Posts

Israel’s Gas Pains Relieved

Great business news from Israel this week. Israel has become a veritable cyber ware super power.  According to Ha’aretz, sales of computer and network security technology reached more than $6 billion in 2014, accounting for 10% of the global $60 billion market place. The other great news was the resignation on Monday, May 25th of Dr. David Gilo, head of the independent Israel Antitrust Authority.  In his statement Gilo said:

My decision is a result of a number of considerations, most importantly the report that the cabinet, particularly the Prime Minister’s Office, the Ministry of Finance, and the Ministry of National Infrastructure, Energy, and Water Resources, will do everything they can to push forward the currently emerging structure in the natural gas sector. I am convinced that such a structure will not lead to competition in this important market, and could possibly detract from the independence of the Antitrust Authority, a matter of public importance, and harm its ability to carry out unilateral measures

 He had single handedly  brought to a halt the development of Israel’s important off shore gas fields by the Israel-US partnership, Delek Group Ltd. (TASE: DLEKG) and Houston based Noble Energy , Inc. (NBL-NYSE) . The partnership had put up $6 billion in risk capital to develop the country’s offshore gas fields, achieving energy security, creating a potential wealth producing export market.   Gilo stopped development of the giant Leviathan field in December 2014 when he reneged on a compromise deal reached earlier last year involving selling two existing smaller fields developed by the partners offshore in the country’s Exclusive Economic Zone (EEZ).      While he resigned on Monday, May 25th, he won’t be departing until the end of August, 2015.  Allegedly that would give him time to clean up his other consumerist initiatives.  However, many believe based on his statement his real agenda was to take pot shots at the compromise plan being floated by the Ministries of Finance, Energy and Infrastructure, backed by Prime Minister Netanyahu for good and sound national security reasons.   A legal opinion from the State’s attorney General provided authority for the government to develop and conclude the proposed agreement with the development partners.    According to Globes, Israel Business, the compromise plan:

Requires Delek Group, Ltd. to sell all of its holdings in the Tamar natural gas reservoir within six years. Noble Energy, Delek Group’s partner will be required to reduce its holdings in Tamar from 36% to 25%, and will be barred from marketing gas from the Leviathan reservoir to Israel. At the same time, the agreement leaves Noble Energy with control of both reservoirs as the company operating them.

As we have written in both NER articles and Iconoclast posts Gilo was seeking to do the impossible. To create competition by forcing the sale of one of the two major fields, the Tamar, hoping to induce foreign competitors to make investments for the completion of the giant Leviathan gas field and thereby lowering energy prices through competition. Problem with that misguided view was there were few if any takers. Further, it put into jeopardy signed agreements for delivery of gas from the existing Tamar field with the Palestinian Authority, Egypt and Jordan. Moreover the government killed a potential minority investment by Australian energy development firm, Woodside, PTY for development of LNG from the Leviathan field and delivery to the Asian market. As a result, Nobel is presently working with the Republic of Cyprus to develop an LNG processing and distribution complex to link up with the Republic’s Aphrodite offshore gas field adjacent to that of Israel’s Leviathan.

In the run up to the March 17th, Knesset elections, it was apparent that Gilo was grandstanding perhaps hoping that the Zionist Union opposition might win. If that occurred he could pursue his consent decree proposal accusing the partners of being a monopoly in violation of Israeli basic law. Instead, Gilo and entourage took off for a junket to Holland to see how the Netherlands handled their off shore gas fields development.

It quickly became apparent that the Netanyahu government was not going to abide by this high handed patently political move by Gilo.  At stake is more than $76 billion in potential tax revenues that might be used to offset burdensome national and other social program expenditures .

Prior to Gilo’s resignation, the Netanyahu government  reached out to Professor Eitan Sheshinski at Hebrew University who had developed the original tax plan in 2010 to produce revenues from oil and gas developments both onshore and offshore. Sheshinski was appointed as adviser to Energy Minister Yuval Steinitz, who he had worked with in the development of the original tax plan. He suggested in a Globes Israel Business interview that liquidation of the Tamar field ownership would not lower prices.  Additionally he said that Gilo’s original intent of controlling prices was unproductive.  Sheshinski was cited by Globes saying:

All in all, today’s price is reasonable by the standards of Europe, and certainly at the level of the Far East.  The price of gas in Europe is $8-10 per energy unit, and is about $15 in the Far East. Delek Drilling Limited Partnership (TASE: DEDR.L) and Avner Oil and Gas LP (TASE: AVNR.L) today reported that the average gas price in Israel in the first quarter of 2015 was $5.45 per energy unit.

Sheshinski also asserted that controls over natural gas prices might do more harm than good. “Controls give a lot of authority to a bureaucratic system, and experience does not justify optimism,” he said, adding, “I don’t see how the regulator in Israel can adapt himself to the many changes occurring worldwide in gas prices. You have to keep this as far as possible from the bureaucratic and political system.”

Globes noted the Finance Ministry’s compromise proposal for ‘soft pricing’:

The state proposed that the price of gas in future contracts be a weighted average of gas prices in the contracts that have already been signed in Israel.

Sheshinski’s assessment of the Gilo’s objective , liquidating the monopoly, that a duopoly would enhance price competition was wrongheaded:

Both global experience and economic theory explicitly state that anyone who thinks that a duopoly will cause perfect competition is wrong. In this matter, you also can rely on our experience in Israel. In a duopoly, the controlling shareholders have a common interest… some claim that a duopoly’s prices are even worse than those of a monopoly.

He went on to address the current international markets impacted by a spike in US oil and gas fracking production:

In my opinion, the goal is to ensure that gas prices in Israel are not different from those prevailing in similar countries around the world. A revolution is now taking place in global energy prices. The US is becoming the world’s biggest oil producer, and both oil and gas prices are on a downtrend. In my opinion, this trend will continue, and our goal should be not to pay more than the reasonable prices of countries in a similar situation with respect to gas reservoirs.

Another expert who happened to be in Eilat,  Israel  at an international conference  this week was a law partner from the Washington, DC firm of Greenberg Traurig, Global Energy & Infrastructure Practice co-chairman, Kenneth Minesinger,  “legal advisor of the Alaska state government in its negotiations with the oil and gas companies.”   Minesinger had these comments in a Globes interview:

I’ve been advising the Alaskan government how to negotiate with the gas companies for decades. Like in Israel, two major reservoirs were discovered in Alaska: Prudhoe Bay and Point Thomson. The population there is small, and the gas industry is controlled by three companies.

Both Alaska and Israel are now trying to find out how to negotiate with the gas companies in a way that will safeguard the interests of the state and its residents, together with the gas companies’ interests.

I think that it’s necessary to act quickly in order to ensure development of the Leviathan reservoir, but hasty action motivated by panic isn’t the right way. What’s involved is an agreement that will ensure Israel hundreds of billions of shekels in revenue over the years, and serious consideration and the necessary time must therefore be devoted to this matter. In contrast to Alaska, the development project for the Leviathan reservoir is simple, but it is still difficult for an inexperienced country like Israel.

Minesinger pointed out that long term contracts must include development of a network   of adequately sized pipelines connecting fields that are developed.  Further, he suggested that pricing in such agreements should be formulaic and not based on a fixed single point basis. To overcome suspicions that developing companies might earn excessive profits Minesinger suggested distribution of profit sharing checks to Israel’s citizens akin to what Alaska presently does. He has also proposed to Alaska possible consideration of a state owned gas company.

The final comment on this week’s developments in the wake of the resignation of IAA head, Gilo, came in a Globes op ed from Norman Bailey, former Reagan national security aide and Haifa University policy expert, citing lessons learned:

The resignation of Prof. Gilo as head of the Antitrust Authority is undoubtedly good news. His reneging last December on the agreement he had made with the natural gas companies Noble, Delek and Ratio the preceding March had thrown the whole development of Israel’s offshore natural gas resources into confusion. The matter had already been badly handled by the government, which had driven out the Australian company Woodside, and Gilo’s retraction had put at risk the economic, financial and geo-political benefits of the gas discoveries. The government, after an unacceptable earlier draft, finally crafted a new, acceptable proposal over Gilo’s objections, which prompted his resignation. The lessons to be learned here are twofold: regulation is necessary but should not dominate at the expense of other relevant considerations; and agreements made should be honored, unless circumstances change fundamentally, which was not the case. Israel as a magnet for investment has been preserved.

We await announcement of an acceptable compromise plan to the parties involved to end this episode once again illustrating that  rule of law must reflect economic market realities.

EDITORS NOTE: This column originally appeared in the New English Review.

The Malaysian Air MH17 Missile Attack: A Chilling Prod to Airline Security

The destruction of Malaysian Air Flight MH17 over the Ukraine by a Russian SA-11“Buk”air defense missile on July 17, 2014 took the lives of 298 passengers and crew on board from more than 11 countries. While the largest contingent was 154 Dutch nationals, there were significant numbers of Australian passengers and more than 98 participants in an international AIDS conference in Australia, among them leading researchers and a World Health Organization official. 80 children lost their lives. One Australian family lost relatives on both Flights MH17 and MH370. The Boeing 777-200ER was a sister aircraft to Flight MH370 that disappeared on March 8, 2014 under mysterious circumstances with the loss of 12 Malaysian crew members and 227 passengers from 14 nations.

That act allegedly by Russian separatists in eastern Ukraine may have been a blunder by Russian President Putin that brought Western approbation at the UN Security Council debates on July 18th.  The possible complicit involvement of Russia in the missile attack on MH17 is reminiscent of the shoot down by Russian fighters of Korean Air Line Flight 007 from New York to Seoul on September 1, 1983 with the 269 men, women and children on board.  Also recall the accidental missile attack by the USS Vincennes guided missile cruiser that destroyed Iran Air 655 on July 3, 1988 during the Tanker War of 1984-1988 in the Persian Gulf, with the loss of 290 on board, including 66 children and 16 crew.

BUC SA-11 SystemThe Downing of MH17

The alleged Russian SA-11 missile attack on MH17 raised the matter of airline security in an era with increased threats to international civil aviation from irredentist and terrorist forces. Those threats are not only in the Middle East and Eastern European conflict zones, but elsewhere, including the Western Hemisphere.

The Malaysian Air dispatcher and the flight captain could have judiciously altered the flight plan of MH17 to avoid the no-fly zone over the eastern Ukraine. They could have used more southerly routes followed by major air carriers to reach destinations in South Asia. Instead they chose to fly above the contested eastern Ukraine no-fly zone at an altitude of 33,000 feet. By doing so, they exposed the flight to a missile attack from a mobile SA-11 missile battery similar to one used to down a Ukrainian military transport and fighters. By foolishly opting to economize fuel consumption on a shorter and more dangerous flight plan, they may have inadvertently triggered the deadly attack.  The two Malaysian Air disasters in 2014, MH370 in March and MH17 in July, have claimed the lives of 537 passengers and crew. Under the international Montreal convention, formerly the Warsaw convention of 1929 regarding aviation liability, surviving families may be entitled to $175,000 in compensation. That would translate to $94 million if Malaysian Air  is found liable.

The result was, in the words of a former National Transportation Safety Board investigator, the creation of “the world’s largest crime scene” 30 miles from the Russian border. The area patrolled by separatist militia with little respect for the remains of the deceased passengers has seriously complicated recovery and forensic investigations by NTSB and FBI agents. Standard recovery procedures have been severely compromised by looters, and the forensic operation has become chaotic. Ukraine’s government accused pro-Russian rebels of removing 38 bodies from the scene of the crash and of trying to destroy evidence. The Russian separatists have made it difficult for the Organization for Security Cooperation in Europe monitors to even approach the massive debris field.

Finding the MH17 black box and data recorder may be difficult if it has been removed from the scene, and other means may have to be used to corroborate the SA-11 missile attack. Certain data from the INMARSAT system drawn from the ill-fated flight’s engines may at least confirm altitude and flight conditions at the time of missile impact.

The Malaysian Air Flight MH17 incident sends a wake-up call to the Montreal-based UN International Civil Aviation Organization, and major country airways safety groups. These include the Federal Aviation Administration in Washington.

SkyShield SystemThe Elbit SkyShield/C-MUSIC Anti-Missile Defense System

The incident may also lead other airlines to consider the ground-breaking anti-missile defense systems that Israel’s airlines, El AlArkia, and Israir are now installing on the Jewish nation’s civil aviation fleet. The SkyShield/Commercial Multi-Spectral Infrared Countermeasures (C-MUSIC) laser system was certified for use in February 2014 and was announced by Elbit Systems, Ltd. (Elbit) of Haifa, the major Israeli defense contractor that developed it.

SkyShield/C-MUSIC has the ability to deflect the guidance systems of incoming man-portable air defense systems (MANPADS), using advanced laser technology and thermal imaging to deflect incoming threats by means of jamming their guidance system, usually well before the pilot of the plane may even be aware a threat is on its way. It has the potential of also protecting the plane from high altitude surface-to-air missiles (SAMs) like the SA-11 and the more sophisticated Russian S-300 systems, which have been sold to both Syria and Iran.

Israel’s program to develop this civil aviation missile defense system was prompted by a close call in Mombasa, Kenya, when a terrorist fired a MANPAD at an Israeli Arkia Boeing 757 with 261 passengers aboard in November 2002. That led to an Israeli government-sponsored development program that chose Elbit to develop the Sky Shield system. We understand that, despite the Arab Boycott of Israel, that both Qatar Airways and Emirates Airways have reached out to Elbit seeking information on the Sky Shield system for protection of their air fleets.

According to Jane’s Defence Weekly, the Israeli government ran a series of live-fire trials of the SkyShield missile protection system in February 2014. Brigadier General Eytan Eshel, head of research and development at the Defense Ministry was very satisfied with the experiment, saying, “SkyShield has been validated under the most complex and sophisticated testing conditions ever conducted in Israel and … included a wide variety of threats that the SkyShield system would have to tackle in order to protect passenger aircraft. It is now ready to protect Israeli airlines . . . . The capabilities are extraordinary.”

Watch this brief Elbit YouTube video on how the SkyShield System operates:

MANPADThe Air Defense Threat that the Elbit SkyShield System addresses

There are potentially multiple terrorist threats from MANPADS and mobile air defense missiles that could attack civilian airliners in commercial air lanes over international waters. A 2012 Defense News report pointed out more than 20,000 MANPADS went missing from the arsenals of the late Libyan dictator Gaddafi. Less than 5,000 of those have been recovered. Some of those have been interdicted in transit across Egypt, destined for Hamas in Gaza, and Salafist and al Qaeda affiliates in the Sinai. The Islamic State, formerly ISIS, may have picked up MANPADS and air defense missile systems during its blitz-like conquest of both Syria and Iraq. Not only is the region awash in weapons in the bazaar of weapons-trafficking that now exists in the Middle East, but IS has been systematically looting the stores of American weapons that had been left for the Iraqi military by the departing US forces.

An ex-CIA covert operations officer, who goes by the nom de guerre “Beowulf,” considers a MANPAD attack on vulnerable US and foreign airlines a plausible scenario in the near term. As co-author Freedman commented, “only Israel’s national airline EL AL has fully equipped its fleet” with pods capable of deflecting MANPADS. Freedman observes that Israel is particularly vulnerable to MANPAD attack, as Ben Gurion Airport, Israel’s primary international airport, is only kilometers away from the disputed West Bank, from where many of the attacks against Israel emanate. Having participated in a number of MANPADS threat exercises with DHS, the Coast Guard, FBI, TSA and other national security agencies, she underscores the seriousness of the concern. “MANPADS are a largely under-rated threat here in the US. But the threat is as real here as it is in the Middle East. MANPADs are relatively easy to acquire, transport discretely, and deploy from almost anywhere.”

In a US Aviation and Space Technology Weekly article on February 2014, Dr. Rachel Ehrenfeld discussed the MANPAD threat. She pointed out that while the US has spent hundreds of millions of dollars on development of a counter-measure, Israeli defense systems company Elbit has successfully developed and installed the light weight Multi-Spectral Infrared Countermeasure system (MUSIC) for both aircraft and helicopters. Israelis are well respected for the speed and efficiency with which they are able to develop cutting edge technology, outperforming most high tech development around the world, and developed this highly sophisticated system within three years.

Ehrenfeld was asked why the American commercial aviation industry has resisted adopting what Israel’s El Al has done to protect its air fleet and passengers:

Despite the alarming spread of MANPADS, U.S. aviation security experts argue that the threat to America’s civil aviation fleet posed by MANPADS is minimal. They say the cost of equipping passenger aircraft with MANPAD countermeasure devices–estimated at $43 billion–is prohibitive and unjustified. However, if a single missile found its way to Hezbollah operatives in Mexico, was then smuggled into the U.S. and fired at any of the 7,000 aircraft comprising the U.S. civilian fleet it would be devastated. Then, U.S. government officials and airline executives could not claim they were unaware of the threat. They could be held responsible for hundreds of deaths.

The downing of MH17 has brought the threat of attacks against commercial airliners to a new level. Because shoulder-fired MANPADS generally have a target detection range of about 6 miles, and an engagement range of 4 miles, aircraft flying above 20,000 feet are relatively safe from them. But the use of a sophisticated SA-11 missile by Ukrainian/Russian separatists has changed the game. MH17 was reported to be flying at 33,000 feet, and was brought down by a SAM. The Israeli SkyShield/C-MUSIC system was developed to defend against multiple threats posed by MANPADS. Three general types of MANPADS use command line of sight, laser guided, and infra-red seeking technology. Whether SkyShield/C-MUSIC can also effectively deflect the longer range SAMs, such as the SA-11 or the S-300, using radar technology to hone it on its target, is not currently known.

However, the technology is already in place and this new threat is not likely to go unnoticed by Israel’s defense industry. Following the downing of MH17, improvements to SkyShield/C-MUSIC will undoubtedly provide a new standard of security for the entire airplane industry.

EDITORS NOTE: This article originally appeared on The New English Review. The featured image is courtesy of the UK Daily Mail.