"The opponents forget two important facts," said Tzemach Committee on gas exports coordinator Michal Franco in her first response to criticism of the report's recommendations, and says that a decision on gas exports must be taken now. "First of all, Noble Energy Inc. (NYSE: NBL) (a partner in an operator of the Leviathan field - A.B.) has updated its estimate about the Leviathan field's reserves. According to the updated estimate, the field has more gas, increasing its conditional resources by two trillion cubic feet (TCF) (56 billion cubic meters (BCM)). The opponents also ignore the Karish field, which Noble Energy estimates has 2 TCF. Despite the higher estimates for these two fields, the opponents do not call for increased exports.
"Secondly, the opponents forgot to mention that the committee took the most conservative position on prospective fields, and more importantly, conditioned exports on the realization of these values. This means that, in practice, exports will only be allowed from currently discovered fields and from prospective fields, and not from the future potential supply of natural gas."
Franco accuses the Israel Union of Environmental Defense (IUED) of distributing an erroneous position paper. "The Tzemach Committee recommendations are based on wrong information and baseless optimistic assumptions about future reserves," says the NGO in a position paper sent to MKs as part of a public campaign against gas exports.
Franco says that not only did the IUED use disproven claims, it did not even bother to accurately copy the relevant citations from the Tzemach Committee's report. "Public dialogue is very important, but more importantly, it should be based on facts," she says. "Regrettably, I've seen reports saturated with errors and inaccuracies. For example, IUED's position paper from last April states, 'The committee increased the gas export quotas', even though the opposite is the case. The interim report did not include a numerical restriction, and the final recommendations capped exports. IUED's paper states, 'The committee promises to keep gas for a brief period of only 15-25 years'. The committee saw this as a reasonable time frame, but explicitly recommended a 25-year period. The problem with position papers of this kind is that they are sent to MKs and other parties which are liable to rely on them, even though they are full of factual errors."
The Tzemach Committee report, published in August 2012, makes a number of proposals for creating a natural gas industry, but the recommendation which ignited public debate was to allow the export of half the gas from each field, subject to certain conditions. The final report estimated the total amount of gas exports at 500 BCM, and that 450 BCM of gas would be set aside as a strategic reserve for meeting Israel's domestic needs for 25 years. At the time of the report, Israel had 800 BCM in reserves, 150 BCM less than the total amount calculated in the report. The committee believed that the shortfall would be made up from discoveries at planned wells. But a string of dry holes at Myra, Sarah, Simshon, and Ishai, following the report's publication rendered its estimates irrelevant, in the opinion of the critics.
"Globes": Would you agree with the statement that the developers and tycoons have an interest in gas exports, while organizations which claim to see the national interest support keeping the gas?
Franco: "No. Concern for people's future is everyone's objective. The question is which means make the optimal use of a resource to achieve the maximum, both in terms of changing the energy mix and making it cheaper for Israeli consumers while guaranteeing their future and independence, and increasing the state's revenues. The public interest requires, first and foremost, keeping a natural gas supply for the domestic market. On this side, it is important to export natural gas to make it worthwhile to develop the fields and supply gas for all consumers."
But gas exports will raise the price for Israeli consumers.
"There are many factors which affect the price of natural gas, but, in general, there is no proven direct connection between developing the export market and higher prices in the domestic market. In the committee's discussions, Bank of Israel representatives said that severing the link between the domestic price and the export price was undesirable because, in the long term, this was liable to create incentives for developing inefficient industries.
"Attempts to keep prices artificially low resulted in the underdevelopment of infrastructures and the creation of over demand in the domestic market, resulting in gas shortages in the domestic market and frequent power outages. There are countless examples of countries which undertook undesirable export policies, resulting in serious damage to domestic economies. Indonesia, Trinidad, and Argentina are examples. In 2008, Egypt greatly restricted exports and sought to keep 60% of gas for the domestic market in order to ensure low prices. As a result of the lower worthwhileness, exploratory operations and the development of new fields were curtailed in favor of the domestic market. The increase in gas supplies did not meet the increase in demand for gas, and Egypt now suffers from daily power outages, and it is now preparing to import gas to meet the shortfall which resulted."
Egypt has larger natural gas reserves than Israel.
The US has sufficient gas reserves for 100 years, and there is a huge argument whether to allow exports. Why should Israel be satisfied with reserves for 25 years?
"This comparison greatly misleads the public. It is manipulation which fails to take into account the expected growth in demand. On the basis of this rationale, if you take Israel's total reserves - Tamar and Leviathan - as 900 BCM, compared with current domestic demand, there is enough gas for 90 years! The committee discussed something completely different: how many years should we keep the gas. A 20-year time frame is realistic, in terms of economics, to prefer keeping the gas over exports. This is the time frame characteristic of investments in the energy industry (including take-or-pay agreements), and indicate prevailing practice. The time frame chosen by the committee is even more conservative."
It is claimed that you did not properly estimate potential domestic demand for gas, and therefore rejected construction of a gas-to-liquids refinery, for example.
"The original recommendation in the interim report was to keep 400 BCM. Ahead of the drawing up of the final report for the government, and at the recommendation of the Natural Gas Authority, the amount to be set aside was increased to 501 BCM (450 BCM would be kept in 2017-40). This is an inconceivable amount, when taking into account that current domestic demand is only 6 BCM a year and that energy security considerations require diversification of energy sources. The natural gas demand forecast which was ultimately chosen assumed, among other things, that all Israeli factories will switch to natural gas, 75% of electricity will be generated by natural gas (up from 40% today - A.B.), and that half of all the countries' gasoline-powered vehicles will switch to compressed natural gas or another natural gas-based fuel. The recommendations did not rule out building a GTL facility. As I mentioned, the decision on the issue should be taken on the basis on the specifics of its worthwhileness. If the decision is yes, there is enough gas for it."
We cannot wait
The government says that exports are needed because gas for domestic use is already largely guaranteed by the Tamar field. It is therefore necessary to guarantee exports from the Leviathan field, otherwise the developers will not be able to raise the financing needed to develop it and connect to the Israeli coast at a cost of $3-4 billion.
Is it possible to develop a gas field without promising 50% exports from it? Can the government develop the fields itself, or at least provide guarantees?
"Theoretically, it's possible, but it is important to understand the significance. Investment in an Israeli government company involves assuming the risks on one hand and the many costs on the other. People who propose building a production system using the state budget should think about where the money will come from. Greatly increasing the deficit is liable to result in a credit downgrade for Israel, which will raise the interest on government debt. Financing through tax hikes will only increase the risk of recession and will reduce consumption, and will naturally hurt the middle class. Cutting the budget will almost definitely affect government services. If the critics have other sources of financing, I am sure that the government would like to hear about them."
Why not wait until we know exactly how much gas there is, as Labor Party chairwoman MK Shelly Yachimovich and former Minister of Environmental Protection Gilad Erdan propose?
"At least three to five years are needed to prepare for gas exports from the moment a decision is made. That's the minimum amount of time needed to build a liquefaction system or to lay a pipeline to the export destination. Even if we were to wait two or five years now, this amount of time will not shorten. But if the decision on exports is delayed, we'll have to make it under conditions which most assessments believe will be much worse. Israel has a very narrow window of opportunity to market the gas. Discoveries in the US and the development of fracking technologies for oil and gas production guarantee many years of supply in the US and outside of it. The US, which until recently was readying for massive imports, has approved ever growing gas exports. For example, in late March, a $10 billion deal was approved to sell 2.5 BCM of gas to Britain.
"The US entry into the LNG market will have major consequences. The prevailing difference in prices between Japan and the US ($18 per British Thermal Unit in Japan, compared with $2-3 in the US - A.B.) will greatly narrow, rendering many future projects around the world not worthwhile. Alongside developments in the US, huge gas offshore gas discoveries - 100 TCF (triple Israel's discoveries - A.B.) - have been made in Mozambique and Tanzania, which are relevant for East Asian markets, and which are an alternative to other gas sources. There are estimates that an additional 250 TCF of gas will be discovered in Mozambique in the coming years.
"Bottom line, it seems that the longer we wait to decide on exports, and as regional and global competition increases, the chances of fulfilling the current potential will fall. A strategic and economic decision to maximize the discoveries and enable their development must be taken, and we'll be left with nothing."
IUED said in response, "IUED stands behind the facts and arguments presented in the report. Ms. Franco's claims that the committee's recommendations did not include numerical errors is pure demagoguery, since the committee's recommendations included percentages, from which it is possible to calculate the amount of gas that the committee recommends leaving in Israel, exactly as IUED did. As for the second claim, we advise Ms. Franco to reread the report which she signed and to focus on page 91, which shows the committee's calculation for keeping gas reserves for 15-25 years.
"It would be better if Ms. Franco and the Tzemach Committee members, instead of trying to sow confusion about the data, were to mention most material matters in the committee's conduct and recommendations, such as its overestimate of the amount of gas, the ignoring of the scale of Israeli demand for gas, and the fact that gas powers like the US export only 6% of their gas."
Published by Globes [online], Israel business news - www.globes-online.com - on May 16, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013