Israeli Energy Strategy - Interview with Shaul Zemach

Natural Gas Europe had the pleasure to interview Shaul Zemach, Former Director General of Israel's Ministry of Energy and Water Resources. Mr. Zemach led an inter-ministerial Committee tasked with proposing an adequate quota of natural gas to be allocated to export markets.

We spoke about Israeli gas projects and strategies. Zemach argued that Tel Aviv should focus on regional cooperation, welcoming stronger ties with Cyprus and Egypt. "Every progress in the Eastern Mediterranean gas scene has positive ramification on all neighboring states.  If the commercial declaration on Aphrodite indicates headway with Egypt on the use of BG's export facilities in Idku it points out the significance of regional cooperation" he said in the interview. On the demand side, Zemach explained that Israel will use more and more gas in the power sector, and in transportation through CNG vehicles. 

In recent conferences, you said that politicians must follow the changes rapidly occurring in the gas industry. You basically repeated that, in just 2 years, prospects for Israeli gas completely changed because of Woodside’s exit, because of new LNG from the US, and slow growth in domestic demand. These elements, coupled with Jordan’s decision to import LNG from Qatar, could dramatically change the options on the Israeli table. How should politicians react? What should be done?

Policymakers should have the flexibility to act in line with shifting circumstances. If circumstances were fundamentally changed over the last two years, then public (and private) sector should react accordingly. In the particular case of Israel and the Eastern Mediterranean gas markets, I indicated that within the existing export policy framework the possibility of international long-distance export became remote, and therefore efforts should be allocated to target and secure regional markets, as well as amplify domestic demand for natural gas, especially in transportation sector and industrial natural gas derivatives. 

You also referred to general legislative framework, explaining that it will not change in the near future and that the government has still some flexibility with commercial contracts. What did you mean? Could you please elaborate on that?

Israel's export policy differentiates between regional markets and distant global markets. Therefore the government has flexibility to set its priorities within the existing regulation and export policy. It also has the flexibility to set its preferences regarding commercial terms such as contracts duration, timing of actual supply, and conditions precedent.  

In other words, is Israel’s main priority still to focus on regional demand and export to immediate neighbours - Egypt, Jordan, and Palestine?

Yes. Regional gas trade makes more sense, given the forecasted trends of global natural gas trade, the huge cost of LNG facilities, and the scale of the current discoveries. The natural evolution of the Eastern Mediterranean gas markets should be generated "inside out". 

More generally, what is your view on potential regional cooperation? What are the limits?

Imagination and creativity are limitless. International relations are based on interests, gains and losses. The greater the "win-win situation", the greater odds for successful regional cooperation. 

During a conference in Tel Aviv, you argued that it is reasonable to expect new discoveries of the size of Karish. Are explorations proceeding? When would you expect new discoveries to be announced?

I argued that reasonable interpretation the data indicates that future discoveries would be more likely on the moderate scale of Karish and less likely on the scale of the mega discoveries Tamar and Leviathan. Future exploration activities depend on the certainty of market's demand.

Still speaking about the Upstream segment, what about the Leviathan field? It seems that 2017 is not viable, that is not possible to start production in two years. If you had to guess, would you expect production to start in 2020 or 2025 or later on?

I do not have crystal ball to make this kind of wild guess…..If Leviathan will start production 5 years from now it will be on the high end of world standards for offshore ultra-deep-water far-distant discovery.

What’s the role in this of the recent dispute between Noble/Delek and Israel’s Antitrust Authority?

Disputes contradict certainty….

Will the resignation of Mr Gilo from his position as Antitrust Commissioner be interpreted as a positive sign towards the effective development of the Leviathan and Noble's continued presence in Israel?

Prof. Gilo is a professional commissioner and he has the right and even the obligation to convey his perspective on issues under his jurisdiction. The state of Israel acts by the rule of law and Noble and Delek had the right to appeal to court to overrule his decisions. As far as I know Noble did not reconsider its presence in Israel.   

Recently, Noble and Delek declared the Aphrodite field commercial. Do you think that it is a good news for Cyprus? Do you think it has positive ramifications on Israel too?

Every progress in the Eastern Mediterranean gas scene has positive ramification on all neighboring states.  If the commercial declaration on Aphrodite indicates headway with Egypt on the use of BG's export facilities in Idku it points out the significance of regional cooperation. In this scenario Israel should consider merging into this establishing framework.

Switching focus to demand, you said that Israeli gas consumption should increase by around 5% a year, correct? What would that mean? Would that imply a decrease in the role of other fossil fuels in the energy mix?

The increase of the domestic demand will come from intensifying the use of natural gas in the power sector, while crowding out mainly coal, and augmented use of CNG vehicles, while crowding out diesel fuel. 

Would it be correct to say that a decrease in demand would also require investments in infrastructure? Where would those funds come from?

The government is responsible for infrastructure. The government's role is to steer the long term planning and the infrastructure investments priorities. By portraying the future roadmap for natural gas infrastructure and taking initial risks the government forms clear investment climate –private sector finance for infrastructure will follow.

Sergio Matalucci 

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci