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Leumi Group

Featured Economic Papers

The Natural Gas Sector in Israel- November 2022

November 2022

Author: Bnayahu Bolotin

Main Points:

The emerging energy crisis in Europe has led to the most substantial structural change in the global natural gas market in the past decade.
The reduction in the supply of Russian gas to Europe, even before Russia’s invasion of Ukraine, strengthened the upward trend in the price of European natural gas (TTF) that started in the second half of 2020.
The Russian invasion of Ukraine led to sharp fluctuations in the price of natural gas in the European market, as the price rose to a peak of €330 per MWh, ten times the price in mid-2021. Price fluctuations occurred as early as 2021 due to declines in natural gas inventory levels in Europe against the backdrop of climatic changes and other reasons, and then, even more so, due to fears of an intensification of the natural gas shortage across Europe resulting from a possible Russian response to European and US sanctions.
In order to deal with the expected shortage in natural gas, the European Union (EU) decided to reduce demand in the coming winter season, along with increasing natural gas imports and filling the natural gas reserves in Europe well before the start of the 2022/23 winter season.
The cooperation between the countries of the EU and their success at stockpiling natural gas, in accordance with an agreed plan, increased the confidence of the markets in the actions of the EU and reduced the immediate concerns about the worsening of the shortage later in the winter season. These developments supported a partial decrease in the price of natural gas in the European market starting at the end of the third quarter of 2022.
The energy crisis in Europe is leading to Israel-Egyptian cooperation, through which Israel will indirectly supply liquified natural gas (LNG) to Europe. Israel does not maintain a natural gas liquification facility, and thus through this cooperation, will use the existing gas liquification infrastructure in Egypt. Egypt maintains a large mark up on the gas imported from Israel, liquefied in Egypt, and exported to Europe.
Israel’s natural gas production is in an on-going upward trend and is expected to continue to grow in light of new gas discoveries, and the start of gas production from the ‘Karish’ reservoir. Connecting the ‘Karish’ reservoir to the local economy strengthens Israel’s supply surplus and energy security, and will make it possible to increase the export of natural gas from other reservoirs, while securing the amount of natural gas needed for the consumption of the domestic economy.
The production of gas from the ‘Leviathan’ reservoir led to a substantial increase in Israel’s natural gas exports in the years 2020-2021, since the lion’s share of the gas produced from this reservoir is intended for export.
Currently, natural gas in Israel is used primarily for the generation of electricity and for industrial purposes. However, recently natural gas has also been used for household purposes, and is expected to be used as well by the transportation sector in the future, due to the transition of automobiles from gasoline and diesel consumption to the use of electricity and compressed natural gas. Natural gas will also have an increasing role in the different energy consumption needs in hospitals and military bases (steam, hot water, air-conditioning, independent production of electricity in cogeneration).
Israel’s sovereign wealth fund began operating in June 2022, after more than one billion shekels had accumulated in its coffers. At the end of August 2022, the total levies collected in respect of oil profits and excess profits of natural resources amounted to approximately NIS 3.84bn, of which NIS 1.88bn were final levies, and NIS 1.96bn were collected as advances or as withholding during the year 2022, but their collection is not yet final.
State revenues from oil and natural gas royalties increased 12.8% in 2021 compared to 2020, amounting to NIS 1.23bn. This increase stemmed from the rise in the production of natural gas from the reservoirs in Israel that more than offset the effects of the drop in the NIS/USD exchange rate, which has a substantial impact on the royalties received from the production of natural gas. Approximately 58% of the revenues stemmed from royalties received from the ‘Leviathan’ reservoir, whereas 42% of the revenues stemmed from the royalties received from the ‘Tamar’ reservoir.
During the first half of 2022, state revenues from oil and natural gas royalties amounted to NIS 820m, representing an increase of 48% compared to the first-half of 2021. Most of the revenues in the first half of 2022 (approximately 55%) originated from the royalties received from the ‘Leviathan’ reservoir, which increased 27% compared to the parallel period in 2021, whereas the revenues from the ‘Tamar’ reservoir (which jumped 85% compared to the parallel period in 2021) represented 45% of the total state revenues from natural gas and oil royalties. This increase was supported by the strengthening of the dollar vis-à-vis the shekel during the first half of 2022.