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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.

Should Turkey be Forced to Leave NATO?

Jonathan Schanzer of the Washington, DC-based Foundation for Defense of Democracies (FDD) has written compellingly in a Politico Magazine article suggesting that  NATO should consider expelling Turkey, “Time to kick Turkey Out of NATO?” Schanzer notes:

Membership in NATO still holds significance. The alliance was designed to be an elite group of countries that stood for Western values. The NATO charter, set forth in 1949, holds that member states will protect one and all from attack at the hands of ideological foes. The Turkish Republic, founded and governed as an avowedly secular state, agreed to these terms in 1952, three years after NATO’s founding.

Of course, NATO was initially engineered to fight communism. But over the years, the threats to the international system have changed. The latest challenge is a jihadist ideology that fuels the Islamic State, but also al Qaeda and other terror groups and their state sponsors.

Yet, it has become clear that Turkey, once a bulwark of secularism in the Muslim world, is now ambivalent at best and complicit at worst, about fighting these forces. The fact that the AKP is a splinter of the Muslim Brotherhood provides a good indication of its leanings. More troublingly, it is a champion of the Palestinian terrorist group Hamas and allows several of its senior figures to operate out of Turkey. It has failed consistently to uphold international standards on fighting terrorism finance, including the designation of al Qaeda figures on its own soil. It has been reluctant to even acknowledge that groups like the Nusra Front—which has pledged fealty to al Qaeda leader Ayman al-Zawahiri—are terrorist organizations. Its dangerously lax border policies have contributed to the rise of the Islamic State. And it has helped Iran, the leading state sponsor of terrorism in the world; evade sanctions at the height of the international community’s efforts to hinder its illicit nuclear program.

 Schanzer’s  question was spurred on by Turkey’s inaction in the face of the ISIS siege and likely conquest of the Kurdish enclave of Kobani just across the border in Syria. allied with the Muslim Brotherhood, doesn’t want to move against the ISIS jihadists rampaging in Syria and Iraq.  Until recently he tacitly supported their cause fighting to eject the Assad government in Syria and replacing it with a self-proclaimed Caliphate.  This would fill his oil pipelines with smuggled product from captured Syrian and Iraqi oil fields to sell at a good profit. He facilitated the so-called “jihadist highway” filtering foreign Salafist jihadist recruits for ISIS and the Al Qaeda al Nusrah Front opposition to Assad. But Erdogan has to play it cool, as he has a lively trade exchanging gold for much needed gas from neighboring Iran, a Shiite ally of the Assad regime to foster Turkey’s economic growth. The gold received by Iran allowed the Islamic Republic to evade US and international sanctions to finance its nuclear development program. We learned this week that he exchanged 180 jihadists, sequestered in Turkey, on September 20th for release of 49 Turkish diplomats and their families held captive for 101 days following the fall of  Mosul in June  2014.

Those of us old enough to have lived through the so-called Korean Conflict of 1950-53, can recall the tough Turkish military contingents part of the multilateral UN force that endeavored to stave off the North Korean and Chinese PLA hordes in what was euphemistically called, “a police action”.  That was then. Now, Turkey’s U.S. supplied F-16 aircraft are not flying from NATO airbases in his  country. He has yet to permit USAF operations out of those airbases despite authorizing legislation passed by the Turkish parliament.  US supplied Turkish Army tanks are positioned silently on the Turkish Syrian border. All while the world’s media  coveys images of the courageous YPG fighters, women among them, lightly armed, desperately fighting against all odds with ISIS troops equipped with stolen US mortars, tanks and artillery. Most of Kobani’s population, over 180,000, has fled to refugee sanctuary in Turkey.

 The Erdogan regime’s decision not to lift the Kobani siege has roiled Turkey’s Kurdish population. President Erdogan was allegedly concerned about Kurdish irredentism in Syria and Turkey.  He got confirmation of  that with the rising of Kurds throughout the Southeastern region of  his country resulting in more than two dozen dead and counting.  Kurds in Europe have also erupted in protest and fought pitched battles with ISIS supporters in the streets of Hamburg.

These developments have given rise to questions  from  fellow NATO  and US-led Sunni coalition members over  Erdogan’s  ‘conditions’ to enter the fray to provide ‘boots on the ground ‘and permit air assaults from NATO bases in Turkey.

Let’s examine some plausible reasons why Erdogan may not wish to unleash  his army in the US-led coalition conflict with ISIS.  He has publicly stated that his objective is to bring down the Assad government. Less well known is the current round of Turkish negotiations with Cyprus over ‘unification’ of the Republic of Cyprus and the rump Turkish Northern Cypriot ‘Republic’. That was  carved out by a Turkish invasion in 1974. An opportunistic invasion contrived by the secular Turkish government at the time to counter the Greek military coup of the Archbishop Makarios government of Cyprus.   Turkey is pressing for a lucrative share of the gas development offshore Cyprus and transmission to EU markets via his network of pipelines.

Until recently the US was willing to sacrifice the Kurds in Kobani and only resorted to conducting  limited bombing to slow down the inevitable advance of ISIS fighters bent on exterminating remaining YPG fighters and the remnant of the town’s  population. Erdogan may be the equivalent of Stalin who during the August 1944 Polish Resistance Uprising ordered the Red Army to sit on the east bank of the Vistula River watching the German Army decimate the valiant Poles and turn Warsaw to rubble.  Stalin barred USAAF air drops from a base at Poltava in the Western Ukraine, forcing allied air drops to originate in England, many of which fell in the hands of waiting German forces.  Stalin also wanted to ensure that a Communist regime spawned in liberated Lublin would rule post war Poland. Erdogan clearly wants the Syrian Kurds decimated so that they will not have virtual autonomy in the country’s Northeast.

We note Schanzer’s conclusion in his Politico article:

The crisis in Kobani once again brings the challenge of Turkey into sharp relief. Despite the best efforts of Washington and other coalition members to bring Turkey along, it now appears clear: Turkey under the AKP is a lost cause. It is simply not a partner for NATO. Nor is it a partner in the fight against the Islamic State.

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