Israel: don’t let your gas discoveries languish underground. Re-upping my oped in TheMarker: http://t.co/MriOSPWYOg
— Dave Sharma (@AusAmbIsrael) June 26, 2015
Watching the debate unfold in Israel about how to manage an emerging offshore oil gas industry, I’ve been reminded of similar debates in Australia.
Today Australia is a major energy exporter. We are the world’s 4th largest exporter of liquefied natural gas (LNG) and are on track to become the world’s largest producer of natural gas by 2020.
But as we found, building a world-class gas industry is a challenging task.
In many ways, the discovery of the resource – the stage Israel is still at with the Leviathan field – is actually the easiest part.
Many countries throughout the world have extensive natural resources. Very few have successful and well-managed resource industries.
The difference usually comes down to policy and governance.
The discussions underway in Israel about how to build a competitive gas industry are healthy and understandable.
How do you ensure the citizens, the ultimate owners of the resource, benefit from it?
How do you ensure competition in a sector where big players tend to dominate?
How do you protect the environment, create jobs and ensure worker safety?
Over a matter of such great public interest, these are all legitimate debates to have. We had them ourselves in Australia a few decades ago. They involve difficult choices.
At the end of the day, it is about finding an appropriate balance between a range of competing interests and priorities.
Did we get everything right in Australia? Absolutely not.
But we managed to create a world-class LNG industry which has created jobs and prosperity, enjoys broad public support, and is well-managed and regulated.
We learnt several lessons from our experience, which are just as relevant for Israel as they were for Australia.
First, foreign investment is a critical partner. The significant capital and risk involved in a big natural resource project means it is usually beyond the scope of a small domestic market to finance. The right foreign investor can also bring relevant technical expertise and access to markets.
Second, foreign investors are ruled by commercial considerations. They are not philanthropists or Zionists. The only reason they will get involved in a project is if they think they can make a decent, risk-adjusted return on capital.
Third, a certain and stable regulatory environment is essential. Given the size of the capital investment required and the decades-long life of these projects, investors need to know the rules of the game in advance – certainty – and be confident that these rules will not be changed arbitrarily over the life of the project – stability.
Fourth, the oil and gas sector is a highly competitive one. New gas field discoveries are made all the time. You have to create an attractive package to lure investors, or they will go elsewhere.
I was very disappointed when Woodside terminated its interest in Leviathan in 2014, because it is exactly the sort of major outside investor needed to help Israel’s fledgling gas sector realise its full potential.
Since that time, the headlines coming out of Israel’s oil and gas sector have not been reassuring, with several developments creating new sources of uncertainty.
Coupled with falling global gas prices, this has further hurt confidence in the sector.
If an oil and gas sector gets off the ground in Israel, it would be an immense strategic asset for the country.
It would create new sources of economic growth, increase government revenue (which could be used for social spending), diversify the economy and lessen Israel’s reliance on the high-tech sector, and even help Israel’s relationships with its neighbours.
But if things continue as they are, I fear the resources may remain under ground and under utilised. This would truly constitute a missed opportunity.