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Burning the Midnight Oil for Israeli Gas Deal

Located off the coast of Israel in the Mediterranean Sea, the Leviathan gas field is one of the biggest offshore gas discoveries in recent years. Considered as nothing short of a miracle for natural resource-poor Israel, the Leviathan and Tamara gas fields could make Israel a contender in the regional energy market. Tense relations with neighbouring countries Jordan and Egypt could be ameliorated through long term export opportunities worth billions of dollars.

The Zemah Report of 2012 recommended that Israel's government act as promptly as possible to create incentives and certainty for companies to develop the gas fields for domestic consumption and export. However, the right wing government of Israel is struggling to secure a $6.5 billion plan to develop the Leviathan gas field.

So what seems to be the problem?

The Leviathan gas field was discovered in 2010. Development halted soon after because the government failed to reach consensus over energy company profits, taxes and prices. Noble and Delek, two energy companies who already control the Tamar field, had been granted over half the rights for the development of Leviathan.

This move was challenged by Israel’s antitrust regulator David Gilo due to the potential for the arrangement to become a “restrictive” one, thus blocking further government action. In May, Netanyahu’s government quietly brokered a compromised deal to allow the development to proceed.

Delek will sell its entire stake in Tamar in six years, with Noble reducing its stake to 25%, allowing for greater competition. Both companies will still be able to develop Leviathan by 2020 but a price ceiling will be created for future sales to Israeli companies.

The government in return rejected formal price controls over gas sold domestically, in favour of more relaxed measures ensuring that the price of gas inside Israel does not exceed the export price.

Details about negotiations of the deal were not made public and the Knesset committee attacked Netanyahu for what was publically labelled as an “organised robbery” of the people. Critics of the deal say that the companies will maintain a de facto monopoly over the Tamar field for the next six years before entering a similar partnership to develop the Leviathan field.

Israelis are no strangers to high prices. Household goods and property are some of the most expensive in the world. Justifiably, Israeli consumers are concerned about potentially high natural gas prices, especially in light of the controversial decision to allow the export of 40% of its gas two years ago. Hundreds of protestors took to the streets in early July to campaign against the deal and the lack of transparency in decision making.

In a move that was intended to strike a deal to address an antitrust challenge, Netanyahu’s government suddenly found itself isolated both from the left wing and the populace of Israel. A vote by the Security Cabinet earmarked the gas deal as a matter of national security, citing geopolitical concerns. Critics were quick to point out that such a ruling by the Security Cabinet allows the government to overrule antitrust authorities.

Netanyahu attempted to push forward a motion in support of the deal in the Knesset, however quickly withdrew as it became increasingly clear that he lacked the necessary support, even from his own ministers. Consequently, the deal will be presented to the public for comment and will have to be approved by the government prior to enactment. All new drilling has now stopped due to investor concern over the political turmoil.

Israel is in a precarious position. On the one hand, the needs of the Israeli people have to be met with lower prices and increased competition. On the other hand, Israel stands to gain much from making itself as inviting as possible to foreign investors. According to the latest UN World Investment Report, foreign direct investment in Israel nearly halved in 2014.

Israel is presented with a rare opportunity to transition from an energy importer to an energy exporter. Realistically, Israel’s reserves are incomparable to the stores of Russia, Qatar or Iran. They are however sufficient to satisfy domestic needs and even provide for export. Israel's other neighbours may too discover deposits and, since Iran and six world powers have recently concluded an historic agreement that will lift sanctions on Iran, the energy market may see a flood of new players.

What is necessary is a stable and transparent regulatory regime to ensure that all stakeholders, including the public and foreign investors have their interests and concerns addressed. Israel is in a strategic position of geographical proximity to the Middle East and Europe, allowing it to tap into established markets. To take advantage of this, the Leviathan gas field deal needs to be implemented and finalised as soon as possible.

Valeriia Minigoulova is the International Trade and Economy Fellow at Young Australians in International Affairs.

This article can be republished with attribution under a Creative Commons Licence. Please email with any questions or for more information.

Image Credit: Israel Defense Forces (Flickr: Creative Commons)

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