat our hats if the following headline never appears: "Delek Group and Noble Energy sell 42% of Tamar to investment institutions group for NIS 20 billion."
The explanation is as follows: the Tamar reservoir is an ideal investment for those institutions, and its value is over $14 billion. Most of its gas has already been sold. It has one prominent anchor customer (Israel Electric Corporation (IEC) (TASE: ELEC.B22), which will buy nearly half of the reservoir's output over the lifespan of the contract). It has a very precise projected cash flow, and the investment institutions have piles of money just looking for an income-producing asset with a fine stable return, especially in the current negligible interest rate environment. What could be bad about that? Delek Group and Noble Energy will make the exit of their lives, the investment institutions will get a wonderful income-producing asset, the "new player" in the natural gas market will be disguised as an investment institution, and all the marvelous slogans about liquidating the monopoly will be buried at sea.
Where will the money go?
We decided to look ahead and wonder what will happen to the tax proceeds from the gas reservoirs when this saga comes to an end, assuming that it does end, with this plan, or in the courts. According to a presentation by the Bank of Israel and Stanley Fischer, its governor two years ago, these revenues total $126 billion - nearly NIS 500 billion added to the state treasury as a result of the natural gas discoveries. Some of the revenues (companies tax and royalties) will be swallowed up by the budget, while others (Sheshinski's excess profits tax) will pass to a fund set up by the state.
It sounds like fantasy, but not too much so, taking into account that these revenues will be spread over 25 years, and the amounts will be small in the next few years. At the peak, 20 years from now, the amounts will reach $10 billion - nearly NIS 40 billion - a year.
The fund initiated by Fischer is likely to reach $72 billion, and is slated to invest exclusively overseas in order to avoid Dutch disease. It will be managed by a special unit at the Bank of Israel. What will it be used for? To transfer money to the government in states of emergency (wars, natural disasters, severe recessions, etc.) and for investment for future generations. First of all, when the money begins to pile up in the fund, no one will be surprised if all the slogans about investment for future generations, education, and narrowing gaps give way to completely different things. Secondly, someone is going to make a big profit, and that someone is the entire capital market gang (in Israel and on Wall Street). You can already guess: commissions, and more commissions, and more commissions on the purchase of assets by the fund likely to reach a grand total in the billions of shekels.
Maybe it is time to think in a completely different direction - a completely different kind of privatization: social privatization - a check for every citizen from the sovereign wealth fund initiated by Fischer, graduated by percentile, of course. This might help some of us to reduce the mortgage strangling us as a result of the real estate bubble so carefully fostered by the Ministry of Finance and the Bank of Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on May 14, 2015
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