A change in energy strategy would significantly reduce the cost of fuel for electricity generation as well as Israel’s dependence on imports; National Economic Council head says state is major shareholder, so tax breaks make sense.
By Avi Bar-Eli

s the government prepares to welcome a new royalty regime for the extraction of natural resources, including natural gas, it’s also looking to develop the next aspect of the Israeli natural gas industry – the introduction of competition.

Prime Minister Benjamin Netanyahu has called for the creation of a number of teams and interministerial committees to address how to increase supply-side competition, as well as demand for and consumption of natural gas. The teams would also be tasked with drafting an export strategy and finding ways to enforce competitive practices.
Eugene Kandel

Prof. Eugene Kandel
Photo by: Ilya Melnikov

Much of the work will be handled by the National Economic Council, headed by Prof. Eugene Kandel.

The large gas finds of the past two years enable a change in energy strategy, primarily shifting away from “dirty” fuels for electricity production, like coal. It might also include the increased use of natural gas to power vehicles.

These measures would have major economic implications, including significantly reducing the cost of fuel for electricity generation as well as Israel’s dependence on imports.

The rapidly developing natural gas sector is highly concentrated, because the National Infrastructure Ministry issued exploration and drilling licenses in an uncontrolled, uncompetitive manner in the past 10 years. The strategic partnership between Yitzhak Tshuva’s Delek Group and the U.S. company Noble Energy thus control all the licenses for the country’s gas reserves, from the Mari-B and Noa fields (100% ) to the more recently discovered Tamar and Dalit (67% ) and Leviathan (85% ).

Beyond the implications of having a monopoly control something as crucial as natural gas, it could also block competing companies from developing gas reserves yet to be discovered. Sites such as Leviathan and Tamar would have a major advantage because they would already have the infrastructure to pipe the gas from the underwater reserves ashore.

For instance, if gas were to be discovered at Mira, controlled by the Israel Land Development Company and Modiin Energy, or at Samson, controlled by Isramco, the companies would likely be dependent on Tamar’s underwater pipeline.

Therefore, Netanyahu’s teams will be discussing whether to force Noble and Delek to offer open access to their pipelines, while regulating the fees they can charge.

If such a move goes through, the gas companies would likely be compensated by means of eased restrictions on exports. Government sources believe that easing exports is another move that would encourage competition in the local market.

The first step in this direction came as an amendment to the Sheshinski bill last week, by exempting natural gas exports from an excise tax. Instead, the tax structure would be based on international prices in cases where the companies could prove that they couldn’t sell the gas locally. Half the gas would have to be sold locally in order to receive this exemption.

National Infrastructure Minister Uzi Landau has said that for strategic reasons Israel must have a reserve natural gas supply adequate for at least 50 years before permitting exports.

The Sheshinski bill, the result of the recommendations of a committee led by Prof. Eytan Sheshinski tasked with reviewing the government’s fiscal policy regarding its natural resources, is scheduled to have its final Knesset vote on Wednesday.

Of the 48 original clauses, 14 have been changed significantly in order to give the gas companies further breaks.

While the Finance Ministry had said the breaks were worth “a few million” shekels it seems that they will actually be worth a few hundred million.

Kandel said that the final changes had no fiscal meaning to the state but would expedite procedures, reduce uncertainty and save the gas companies money.

He defended the last-minute tax breaks by saying that the state was in fact the biggest shareholder in the country’s gas reserves, and thus the tax breaks were in its interest.