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Israel has struck energy gold offshore. Now what?

Israel has long bemoaned its lack of natural resources in the oil-rich Middle East. With the discovery of offshore natural gas fields, it faces big economic decisions.

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Israel's Prime Minister Benjamin Netanyahu speaks during a joint news conference with Bank of Israel Governor Stanley Fischer, Energy Minister Silvan Shalom and Finance Minister Yair Lapid (not pictured) in Jerusalem June 19. Israel said on Wednesday it will keep the majority of it's newfound natural gas for domestic use, but will still allow enough gas to be sold abroad to satisfy exploration companies who want access to the global market.

Baz Ratner/Reuters

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Two offshore natural gas discoveries in the Mediterranean have left Israel flush with energy reserves for decades to come, but the country is stalled at an economic crossroads with geopolitical consequences as it considers the best way to use them.

Prime Minister Benjamin Netanyahu said on Wednesday that Israel will become an energy exporter, but Israelis, who have long bemoaned their lack of natural resources in the oil-rich Middle East, are debating whether that's the most prudent move. While focusing on exports presents the prospect of new political clout and will encourage investment in new exploration ventures, critics say it is more important to keep the gas for local use, ensuring Israel’s energy security for a longer time and lowering energy costs for the domestic market.

The US faces a similar dilemma regarding its domestic natural gas finds. There is reason for moving cautiously: Britain, Australia, and Egypt have all focused on exports, only to later find themselves saddled with energy shortages that have pushed up energy costs at home.

"The balance between export and the domestic market is not clear cut," says Brenda Shaffer, a political science professor at Haifa University who focuses on energy politics. "Israel has to look at something nuanced: Does it want a quick buck from exports or do they want to think about long-term supply security?"

Extreme capitalism?

On Wednesday, flanked by economic ministers and Israel’s central bank governor, Prime Minister Benjamin Netanyahu endorsed a plan to export 40 percent of the natural gas reserves, a move he said would yield some $60 billion dollars for state coffers over 20 years while ensuring Israel’s energy needs for 25 years. The cabinet will vote on the plan on Sunday.

The windfall is expected to be so strong that Israel’s government has set up a sovereign wealth fund to guard against currency appreciation that would hurt exporters.

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Soon after the announcement, critics protested in Tel Aviv, alleging that the government is allowing critical natural resources to be sold off to fill the pockets of business tycoons, something they say is akin to a "gas heist."

Israel’s two-year-old social protest movement – which has brought tens of thousands into the streets this year – has homed in on the gas export issue as an example of alleged government favoritism toward Yitzhak Tshuva, a mogul who owns the rights to the fields, at the expense of the middle and lower classes.

"There’s no reason to vote for exports.  The only reason why is that elected officials are chosing for Tshuva over the rest of the people. This is an extreme instance of capital and government’’ being in cahoots, says Shir Nosatzki, a spokeswoman for the social protest movement.

The potential for exports has kicked up visions of energy companies building pipelines from the Israeli fields to pipelines in Turkey that would then relay the gas to Europe. Others have speculated it could be exported to China

The inaugural tapping of Israel’s Tamar natural field – with 8 trillion cubic feet of gas –  in April 2013 is expected to add 1 percent to the country’s economic growth this year. Leviathan, a field with more than twice that amount, is expected to come online in the coming years.

Price tag disputes

Government officials and some analysts say that new exploration companies won’t be interested in prospecting for new discoveries unless Israel’s government allows sufficient exports.

"Whoever undermines this is acting irresponsibly. This is an important decision," said Uzi Landau, Israel’s former minister of national infrastructure in an interview with Israel Radio. "We want the maximum tenders to be issued and for the maximum amount of energy infrastructure to be built."

The collapse of a gas supply deal with Egypt two years ago after the pipeline was attacked led to higher prices, and left Israel's energy security temporarily more precarious. Although tapping its reserves has mitigated that, Israelis still fret and export opponents say that Israel risks having to buy more expensive gas decades down the line. 

"This is an economic and social mistake, because ultimately the price will be paid by us," said Dov Khenin, a member of parliament from the left-wing Hadash party, in an interview with Israel Radio. "The Israeli interest is that the gas will stay in Israel for the use of the economy in the short and medium term."

Their concern that the natural gas resources will one day run dry is genuine. But the solution for that is "increasing the pie" by giving explorers ample incentives, says Amit Mor, the director of Eco Energy, an Israeli energy consultancy.

"There is already reserves for half-a-century, and in order to justify investments of billions of dollars in additional exploration, developers should have a horizon of exporting the gas because the local market is saturated," he says.

Good neighbors

In a nod to the protesters, in his final decision Mr. Netanyahu's lowered the export quota from the initial 53 percent figure recommended by a government committee that researched the issue.

However, the prime minister's policy actually tips in favor of gas companies because it allows them to sell to Jordan and the Palestinians without counting those sales as exports, says Ms. Shaffer.

That will enable Israel to help its neighbors enjoy cheap energy and boost economic prosperity next door, potentially providing greater regional stability, but it will also leave less gas available for Israeli domestic consumption, further illustrating the gas trade off, Shaffer says.

"If there is a geopolitical value, it’s when you export to your neighbors," she says. "Discoveries are always good news. But crafting a policy that promotes national interests isn’t always easy."


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