"Forget gas exports"
22/09/2014, 14:30
British energy expert Nick Butler says Israeli gas is not competitive, and the government should take the industry in hand
"Forget about the myth that gas can be exported. The Israeli government paid too much attention to the claims of the gas developers, who said that gas could be exported. Now the government has to take matters into its own hands," says Nick Butler, former senior energy advisor to British Prime Minister Gordon Brown and former British Petroleum Group Vice President for Strategy and Policy Development. Butler is currently a visiting professor at King's College London and a consultant for various businesses and academic institutions. He has published many books and articles, and in the energy industry is considered someone who knows what he's talking about.
In a special "Globes" interview, Butler discusses the Israeli government's role in the natural gas discoveries, and how he thinks it should manage the industry.
Two major gas reservoirs, Tamar and Leviathan, have been discovered in recent years, as well as several smaller reservoirs, such as Shimshon, Karish, Dalit, and Tanin. Many believe that the gas discoveries hold great financial potential for the country. On the other hand, there is a large measure of misunderstanding about the gas issue.
"I think that the government was too hesitant. It was a complete novice with respect to gas, and believed the gas developers when they said that it could be exported," Butler says, "Reality has proven otherwise. It's time for the government to take matters into its own hands."
Israel has gas reserves totaling about 990 billion cubic meters (BCM). The gas partnerships have signed MOUs to sell 3 BCM a year to Jordan for 15 years, about 0.3 BCM a year to the Palestinians, 4.5 BCM a year to Spanish company Union Fenosa, which owns a liquified natural gas facility (LNG) in Egypt, and 7 BCM a year to British Gas, which also owns an LNG facility in Egypt. Up until several months ago, the gas developers were also considering the possibility of exporting gas to the Far East in the form of LNG.
"Globes": Do the figures for the MOUs not change your opinion about the gas partnerships being wrong in their emphasis on exports?
Butler: "All these options are very complicated either economically or politically. Exporting gas as LNG is very expensive. Israeli gas isn't competitive enough to compete with LNG from other countries. Most of LNG's cost is in its mobility. In order for Israel to export gas to the Far East, the ship would have to go by one of two routes. One is through the Suez Canal, which will make transportation more expensive, because you have to pay for the right to go through the canal. The other is to sail around Africa, which will be expensive because of the distance. In any case, transportation costs will be very high. Israeli gas will have to compete with gas from East Africa, Indonesia, Qatar, Turkmenistan, and Australia, and will be the most expensive of all those options."
The Leviathan partnerships had an MOU with Australian company Woodside Energy to buy 25% of the reservoir for $2.7 billion, but the Australians turned the deal down. What's your opinion on that?
"As I understand it, the deal was based on the assumption that the gas could be exported as LNG, but as I said, it's not economically viable. From this standpoint, Woodside is right to abandon the deal. The Leviathan partnerships should be more realistic in their plans."
What do you think about exports to neighboring countries?
"Jordan doesn't need much gas, and exporting by pipeline to Egypt and Turkey incurs many political risks, of which you are very well aware. Israeli gas can be a lever for development of the West Bank and the Gaza Strip, with all the political benefits that will result from it. If the government decides to export gas to Jordan and the Palestinians, it will be for justifiable political reasons."
Given the paucity of export prospects that you have indicated, what would you recommend the Israeli government to do?
"The government has to decide that it is putting development of the local gas economy at the top of its order of priorities, and anyone who argues otherwise evidently does not understand the global gas market."
The existing quantity of gas is enough to supply the domestic economy for about 75 years, and 55%-60% of Israel's electricity is currently produced with gas, the highest proportion in the world. Under these circumstances would you not agree that there may be no alternative to thinking in terms of exports?
"This calculation is correct only if the target is to reach 70% of electricity production using gas. In my opinion, however, the target is wrong. The government should aim at having 90% of electricity production based on gas. In addition to electricity, the government should introduce the use of gas in transport and the petrochemicals industry. All these ventures will generate large investments and many jobs in the country."
The Manufacturers Association of Israel estimated in the past that converting 400 plants and institutions in Israel completely to gas would save NIS 1.8 billion a year. 10 factories are currently connected to the distribution network, and only six of them use gas. Is this situation appropriate for the goals you are suggesting?
"I'm surprised at the Israeli's government's complacency. It should do everything in order that gas will flow to industry, transportation, and even homes."
To people's homes?
"Yes, certainly. It's true that at first glance, bringing natural gas to people's doorsteps requires high investment, but although it's expensive, it's undoubtedly likely to pay off. The energy efficiency of coal-fired power plants is 35%, while that of gas-fired power plants is 45%. By the time electricity reaches homes from the power station, we're left with 27% efficiency for coal and 37% for gas. If the gas is brought directly to homes, on the other hand, we're left with 75% efficiency. That is a prodigious saving. In the UK, for example, gas reaches people's homes, and they use it, among other things, for heating, air-conditioners, and cooking. Why shouldn't Israelis benefit from gas like any European country?"
The government does want people to benefit from the gas, and decided to establish a fund that will have $75 billion by 2037, with another $55 billion going to the state budget. Is setting up a fund like this right?
"Might it not be better to repay debt, help the needy, and reduce taxes? To the best of my knowledge, at this moment the fund does not have a penny. I'm sorry to be the one to tell you, but there won't be a fund or any tax reduction as long as the gas stays under the ground. The Leviathan reservoir was discovered four years ago, and nothing has been done with it since. In order to develop it, you have to be realistic about what can and can't be done with the gas. If the reservoir is developed, it will be right to pay some of the money into a fund for future generations. I suggest we have another conversation when development of the reservoir is closer."
Published by Globes [online], Israel business news - www.globes-online.com - on September 22, 2014
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Link to source: http://www.globes.co.il/en/article-forget-gas-exports-1000973891
