In the past five years, gas reserves have been discovered in Israel that should be sufficient for local consumption for decades and provide energy at as low as a third of the cost of fuels like fuel oil and diesel. But not everyone is benefitting from the gas revolution. Of 2,000 Israeli factories that could switch to natural gas and reduce their production costs, only eight are currently connected to the natural gas supply.
In 2013, even before the gas started to flow from the Tamar reserve, state-controlled Israel Natural Gas Lines networked Israel with gas pipelines that would transport the gas from the reserve to the coast, and from there to all parts of the country. The biggest gas consumers, Israel Electric Corporation, private power producers, and energy intensive plants, are connected to this pipeline network. Since the high pressure in the network does not allow most factories to connect to it, the Ministry of National Infrastructures, Energy and Water decided that another network should be connected to it, at lower pressure, to which factories would hook up. This is the distribution network, for which a different company is responsible in each area of Israel.
Connecting to the gas distribution network obliges factories to adapt their existing fuel supply piping to natural gas, a conversion that costs, on average, over one million shekels. A reduction of at least 60% in future energy costs, alongside government grants, is supposed to lead to payback of the investment within two years. That at least is what senior people in the gas industry and dozens of factories that have already begun the process of conversion to gas thought. The reality, however, is that the gas is stuck in the bureaucratic pipeline.
Who's responsible for safety?
Talking to "Globes", industrialists raised one main difficulty that prevents factories hooking up to natural gas, and that is the battle between the Ministry of National Infrastructures, Energy and Water and the Ministry of the Economy over who is responsible for the safety of the installations. The Ministry of the Economy, currently responsible for the safety of boilers that burn fuel in factories, claims that, with the switch to natural gas, responsibility for the safety of boilers should pass to the Natural Gas Authority in the Ministry of National Infrastructures, Energy and Water, whereas the Natural Gas Authority refuses to accept full responsibility for this area. This dispute has been going on for about eighteen months, and each ministry has been trying to shift as much responsibility as possible to the other. The situation today is that Jasha Jurborsky, who is the Natural Gas Authority official responsible for carrying out inspections, together with the Standards Institution of Israel, has available only a few engineers who can certify the safety of hundreds of end-user installation, causing long delays in approving them.
Besides these delays, many industrialists say that the standards they have to abide by themselves do not make sense, and make the entire conversion process not economically worthwhile.
"There's one person in the Energy Ministry responsible for the safety of every installation, but he clearly does not want to carry this responsibility," says Eli Stein, CEO of Yehuda Steel. "In my factory there are three different kinds of installations imported from different countries. Each one needs to be approved by the Standards Institution. It's a joke. Only an expert who understands every installation will take on this responsibility. Meanwhile, every month that the conversion is delayed costs us millions of shekels. Our expenditure on energy accounts for 20% of our total costs. This means that when I want to compete with other steelworks around the world, I can't, because they all consume natural gas."
Eli Abramov, EVP Global Operations at Adama Holding Ltd. (TASE:ADMA.B1), confirms what Stein says. "The switch to natural gas saves our plants $28 million a year," says Abramov, who has also served as chairman of the Energy Committee at the Israel Manufacturers Association. Adama has two plants in Israel, at Ashdod and Neot Hovav, and another twelve overseas. The company hooked up to the natural gas network five years ago, when it signed an agreement for the supply of gas from Egypt with EMG. "At the time, the Natural Gas Authority approved our connection to the gas transportation network, but since then we have added new installations in the plants, and we haven't managed to obtain approval for them for years."
According to Abramov, were it not for the switch to natural gas, the plants' production would have been transferred overseas. "Production using natural gas can change the face of industry," he says, "In recent years, traditional industries in the US have been returning there, and one of the main things that makes that possible is cheap natural gas. It's a matter of the cost of living. Whole industries of raw materials and food could reduce their costs significantly, which would eventually result in lower consumer prices. The problem is that there isn't one address to turn to. Too many players are involved in the process that contribute nothing and only take money. This is the case with the entire approval chain, such as the Standards Institution, for example, which inspects systems supplied by reliable and well-known international companies."
Gas supply network years behind schedule
Not only are safety certifications held up, but the network that the distribution companies are supposed to lay is years behind schedule, which the companies claim is because of local authorities, illogical demands by the engineering company advising the Natural Gas Authority, and, mainly, a shortage of customers.
Let's start from the end the shortage of customers. According to the operating model of the distribution companies, they receive their money from hooking up and supplying gas to factories. The cost of laying the transport pipeline to the factory falls on them. So, because the gas is not reaching the factories already connected to the network (because there are no safety certifications), the distribution companies are operating without revenue, and so are in no rush to lay further pipelines. A chicken and egg situation emerges: most factories cannot in any case consume natural gas because there is no pipe, but there is no pipe because the factories are not investing in switching to natural gas.
Factories that in the past considered switching to natural gas changed their minds as soon as they heard from other factories about the obstacles they would face. But besides this difficulty, sources in the distribution companies, who preferred to talk anonymously, claim that the supply network has been held up for years because every local authority through whose jurisdiction the pipe network passes has something to say on the matter, and has objections to the pipeline passing close to it. Not just them, but also infrastructure companies such as Israel Electric Corporation, Israel Railways, and Israel National Roads Company object to the gas distribution network encroaching on their territories.
A further claim is directed against the engineering company hired by the Natural Gas Authority, PB. The distribution companies say that it makes laying the gas network impossible, and that the safety standards they have to meet exist nowhere else in the world. Besides that, they say, the Standards Institution, which is supposed to join PB and assist in certifying end-user installations, does not understand natural gas, and so hooking up to the network becomes impossible.
According to the operations manager of a plastics factory in southern Israel, who also prefers to remain anonymous, the contract signed with the distribution company is worthless. "We signed a contract with a distribution company in early 2012, and had to pay NIS 300,000 on signing, 50% of the cost. For their part, they undertook to reach us with the pipeline within 18 months. Needless to say, that didn’t happen. The distribution company, because of the bureaucracy it encountered, hasn't even started constructing the pipe that will connect us."
The same operations manager also describes the difficulties factories encounter in converting existing installations to gas. "To connect to the gas distribution network, we had to hire the services of an engineering company that would be responsible for the conversion in the factory and the pipe from the entrance to the factory to the distribution pipeline. But the regulatory technical requirements, the directive for laying the pipe, have changed eight times since 2012, three times in 2014 alone.
"Every time the engineering company plans something, and the regulatory requirements change, the planning goes down the tubes, and we have to start again from the beginning and submit the plan to PB, the engineering company that advises the Natural Gas Authority. Every change like that costs tens of thousands of shekels.
"It doesn't end there," the factory manager continues, "The Natural Gas Authority recently issued a directive whereby every engineering company hired by a business has to find an international engineering company to instruct it. So now the engineering company with which I signed a contract has to find an international company, and of course we have to pay for its services as well.
"In the end, I have to pay for a supervisor to supervise the engineering company, and there are two of those in Israel. After this Via Dolorosa, I still have no gas."
The recommendations are also stuck
Meanwhile, in the government, discussions have been going on for over a year on removing obstacles in the planning and construction processes for the gas distribution network and conversion of factories. To solve the problems of the distribution network, a committee was set up headed by Harel Locker, and it recently even submitted draft proposals. But with an election looming, discussions of the proposals will also be delayed.
For their part, the manufacturers say that it is necessary first of all to amend the law on natural gas safety and adapt it to the economy's current needs, and also to raise the amounts of grants available to small factories for connecting to the gas network and set a clear target for connecting them (the amount allocated for grants is currently NIS 120 million). Such a target, they say, would serve to galvanize the regulators and spur them to find the requisite solutions.
Responses
The Standards Institution of Israel: "The Standards Institution has organized itself within a very short time and obtained authorization from an international laboratory. The Institution has trained a team of twelve inspectors who are working around the clock. So far, six factories have been certified on a fairly short timetable. In this period, discussions have been taking place with the Manufacturers Association to clarify the requirements, which are mainly to do with safety."
The Ministry of the Economy: "The Ministry of the Economy and the Ministry of National Infrastructures, Water and Energy set out operational guidelines more than two years ago for converting factories to natural gas. Deputy Attorney General Avi Licht, who examined the matter, clarified the areas of authority, including the fact that the exclusive regulator for gas will be the Ministry of National Infrastructures, Energy and Water. The claims of a lack of cooperation harming conversions are not clear in this case.
"As far as the process in concerned, it was agreed that the first segment, the transport of the gas from the gas distribution network to the factory itself, is fully the responsibility of the Ministry of National Infrastructures, Energy and Water. The way the gas is used within the factory is examined by the Standards Institution (which is the responsibility of the Ministry of the Economy). After the Standards Institution has given its certification, the Ministry of National Infrastructures, Energy and Water is responsible for issuing the required approval. On this matter, we would point out that the Standards Institution some time ago began inspecting dozens of factories and is making progress on that. For further clarifications, apply to the Ministry of National Infrastructures, Energy and Water."
The Natural Gas Authority in the Ministry of National Infrastructures, Energy and Water: "The required safety standards are of the highest level and are supported by international standards and coordinated with them. The ministry advises and instructs the factories and those involved in natural gas on correct and safe working methods, providing clarifications designed to prevent risks and delays to projects. The ministry supports and encourages factories and consumers in converting their systems to natural gas, something that will lower factories' operating costs and lead to a fall in the cost of living".
Published by Globes [online], Israel business news - www.globes-online.com - on January 27, 2015
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