Israel's natural gas reserves have tremendous strategic and economic value. Strategically, the reserves can provide energy security that may be increasingly vital over the coming decades as oil and gas reserves become more scarce outside of Russia and OPEC nations.
The economic significance can be gauged by considering that the cost of importing fuel this year (coal, oil, and oil derivatives) will be roughly the same as the country's expenditures on national defense, that is, in the range of 15-18 billion dollars. Israel's gas reserves equal about 35 times the country's annual energy imports, that is, about 35 years of national defense expenditures. In short, more than $500 billion.
It may therefore seem incredible that the government may decide to allow gas exports of half or more of these gas reserves. However, such authorization is likely, especially as it would be merely the final stage in a process by which this key strategic resource has been transferred into private hands.
For the past 15 years, the Ministry of Infrastructures has issued gas licenses without tenders, for free and in secret, to partnerships established by a small group of well-connected individuals. But the mere granting of these licenses for free has not, by itself, been a gross misappropriation of public property, because the value of these licenses has been limited by two provisions in Israeli law. The first is the government's authority to set domestic prices. The second is the government's authority to limit exports (because without guaranteed export allowances, the licensees cannot risk investing in the infrastructure needed for exports).
Under domestic price regulation, by which the licensees would sell gas at its cost plus a reasonable mark-up, the $500 billion worth of gas would cost the Israeli public $40 billion or less,* meaning a net savings of about $460 billion. If half were exported, the country would lose half of this savings, or $230 billion.** If the government were planning on selling the right to export for $230 billion, this would be economically valid, though it would be a strategic mistake, given the national security risk of not having a long-term domestic energy source. However, the government is not only planning on giving away this right, but on giving it away almost for free.***
The decision on exports will be a test of whether the government puts the country's long-term well-being and security first, or whether it prefers to further enrich the well-connected licensees. Moreover, the decisions will also be a test of the general public's concern for their country's future. Will the public, which only recently protested food and housing prices, demand responsible oversight of the country's energy wealth? Or will they permit, through apathy and indifference, the sale of their natural birthright?
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*The $40 billion cost assumes a regulated price of $1.40/mmbtu (and reserves of 800 BCM). This price is more than enough to cover the capital and operating costs of gas production, as well as 11% royalties, as described in prior posts. This price would mean that the government would make very little revenue from the "Sheshinski tax" (which only hits its maximum of 45% of profits after the licensees make back 250% of their investment). In other words, tax revenue would be limited to the country's 11% royalty on $40 billion (i.e., less than 1% of the $500 billion value of the gas).
**Unfortunately, the current government seems intent on not regulating prices, having approved the contracts of the Israel Electric Company and other customers at gas prices of $5.6 and more. If allowed for all future sales, this price would mean sales of $160 billion instead of $40 billion. About half of the $120 billion difference (i.e., $60 billion) would be returned as taxes under the Oil Profits Law (the Sheshinski tax). The country's total savings would then be $500 less $160, plus $60, or $400 billion, instead of the $460 that would be saved with regulation. If half were exported, the net savings from having domestic gas would be half of $400 billion, that is, $200 billion. The tax revenue from exports would be about $30 billion (the same as the tax revenue on domestic sales, a small detail in the Oil Profits Law), so the total savings from having domestic gas, plus the revenue from exports, would be about $230 billion.
***Note that with exports, approximately the same savings ($230 billion) is achieved whether or not there is domestic price regulation. In other words, if the government allows gas exports, it is no longer relevant whether or not there is local price regulation. Another way to describe this is that the tax revenue on exports would be no more than a return of the public's payment of windfall profits on domestic gas. There would be almost no true tax revenue made on exports considering that the domestic price should legally be regulated.
