New Research at the Bank of Israel: The Natural Gas Production Industry—Government Policy Seven Years after the “Tamar” Discovery
New research conducted by Dr. Yoav Friedmann from the Bank of Israel Research Department studies the Israeli government’s policy in the natural gas production industry since the discovery of the Tamar reservoir.
New research conducted by Dr. Yoav Friedmann from the Bank of Israel Research Department studies the Israeli government’s policy in the natural gas production industry since the discovery of the Tamar reservoir, while analyzing the differing goals and the conflicts of interest between the government and the investors. The research focuses on the four major decisions by policymakers in the industry since the Tamar discovery—approval of the Sheshinski Committee recommendations, adoption of the main recommendations of the Zemach Committee, agreement on the “Consent Decree” and the Israel Antitrust Authority Director General’s subsequent backtracking from that decree, and the natural gas framework that was formulated and recently approved.
The research points to the possibility that policymakers used new information to improve the Israeli public’s standing at the expense of the investors. Such a policy, when adopted in moderation, in line with what is generally accepted worldwide, and in view of the marked improvement in the standing of the investors compared with the original forecasts (which were available, for example, when accepting the Sheshinski Committee’s recommendations) is likely to benefit the public from a long-term perspective as well. However, numerous decisions in a relatively short span, with repeated adverse impact on the investors for the benefit of consumers, is liable to be viewed by entrepreneurs and potential investors in the future as a negative impact on the business environment, leading them to reduce their investments in Israel, and to negatively impact the economy. Such a negative impact is liable to overshadow the benefit that can be gained from the decisions in the short term.
The source of one of the conflicts of interest between the reservoirs’ license holders and the state’s citizens, represented by the government, is the difference between the price of natural gas sold on the domestic market from a nearby reservoir and the price of imported natural gas. The reservoirs’ license holders are interested in a quick sale of the natural gas, while the government, taking into account the high costs of importing natural gas (due to high shipping costs) after the gas in the domestic reservoirs is depleted, prefers to defer the point in time when the domestic natural gas reservoirs are depleted. This conflict of interest was the main economic justification for the government’s decision to keep the gas for the domestic economy’s use for a period of nearly 30 years.
The restriction on exporting natural gas highlights an additional problem deriving from the differing goals of the government and potential entrepreneurs in the industry: while the government is interested in developing reservoirs for the domestic markets, in order to, among other things, produce reserves and encourage competition, the business people are interested in maximizing their profits, and will find it difficult to finance expensive development of a natural gas reservoir that will lead to surplus supply in the domestic market, especially when they are not allowed or able to export the gas. This problem is particularly acute in the development of the Tanin and Karish reservoirs, and reduces the probability of their development in the short term. Likewise, it impacts on new natural gas exploration and development at the current time.
An interesting point that is raised by the research is the possible gap between the value of a new natural gas reservoir discovered off Israel’s coast, as viewed by the entrepreneurs and as viewed by the government and consumers. In a period when the domestic consumer uses (expensive) imported natural gas, society’s value of the discovery of a domestic natural-gas reservoir is greater than its value for the entrepreneur who discovered it: the entrepreneur would calculate the reservoir’s value based on export prices, meaning without transport costs, while in contrast, the government and consumers are likely to calculate the value including shipping costs, because the discovery of the reservoir saves consumers those expenses. This gap, in and of itself, is a good reason to encourage natural gas exploration by the government in a period when a natural gas shortage is expected.
In terms of the formation of a monopoly by Delek and Noble Energy, the research indicates that this is, to a large extent, a consequence of the industry’s features—a small number of participants, difficulty in raising funds and recruiting top-tier operators for deep sea exploration, as well as policymakers' interest in encouraging oil and gas exploration by the private sector—in addition to the lack of development of the natural gas industry in Egypt, whose gas could potentially become a competing supply in the domestic market.