The real cause of the plummet in investments in Israel lays elsewhere. And to understand it we need to understand recent developments in the natural gas industry.
Direct Foreign Investment in Israel is in free fall. According to a report published last month by the UN Conference on Trade and Development, (UNCTAD), foreign direct investment in Israel in 2014 was 46 percent below levels in 2013, dropping from $11.8 billion to $6.4bn. During the same period worldwide direct foreign investment dropped a mere 16%, meaning the drop in investment in Israel was nearly three times the global average.
Some responded to the report by blaming Operation Protective Edge or the boycott Israel movement for the sudden downturn. And there is probably something, although not much, to that view.
Israel tends to bounce back relatively quickly after wars end. Since 2006, the impact of wars on Israel’s economic growth has been marginal.
As for boycotts, it is hard to enact them. Only 5% of Israeli exports are finished consumer products capable of attracting the ire of Jew-haters. The other 95% are business to business sales with Israeli exports incorporated into products assembled in other countries, and so largely immune to boycotts.
The real cause of the plummet in investments is elsewhere. And to understand it we need to understand recent developments in the natural gas industry.
For nearly 60 years – from 1952 through 2011 – the regulatory situation in the Israeli energy sector was stable. By law, the state was to receive 12.5% of royalties on the sale of energy supplies developed by holders of development licenses, in addition to normal rate corporate taxes.
The regulatory situation was well suited to a market where costs of exploration and development are high and the chance of profits is low.
Opportunity costs also played a role in determining the investor-friendly license conditions. Due to the Arab economic boycott, companies that sign energy contracts with the Jewish state risk being denied energy contracts with the Arab states. And whereas the probability is low that an investor in Israel’s energy market will turn a profit, the probability of profits in Arab energy markets is high.
When, at the end of 2006, the US firm Noble Energy entered the exploration concession for the Leviathan basin gas deposits, which among other things includes the Tamar and Leviathan gas fields, chances of finding gas were not considered high. Noble entered the market after British Gas abandoned its rights to the fields because they were not deemed profitable.
Without Noble, or another firm with comparable capabilities and experience, Israel wouldn’t have been able to develop or operate the fields. Delek Energy and the other Israeli partners lacked the capacity to carry out the complex operations required. To develop the Tamar gas field, a well was built across 500 meters of water at a depth of 5,000 meters. The drilling was carried out at exceedingly high pressures and beneath a thick layer of salt.
The drilling operation at Tamar cost Noble and its Israeli partners $140 million. To transport the gas to Israel required an additional investment of $4b.
When Noble began its drilling operation at the end of 2008, it estimated its chances of success at 35%. Tamer wasn’t expected to be particularly large. But by early 2010, it was clear that Noble, Delek and their smaller partners had hit the jackpot. Tamar with its 9 trillion cubic feet (Tcf) (254.85 billion cubic meters) of natural gas was the largest find worldwide in 2009.
In 2011, Delek and Noble’s luck continued when the initial drilling at the Leviathan gas field exposed an estimated 21 Tcf of gas. The Leviathan find was the largest of the decade. Together, the two fields not only have sufficient gas to make Israel energy independent for decades. There is enough gas in the two fields to transform Israel into a significant player in the global energy market.
Rather than celebrate the miraculous find, and then sit back and wait for the tax revenues and royalties to start flowing in, adding unanticipated billions to the Israeli economy, and additional investors to flock to its shores begging for development licenses, whatever the cost, Israel’s populists pounced on Delek and Noble’s extraordinary find like a street gang and proceeded to mug them.
Here it is necessary to note that aside from sell licenses, the government did nothing to develop the gas fields. It incurred no economic risks. Yet from the tenor of the debate begun in 2010, you might have thought that the clerks at the Finance Ministry and the opposition MKs in the Knesset had swam to the bottom of the sea and carried out the gas by hand.
A rent-a-mob composed of socialist politicians and activists, regulators and bureaucrats, all upset that free market forces enriched investors without their permission, demanded a confiscatory cut in the profits from the energy resource Israel now enjoys only because private companies invested hundreds of millions of dollars to extract it from the bottom of the sea.
Rather than stand by the investors and stare down the populist bullies, then-finance minister Yuval Steinitz joined the mob and appointed the Sheshinski Committee. The committee was tasked with recommending ways to breach the government’s contracts with the energy companies in order confiscate a far larger share of their future profits.
The Sheshinski Committee, and the 2011 law regarding windfall energy profits promulgated on the basis of its recommendations, taxed energy profits at a rate of between 52% and 62% rather than the 27% corporate rate. The increased taxes were applied retroactively to Noble, Delek and the rest of the license holders.
Noble CEO Charles Davidson reacted angrily to the changed regulatory environment, telling The Wall Street Journal , “A retroactive change would be egregious and would quickly move Israel to the lowest tier of countries for investment by the energy sector.”
Israel was about to see just how right he was.
Ever since the European Union began threatening economic boycotts against Israel, the government has rightly urged exporters to diversify their markets in order to lower Israel’s exposure to Europe. In the gas industry, diversifying markets means exporting gas to Asian markets. To open Israeli gas to Asian markets, Noble and Delek began negotiating the sale of 25% stake in the Leviathan gas field to Australia’s Woodside Petroleum. Woodside has the technical and marketing capacity to sell Israeli gas in Asia.
In May 2014, Woodside was poised to sign the deal with Noble and Delek and enter Leviathan with a $2.7b. investment. But at the last minute, Woodside walked away from the deal. It said it would be willing to reconsider its decision if Israel enacts “material changes” in the investment environment.
Despite the draconian retroactive taxes, Delek and Noble soldiered on. They signed a new contract with the government, in accordance with the new law, despite the high taxes and the fact that the law required them to sell their rights to the smaller Tanin and Karish fields.
But that wasn’t enough for the populists. Last December David Gilo, the head of the Anti-trust Authority in the Finance Ministry, proclaimed that the deal was illegal because Delek and Noble are a “terrible monopoly” with near complete control over Israel’s gas industry. Gilo determined that they have to end their partnership, and sell of their shares in either Tamar or Leviathan.
In response, Noble announced it was suspending its development of the Leviathan field. Whereas in 2014, Leviathan was expected to come online by 2017, now it won’t be under production until 2020 at the earliest.
When the new government entered office, Prime Minister Benjamin Netanyahu – who supported the 2011 windfall profits law – decided to sidestep Gilo and approve the deal the previous government signed with Delek and Noble. Everything seemed to fall into place last week when the security cabinet approved the deal. But then Economy Minister Arye Deri decided to spike the football and refused to sign the requisite order to implement the cabinet’s decision.
This week we were subjected to yet another populist assault on Noble and Delek. Now the rent-a-mob demands that the government abide by Gilo’s ruling, using his buzzword “terrible monopoly” at every opportunity.
But as with most populist economic protests, there is no basis for their claim. The notion that Delek and Noble’s partnership in gas development is a monopoly is utter nonsense. They are licensees. They purchased their licenses lawfully, and abided by their terms. They even agreed to pay more when the state scandalously passed a law and applied its draconian regulations retroactively.
Moreover, Delek and Noble cannot dictate prices for their gas. Israel isn’t required to buy gas from them. The only reason Delek and Noble became Israel’s only suppliers is that Israel decided to buy all of its gas from them after Egypt’s Muslim Brotherhood government canceled the gas deal Israel signed with its predecessor.
If the government thinks that Delek and Noble are charging too much for their gas, Israel is free to look elsewhere.
From the perspective of the future growth of Israeli energy markets, perhaps the worst aspect of the state’s decision to abuse the investors is the timing. The government went after the investors before they had the chance to bring the Leviathan field on line. In the current regulatory chaos, the gas may well stay in the sea forever.
What serious energy company would agree to invest here now? The entire world energy sector now knows that you can’t trust the Israelis. Any exploration project in Israel is a double gamble. First you roll the dice when you begin developing a field that will in all likelihood be dry. Then, if you happen to get lucky, you have every reason to expect that the state will invent a way to seize your future profits.
This brings us back to the UNCTAD report from last week. Israel’s populist – and corrupt – treatment of Delek and Noble is a massive warning sign to investors. Not only shouldn’t you rush to Israel, you should stay away from Israel.
If we are to correct the damage – to our energy market specifically and to the Israeli economy overall – there is only one path to take. The Knesset must abrogate the 2011 windfall profits law and end all attempts to define the Delek-Noble partnership as a monopoly while seeking new, creative ways to seize their profits.
Then, the Knesset must pass a law that will protect investors from attempts to retroactively change the terms of operating licenses they receive from the State of Israel.
Israel has enough problems with the anti-Semitic boycott movement that is growing by leaps and bounds. We need to curb our populist tendencies and stop making those who want to invest in Israel feel that they are fools to do so.
Numbers in a vacuum are subject to manipulation. Warren Buffet bought the last 20% of Iscar for $2 billion. If you do not have billion dollar buy outs in the 2014 that distorts the picture.
Looking at foreign investment which is subject to huge deals from one year to the next is subject with wild fluctations.
Without taking sides on this issue., I must say that I didn’t find Glick’s argument, that the drop in foreign investment was due to the reaction to Israel changing the rules, convincing. I think that foreign investment will bounce back regardless of Israel’s attempt to gain more from the gas licenses.
Caroline Glick is absolutely right. The agreement is an agreement. Companies should know in advance what kind of taxes will be or nobody will risk their money. The decision is not wise and bring only loses in the long run.
@ babushka:
enjoyed the clip, which led me to this interview with Serling, a very articulate person speaking simply.
https://youtu.be/q8sT6nz7VUM?t=1285
Arent these authorities the legal authorities invested with the responsibility of safeguarding the people of Israels assets? even though I know nothing, I would take their positions seriously.
yet, it is difficult to take seriously the position of one who repeatedly declares a platform when advantageous and then abandons it after elections.
Is this a security issue, why would the security cabinet have more authority than a knesset law or the ministers and authorites who oppose it.
the knesset passed the law but it is too populist for glick. when BB abandons his prior position, wehn the security cabinet attempts to bypass and economic law, when Kerry appears to have ties to Noble…. when caroline never crosses BB……
one must wonder why the knesset should change its “populist” law, which reflects the will of the people, in order to make BB, the security cabinet and Noble happy?
Glick did not tell us why the security cabinet votes on this bypass of a knesset economic law?
When corporate parasites and the politicians they own subvert the public good for personal profit, they demonstrate themselves to be seditious and should be regarded as traitors. In America, it is Buffett and Gates and Zuckerberg for whom avarice outweighs patriotism. Employing their political and judicial operatives, they eagerly damage the average citizen in pursuit of additional billions they will never even live to spend.
Israel is afflicted with the same problem. Just as the Fortune 500 runs the United States, Israeli corporate oligarchs call the shots. It is most difficult to defeat the plunderers who control the political system, but the alternative is national entropy.
Israel enjoyed its asset in the bank and Noble now enjoys profits from its venture. glick appears to pretend that Israel has no right to enjoy its asset even if it chooses not to develop it. she infers that the only party with the legitimacy to “enjoy” and benefit from the national patrimonial asset belonging to the people of israel is the foreign oil corp.
the responsibility of the gov is foremost to protect the national asset for the people of Israel. this is the old ideological canard which seeks to delegitimize the Israeli peoples ownership interest and elevate the oil companies interest. the arab nations dealt with this approach when they nationalized their oil cos and kept the bulkof profits for themselves, opting for the lower price of paying off corrupt pols in western nations to do all their biddings.
the use of such homilies remind me of the tactics of the leftand BDS in their denigration of israel, calling folks names in the absence of an argument that goes beyond the ideological and the obvious bias. I dont know enough to judge this issue on the facts but ideological arguments, ad hominem tactics,coupled with the absence of facts and figures that enable an unbiased assessment cannot convince me, in the same way the BDS churches, leftists, and defamers do not convince me of BDS.
speaking of BDS:
She who advises us always to ignore and fight against the foreign liars of BDS and stand up to their threats of military and economic sanctions advises us now to buckle to foreign oil companies based on ideological arguments, ad hominems and a transparent absence of projected profits to both sides under the new regimen signed by Noble.
If I were to base my views of economy on ideological arguments I would have to wonder how it is that the “free market” touts in the US who since R Reagan in the 80’s have systematically exported Jobs, production and capital to the centrally planned communist non free market economy of China has bankrupted america and grown communist china? That this was done by both parties in collusion with crooked pols; that the result has left the US bankrupt with 47% of folks on welfare especially those who are employed by the sellers of the supposedly lower priced goods. Now in america after a period of major technological advancements we see a bankrupt economy where full time employed individuals must be given welfare to survive. So much for my trust in the BS narratives of “free trade”. At this moment the gop have colluded with Obama and Soros to put the final nail in the coffin of transferring the US economy to communist china with the “free trade” act just signed. Add this to the flood of cheap labor immigrants one should expect no improvement in the US for the mass of the US population.
However, during that same time period the communist centrally planned non free market nation of china has grown miraculously.
glicks references to “populist” seem to imply that people are unimportant in her equations.
LOL, why look elsewhere to foreigners when you own your own oil wells????????
glick makes it appear that renegotiating contracts is anathema but companies do it all the time when it is to their advantage, so do nations.
really???????
If israel does not have the ability to “sell” to china, the fastest growing energy consumer in the world, when china is building a railroad from the med to eilat, and when china is investing billions in Israel…. if israel needs aussies to sell to china who is right there now in Israel in the billions…… then Israel would indeed be an idiot in need of down-under help in “selling” to someone sitting in their own living room.
😛 😛 😛
a truly ludicrous comment
LOL, its always “draconian” when eating into the massive profits of international corps; but note that they agreed to pay more, obviously basedon their charitable motives.
massive investment capital inflows such as that experienced by israel do not continue forever. they naturally subside. what is important is to make the return on those inflows accrueable to Israel. the selling of apps for billions does not necessarily enrich Israel, it makes billions for the owner and the sale profits and future profits can easily be moved by the new owner. Short term capital inflows are easily squandered unless one protects their assets and ensures sustainable growth in Israel.
such windfall assets are easily squandered or pilfered by corrupt politicians in collusion with greedy corps.
any such licenses should be issued to ensure that the patrimonial asset provides windfall, if any, first to the nation and people who own the asset.
Like the deal with iran, sometimes no deal is better than any deal. If Israel has not developed the expertise and resource at this stage to either do it itself or make a deal which benefits the people of Israel then perhaps it should wait until it can make a better deal or develop the expertise. The prime directive must be that the people of Israel have the major benefit as opposed to international corps and corrupt politicians.
we often hear of people with only a piece of land holding out for their price from large corps. they do not always jump at the first deal. In the case of such a major national asset it is the peoples stake that comes first. glick only has us weeping for noble’s stake.
corps always come up with such figures, I doubt that a successful energy corp throws away big money without a good chance to recoup. but this is moot.
Politicians are famous for corruptly making deals with corporations that enrich themselves at the expense of their constituents. Israel is famous for corrupt politicians at the highest level. It makes sense that patrimonial long term limited assets of the nation of such a great magnitude should be examined with a high power magnifying glass with the overriding concern that the people of Israel, not Noble, not delek and not the politicians end with the fair lions share of the national asset. the first thing to remember is that it is a national asset and not the private preserve of greedy corps and crooked politicians. the linking of Kerry to the corps should raise a warning sign in itself.
in a capitalist system the only way to evenly distribute the gains accruing to the economic community in question is through taxation. Of course in all her figures Glick fails to mention how much Noble will make from the israeli assets.
what about the billions that noble will make? glick implies that israel should be happy with whatever billions it gets for the asset which will in time run out. she spends a lot of time enumerating figures advantageous to noble in this argument but we hear nothing of that the expected windfall profits are. There should have been a cap to high profits at a certain point and after the return of capital and a reasonable return the deal should then reflect a lower return to the investor with a higher return to Israel for the depleting asset. Glick does not actually tell us the deal and profit figures, she presents a one sided ideological case. she says Israel should be satisfied with billions but noble should not.
Distilled to its essence, Israel’s problem is humanity’s problem: liberalism. If Rod Serling’s Kanamits would belatedly transport all the liberals skyward to be roasted until crispy and delicious, Earth would become a paradise.
https://www.youtube.com/watch?v=NIufLRpJYnI