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Featured Economic Papers

November 2020

 

Author:  Bnayahu Bolotin

 

Main Points:

 

  • The global supply of natural gas has been in an upward trend over recent decades, reaching a historic peak of 4,088 BCM in 2019.  At the same time, the demand for natural gas has also been in an upward trend, reaching 3,986 BCM in the same year.
     
  • Israel exports natural gas to its neighbors, Jordan and Egypt, with whom it currently has signed agreements for the export of a total of 133 BCM over time, out of a potential of 340 BCM.  Europe also represents a central export market for Israel, and the East-Med natural gas pipeline agreement between Israel, Cyprus, Greece, and later on also Italy, will enable Israel to export to Italy and to additional countries throughout Europe.
     
  • The outbreak of the coronavirus led to a decline in global natural gas demand, due to a contraction of economic activity, which led to a 30% drop in the price of natural gas at the peak of the crisis.
     
  • The outbreak of the panemic led to a slowdown in natural gas consumption in Israel, after consumption had been in an uptrend between 2013-2019.  However, the slowdown did not hurt government revenues from royalties due to the production of gas from the Leviathan reservoir, which started to operate in December 2019.
     
  • The main gas supply to Israel comes from the “Tamar” reservoir, which is backed up by a liquid natural gas (LNG) collection facility, stored in the "Marine Link" moored buoy system.  However, with the initiation of gas production from the Leviathan reservoir, and later on also from the Karish and Tanin reservoirs, a decline in natural gas prices is expected in the local market.
     
  • In December 2019 natural gas production was initiated from the Leviathan reservoir, the largest reservoir in Israel with 500 BCM of natural gas, after this offshore reservoir was connected to the natural gas transmission network.  Thus, the Israeli economy currently benefits from redundancies in natural gas supply sources, which enables the export of some of the gas produced.
     
  • Natural gas consumption for the generation of electricity declined slightly in 2019, whereas natural gas consumption for industrial purposes increased in the same year.
     
  • Currently, the main uses of natural gas are in the generation of electricity and in industry.  However, recently natural gas has started to be consumed for household uses and it is expected to be used in the future also in the transportation sector, due to the transition of gasoline and diesel powered automobiles to electricity and compressed natural gas based systems.
     
  • The baseline scenario for domestic demand forecasts that between 2018-2042 the aggregate demand for natural gas will equal 452 BCM.  However, due to the high uncertainty surrounding the variables impacting the forecasts and the assumptions made, the government decided it must maintain 500 BCM of natural gas to fulfill domestic demand in Israel through 2042.  In the short-term, the domestic demand for natural gas is expected to increase gradually to 14 BCM in 2025, and to 18 BCM by the year 2030.
     
  • In our opinion, when the current crisis passes, natural gas consumption is expected to return to its upward trend.  This comes particularly in light of the continued deployment of the national natural gas distribution network and the connection of new consumers to this network, and against the backdrop of the expected increase in natural gas demand for the generation of electricity.  Furthermore, the government's decision to phase out the operations of a number of coal powered facilities for electricity generation by the end of 2022 and also setting a target for the complete cessation in the use of coal for electricity generation in Israel by 2028, against the backdrop of Israel's joining the Powering Past Coal Alliance (PPCA), are expected to raise natural gas demand among local producers of electricity.
     
  • State revenues from the levies on profits from natural gas and oil from the Tamar, Leviathan, Karish, and Tanin reservoirs through 2064 are expected to amount to NIS 200bn.  Meanwhile, it is expected that the state's revenues from levies on the profits from natural gas, oil, and other natural resources by 2030 will amount to NIS 13.5bn, such that in annual terms, in the coming decade, these sums do not entail substantial fiscal nor macro-economic consequences.

 

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