Oil’s Well that Ends Well
Mar 29, 2011 | Amotz Asa-El
By Amotz Asa-El
Back in 1955, when Israel found its first and last commercial oil field, the national jubilation was such that the discovery dominated all headlines for days and songs were written in its praise. The celebrations proved premature. Having produced over the subsequent 56 years less than what one Saudi field produces in one year, the Heletz oil field north of Beersheba – which still pumps 100 barrels a day – actually monumentalised Israel’s mineral dearth.
Since its inception Israel’s energy economy has been a tale of geological frustration and international maneouvring. Now, with the Fukushima reactors smoldering in Japan and political upheaval shaking the Middle East, the plot thickens further.
Israel’s historic lack of oil and gas posed a challenge much like the Japanese economy’s, with two exceptions: postwar Japan had no serious enemies, and became a signatory to the Nuclear Nonproliferation Treaty. Israel, by contrast, had enemies, which meant it needed energy sources not only to thrive, but even to survive, and it never signed the NPT, which meant it could not obtain the international approval for operating civilian nuclear plants.
The nuclear reactors Israel built in the late 1950s, formally for research and reportedly for defence, reflected a conscious choice to forego nuclear power. Instead, Israel bought oil from a succession of strategic partners. First there was pre-Islamist Iran, with whom energy relations were eventually so intimate that Teheran transshipped much of its west-bound crude through a specially-built Israeli pipeline that linked the Red Sea and the Mediterranean, circumventing the Suez Canal.
All this of course came to an abrupt end upon Khomeini’s rise to power, but by then Israel had signed the peace treaty with Egypt, which included a clause that ensured Egyptian oil sales to Israel. That was fine as long as Egypt was a net exporter of crude, a status it lost in the 1990s as its economy grew and its oil dwindled. But then, the end of the Cold War opened new commercial vistas for Israel, as Russia became its primary oil supplier and Azerbaijan its second.
In all, having also imported over the years oil from Mexico, Venezuela, and Norway, Israel learned that oil suppliers can emerge most improbably and then can vanish unexpectedly. The problem was that in the aftermath of the Arab embargo of the 1970s, oil became not only politically elusive, but also financially unpredictable. And so, Israel decided to fuel its string of power stations along the Mediterranean coastline with coal, which was cheaper and seemed more reliable.
It was a solid policy. Coal saved Israel money and shouldered the economy’s dramatic growth during the great post-Soviet immigration. Still, as the economy grew so did the need in power stations, which in turn raised a need for even cheaper, and in an increasingly environmentally-conscious era, cleaner energy sources. That is how Israeli planners arrived at the two sources that have now made headlines under dramatic circumstances: nuclear energy and Middle Eastern gas.
Not long before the Fukushima nuclear disaster the Netanyahu Government made public its intention to build nuclear power stations.
Wind, solar, and other sustainable sources will never supply more than a third of Israel’s energy needs, said Infrastructure Minister Uzi Landau last year. “Nuclear electricity will be the spine of Israel’s energy in upcoming decades,” he declared bravely. Minister Without Portfolio Benny Begin, a professional geologist, supported the scheme while assuring the public that nuclear plants can be built so they will not be vulnerable to earthquakes.
Just how the two intended to obtain an international license without joining the NPT remained unclear, though one idea – to share a reactor with Jordan – excited French firms which agreed to sponsor its construction. Alas, one year on that vision seems like prehistory. With the world watching anxiously the disaster in Japan, and with governments the world over reconsidering long-term reliance on nuclear energy, Israeli PM Binyamin Netanyahu recently told CNN somberly: “I don’t think we are going to pursue civil nuclear energy in coming years.”
That means returning to the original plan of expanding Israel’s usage of natural gas. However, that energy strategy partly depends on a deal that involves Egypt’s unclear political future.
Under a US$2.5 billion dollar deal signed with Egypt in 2005, Israel was receiving some 40% of its natural gas consumption streamed through a US$1.2 billion pipeline system that brings gas from the Nile Delta to Israel through the Mediterranean west of Gaza. But the gas stopped flowing as the Egyptian revolution accelerated. Initially attributed to an accidental explosion in a metering station, it later emerged that four masked gunmen had been seen placing a bomb near the station. Moreover, the stoppage lasted six weeks, much longer than that apparent terror attack’s damage seemed to justify.
Considering the overall effect of the regional upheaval on commodity traffic worldwide the situation Israel faced was hardly unique.
Egyptian gas stopped flowing not only to Israel but also to Jordan, Syria and Lebanon, and the Egyptian disruption was but one detail in a much broader picture highlighted by suspended shipments to Europe of Libyan oil and Algerian gas.
Egyptian gas flow resumed in mid-March, a clear indication that the interim government in Cairo appreciated both the financial revenues it brought and the political implications of failing to confront saboteurs.
Even so, just like the Japanese disaster caught Israel while it was considering nuclear reactors, the Egyptian upheaval caught it just when gas was surpassing coal as Israel’s main fuel for power generation. From an Israeli viewpoint, this indicates that the deal with Egypt, though theoretically guaranteeing supplies through to 2028, can not be allowed to become too important a mainstay of the energy sector, because Egypt’s long-term stability and mercantile interests cannot be taken for granted.
Fortunately for Israel, since 2009, vast gas deposits have been found within its territorial waters in the Mediterranean. The Egyptian deal, besides cementing ties with Egypt, was hoped to hold down the price at which Israel would buy gas extracted from its own offshore gas fields.
The gas finds were made by private companies Delek and Avner of Israel and Noble Energy of the US at a cumulative investment of US$300 million after a disbelieving Israeli government refused to invest its own funds in underwater energy prospecting.
While those fields remain some three years away from full commercial production, they should then generate an annual 5% of Israel’s current GDP for more than half-a-century, supply Israel’s entire energy needs for several generations and at the same time turn into Israel into a net-exporter. Further, experts say that under the gas fields there may also be oil.
It was obvious from the onset that these large finds, the largest in the world for 2009 and expanded further in 2010, carry with them more than just an economic windfall. For instance, Israel is currently discussing pipelines into Europe with Greece and a joint gas liquefaction plant with Cyprus.
Yet this economic bonanza and diplomatic opportunity has also became a social bone of contention, as extraction royalties, once an exoticism here, have suddenly became a relevant, and prickly, issue. Based on legislation that was passed decades before anyone imagined Israel possessed any offshore gas, the developers of the newly discovered fields originally stood to pay a mere 12.5% of revenues in royalties. This is a low rate even for the US, where comparable fees are closer to 20%, and a lot less than their level in Australia or Canada, not to mention Norway, where the government own two-thirds of a national energy monopoly.
Faced with pressure from within and outside the Knesset to change the law, Finance Minister Yuval Steinitz last year tasked an expert committee with offering alternatives to the existing law. Alert to criticism concerning retroactive legislation, the panel emerged with a proposed bill that leaves the 12.5% royalty intact, but levies taxes on the mining firms progressively, beginning at 20% once 150% of the investment is returned, and peaking at 60% should they reach or exceed 230%.
Steinitz immediately endorsed the panel’s recommendations, and Netanyahu soon followed suit. The gas companies, meanwhile, enlisted batteries of lobbyists and PR firms in a last-ditch effort to pressure lawmakers to at least water down the legislation that would potentially cost them billions.
By sheer coincidence, both the Arab upheaval and the Japanese nuclear leak happened just as the deadline for this legislation approached. With Netanyahu personally pressuring lawmakers to stand fast, the Gas Royalties Bill is likely to pass. But whatever the outcome of the legislative saga, Israel has accidentally emerged with a clear long-term energy strategy: no nuclear energy, less oil and coal, and more natural gas – especially Israel’s own.