Haaretz: Exporting Israel's natural gas bounty could thwart bid to lower fuel prices
The country's bounty of natural gas could save billions on transportation costs - if it were used to manufacture other fuels. But the Tzemach committee neglected this calculation when it recommended that half of Israel's natural gas resources be exported.
It took seven ministries 11 months to decide how much natural gas Israel should export and how much it should save for its own citizens. It's been only two months since these ministries' representatives on the Tzemach Committee presented their recommendations to Prime Minister Benjamin Netanyahu, but in the meantime, it seems like developments on the ground have rendered them worthless. MORE (register to view article).
The exploratory drilling at the Mira and Sara sites was determined a failure, and the Shimshon site was found to contain less gas than had been expected - undermining the committee's projection regarding Israel's gas supply. In addition, a new report states that the committee underestimated how much gas Israel needs. This report was prepared for the Energy and Water Resources Ministry's Dr. Bracha Halaf, an advisor to ministry director general Shaul Tzemach.
The report, drafted by the consulting company Pareto Group, determined that the Tzemach committee made faulty assumtions when projecting how much gas Israel would consume. Israel would save billions by manufacturing gasoline from natural gas, and this alone would increase the quantity of gas the country needs for its own use by at least 120 billion cubic meters by 2040, the report found. The Tzemach committee had recommended the country reserve only 50 BCM of natural gas for transportation purposes by that year, out of the total of 450 BCM it recommended the state keep in reserve.
It would pay off for the country to use some 59 BCM of gas for transportation purposes through 2025, and 190 BCM by 2040. This figure includes gas-based gasoline as mentioned above, as well as methanol and compressed natural gas. This means that the state should reserve 30% more than the Tzemach committee's total recommendation - for transportation uses alone.
The committee had recommended the state keep 450 BCM of gas in reserve for use by 2040 while letting the drilling companies export more than 50% of any gas field, up to a cap of 500 BCM. In order to calculate the local demand for natural gas - the basis for the export figure - the committee drafted different consumption forecasts, while taking into account that demand for electricity would increase and that natural gas could be expected to play a larger role in transportation.
The committee predicted Israel would use 40 BCM directly for transportation, and another 14 BCM to make methanol. This forecast has already been a source of conflict: The scientists at the energy and the environmental protection ministries drafted a report stating that the figures were 50 BCM to 100 BCM too low, as TheMarker revealed. They received the backing of Environmental Protection Ministry Director General Alona Sheffer Caro, who is on the Tzemach committee. Meanwhile, Dr. Halaf, who is in charge of oil alternatives at the Energy Ministry, commissioned her own report from Pareto on the potential of oil alternatives in transportation, and it painted a different picture altogether.
That report found that switching over to methanol and compressed natural gas (CNG ) for transportation purposes, and producing gasoline and diesel via the gas-to-liquid (GTL ) refining process, would save Israel NIS 2.92 billion a year on gasoline and oil refining expenditures. The Tzemach committee had heard these proposals in the past, but rejected them, arguing that these were fuels that could be imported, and concluding that there was no reason to use Israel's own gas to manufacture them. This is the first report to present calculations showing that Israel would be better off forgoing 150 BCM of exports in order to use its natural gas to make these fuels.
Either way, the Tzemach committee did not wait for that study to be completed, and makes no mention of it in its report.
Natural gas powered buses
The Pareto report examines three oil alternatives derived from natural gas that could be used for transportation: CNG; methanol, which can be produced from natural gas, and then mixed with gasoline; and gasoline and diesel.
Several developing and developed countries use CNG to power vehicles. It makes gasoline cheaper, but vehicles need to be adapted or replaced in order to use gaseous fuel. In addition, CNG necessitates its own gas stations, which are more complex than standard gas stations that serve up liquid fuel. Therefore, CNG pays off primarily for vehicle fleets that consume a lot of fuel.
The Pareto report is more optimistic than Tzemach when it comes to how quickly Israel will adopt CNG as a fuel. Pareto predicts the country will be using 2.5 BCM of CNG by 2025, while the Tzemach committee projected the figure would be merely 0.9 BCM.
The Pareto report justifies the higher number in noting that switching over to CNG would pay off, factoring in costs including the vehicle itself, maintenance and fuel expenses. The figures do not include tax.
The nation could save oodles by switching its buses over to CNG, the report finds. A bus running on CNG would cost NIS 2.19 million over the course of its life, compared to NIS 2.39 million for a standard diesel bus - a 9% savings. Smaller trucks also would benefit from using CNG - a CNG-powered truck would cost NIS 184,000 over its life, compared to NIS 199,000 for a diesel truck. That's a 7% savings.
CNG would not make sense for larger trucks, since vehicles running CNG generally can travel no more than 450 kilometers before refueling, and CNG takes up a significant volume, states the report. It also does not believe CNG would be worthwhile for cars, since it would save only NIS 1,000 over the car's lifespan but impose significant burdens on car owners.
Ultimately, by 2022 the country could be using 1.7 BCM a year of gas in CNG form, which would replace 8.9 million liters of gasoline and 94.2 million liters of diesel, saving the nation NIS 79.2 million a year.
The more methanol, the better
And then there's methanol, an alcohol that can be added to gasoline. In theory, any vehicle could run on gasoline that contains up to 15% methanol (M15 ) without undergoing any adaptation. The Prime Minister's Office's authority for oil alternatives is currently testing this mixture on cars and determining how it affects the vehicles' maintenance, in partnership with Dor Chemicals and Ten Petroleum.
In order to use a higher percentage of methanol, vehicles have to be adapted. These are known as flexible-fuel vehicles, and they can be found in Europe and the United States. Some are already being imported to Israel. The Tzemach committee predicted that by 2020, Israel would be using 0.7 BCM of natural gas a year in order to make methanol. But the oil alternatives authority has set a goal of 2 BCM a year by 2025.
Both the Tzemach committee and the oil alternatives authority rejected the idea of reserving natural gas in order to make methanol, since it can be imported. But the Pareto team calculated that manufacturing it locally makes more economic sense, once you factor in the manufacturer's profits. Locally manufactured methanol should cost $100 less per ton. Currently it costs $400 to $500 a ton on the global market.
While the Pareto team does not predict that Israel will have enough methanol sources to let the free market set prices here, proper regulation could ensure that locally manufactured methanol would cost less than imported alternatives. That said, international production is expected to increase over the coming decades, which would decrease the price advantage of producing methanol locally. Even so, the argument here is interesting, since government sources have repeatedly rejected the option of producing methanol locally.
Pareto predicts that in 2025, Israel will need 2.8 BCM of gas a year in order to produce methanol if it is going to meet the oil alternatives authority's benchmark - 40% more than the figure the authority itself predicted.
The report goes farther: It may not be economically viable to mix a small percentage of methanol into gasoline, it states. Prior analyses had stated that a 15% mix would cut the cost of gasoline by about 50 agorot a liter. Yet those analyses failed to take into account that it takes more methanol to produce the same amount of energy you would get from a similar volume of gasoline, which means that vehicles' fuel consumption would increase. In addition, it costs more to maintain a vehicle that uses methanol. The Pareto team found that it would cost NIS 400 more over a car's life to use M15 instead of regular gasoline. Using M30 - a mix of 30% methanol - would cost only NIS 100 more. But using M85 - an 85% mix - would not only make fuel cost 62 agorot less per liter, it would save car owners NIS 1,500 over the vehicle's life span, the team found. Using M85 manufactured in Israel could save the state NIS 140 million a year, they concluded.
They based this figure on their projection that by 2022, methanol could be replacing 248 million liters of gasoline a year, and would consume 0.43 BCM of natural gas in the manufacturing process. Therefore, the Pareto team recommends that the government approve methanol-based fuels that contain no less than 37.5% methanol - so long as they're locally produced. When it comes to imports, it will take a mix of at least 90% methanol in order for it to make economic sense to use the fuel. It recommends mandating that at least 15% of imported cars be flexible-fuel vehicles, and that 20% of cars within the government fleet meet this standard.
An inverse refining process
Gas-to-liquid could be considered an inverse refining process. Instead of breaking up natural gas into small particles that can be mixed into gasoline and diesel, it creates larger particles that simulate oil products. In theory all kinds of fuel could be created through GTL, freeing the country from its dependence on oil imports. But the process has several disadvantages, primarily that it's relatively polluting and expensive. Neither the Tzemach committee nor the oil alternatives authority called for setting aside gas for GTL processing, stating here, too, that any fuels produced through GTL could also be imported. In addition, setting up a GTL plant would cost $3 billion to $5 billion and would probably necessitate government financing.
Yet Pareto found that producing GTL fuels in Israel would save the country NIS 2.7 billion a year on fuels, making it economically worthwhile so long as a barrel of oil costs at least $64.5. Their calculations neglected to include the environmental damage to Israel, but also did not take into account the value in improving Israel's trade balance, reducing the variance of fuel prices and making the country less dependent on oil imports.
The team found that it would pay off to build a GTL plant next to one of the country's two oil refineries. GTL gasoline would cost NIS 2.46 a liter (including the seller's markup but not including taxes ), compared to the current NIS 3.79 for a liter of oil-based gasoline - a difference of 54%. This works out to a savings of 9 agorot per kilometer for a car, 11 agorot for a truck and 58 agorot for a bus. Over each vehicle's lifespan, this works out to NIS 3,900 for a car, NIS 17,800 for a truck and NIS 339,000 for a bus. In order to meet the oil alternatives authority's goals, the country would need 5.4 BCM of natural gas a year by 2025, and 90 BCM in total by 2040, Pareto found.