Upon taking office, the next Minister of Energy will face a major challenge. As Israel marks the start of production from the Karish offshore gas field, it may miss a unique opportunity to export gas to Europe, which is suffering from a shortage due to the Russia-Ukraine war.
“The contradiction of leaving gas in the ground despite growing, enormous demand from European markets can only be resolved through government action and regional cooperation,” says Energean Israel country manager Shaul Zemach who served as Ministry of Energy director general from 2009 to 2013. Zemach told “Globes” that the government must formulate a long-term plan for the Israeli market that will balance supply and demand with the possibility of exporting gas.
“A regional cooperative gas market is needed “
According to Zemach, a regional strategy is necessary to quickly establish the infrastructures needed to transport gas to European markets. He defines this as a “regional cooperative gas market”, meaning a step up in the cooperation between the member states of the East Mediterranean Gas Forum – Greece, Cyprus, Egypt and Israel – as well as Lebanon, which may join following the signing of the maritime border agreement. “The countries of the region should coordinate, plan and finance, in cooperation with the energy companies, the laying of a transmission pipeline infrastructure to the liquefaction facilities in Egypt, whether through Cyprus or Israel,” says Zemach. The latter option is considered more problematic due to opposition from various entities and organizations, due to pollution concerns and bureaucratic procedures.
“If each country acts separately, we will not progress anywhere. It is ineffective and will only delay the main course of action, and the economic interests of all countries in the region,” Zemach stresses. “It makes no sense that Energean is currently the only gas exploration operator in Israel’s economic waters. The reservoirs are there, you just have to find them and produce, both for continuing to ensure Israel’s energy security and for exports, to satisfy Europe’s hunger for energy. It’s in everyone’s interest, it just needs to be implemented. Crises don’t last forever, and they also provide opportunities that should be taken advantage of.”
Not only Hezbollah put pressure on Energean
The maritime border agreement with Lebanon took place simultaneously with start of production from the the Karish gas field, and was accompanied by threats from Hezbollah to hit production, and even to directly harm Energean executives. “Globes” reported that the company was under extreme pressure to slow down the pace of its preparations and not start production until the agreement was completed and approved. Production eventually commenced the day before the agreement was signed.
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In addition to security and government officials in Israel, Energean was also under pressure from the two parties pushing for the maritime agreement, the US and France. Pressure was exerted by political figures from both countries, and through energy majors in Europe. Energean will not confirm this information; when asked, Zemach replied, “The company conducted itself in accordance with the instructions it received from Israel’s Ministry of Energy.”
Were you afraid of Hezbollah’s threats?
“Absolutely not. I was on the rig both in the weeks before and on the day production began. We are not afraid and feel completely confident that the State of Israel can protect all of its strategic assets and critical infrastructures. We cooperate with all the relevant security agencies, and we have complete trust in the state and its security forces.”
Indeed, Israel provides a broad security envelope for the gas facilities in the Mediterranean Sea, including the Karish rig, which is closest to the border with Lebanon, and has the tightest security. Between 80 and 100 workers from various countries work on the rig, with only a few Israelis, most of whom work in security. Underneath the rig, at a depth of 1.7 km, is a subsea network of flow-lines, manifolds, control systems, and distribution units that deliver natural gas and its by-products to the surface, including condensate (a mixture of light liquid hydrocarbons), which is also sold to the European market.
By end-of-year 2022: $1.4 billion revenue
Gas production in Israel’s economic waters is a huge investment, and the energy companies want to make sure it pays off. Compared with the $4-5 per BTU for natural gas paid in Israel, the price in Europe today is about $35 per BTU. Even after accounting for the cost of transporting gas from the eastern Mediterranean to Europe, profitability is still very high.
If Israel exports gas to the world, it will not only increase profits for the energy companies, but also generate a very large income for the state through taxation on those profits. These include three types of tax imposed on the companies: corporate tax, levy on excess profits (the “Sheshinski tax”), and royalties of 11.5% on income from the exploitation of natural resources.
Over this year, the Ministry of National Infrastructures, Energy and Water resources has reported that the tax revenues collected from the gas companies grew by 48% to about $650 million in the first half of the year, from the Leviathan and Tamar fields alone. Now, with the start of the Karish field operations, it is expected that tax revenue will reach $1.4 billion by the end of 2022.
Although this number is a far cry from the Bank of Israel’s forecast of the previous decade, a significant increase in gas reserves, achieved by developing new reservoirs, could lead to even bigger annual amounts in the future.
Gas exports may lead to local shortages
Aside from the advantages, there are significant concerns that exporting gas could lead to shortages in Israel; a situation in which Israel would need to important gas at a high price, leading to increased energy prices locally. In the committee chaired by the previous Ministry of National Infrastructures, Energy and Water director general Ehud Adiri, a course of action was proposed that would ensure local consumption concurrent to exports and would allow the energy companies to invest in new exploration. However, the committee was halted before issuing its conclusions. Perhaps the incoming minister will revive the issue and move it forward at this time.
The Ministry of National Infrastructures, Energy and Water said, “The Ministry is preparing to enter the fourth round of competition for natural gas exploration licenses in its economic waters. Publication of this offer is important in the coming period mainly due to the global energy crisis, and European demand for Israeli natural gas, as well as for increased assurance of the natural gas supply to the Israeli market.”
Published by Globes, Israel business news – en.globes.co.il – on November 27, 2022.
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