No more Gas from Egypt? The Israeli Gas Sector between Offshore Discoveries and Import Uncertainty

1 Introduction In 2009, major offshore natural gas deposits were discovered in Israel after historically being an energy-poor state relying on imported fossil fuels to meet its energy needs, and an energy island that is disconnected from energy infrastructure in the region, with the exception of gas supplies from Egypt (Shaffer, 2011). Since 2008, Egypt is supplying Israel with 40% of its domestically consumed natural gas. The gas is delivered through a pipeline that connects the Arab (Egypt, Jordan, Lebanon, and Syria) Gas Pipeline with Israel, which branches off from the same pipeline in Egypt. Natural gas entered Israel’s energy mix for the first time in 2004, with a domestic field (Yam Tethys) supplying its production to the market. The consumption of natural gas expanded in 2008, when the Eastern Mediterranean Gas and Oil (EMG) Company began importing natural gas from Egypt to Israel. The EMG supplied 2.5 Billion Cubic Meters (BCM) of natural gas to consumers in Israel in 2010, which was nearly 50% of the 5.3 BCM consumed in Israel in 2010, while the rest was supplied by domestic fields (Shaffer, 2011). There is no detailed information available on the level of the preferential price paid by Israel and its difference from the world price of natural gas. However, according to Khadduri (2011), the initially agreed upon price was 3 to 3.5 dollars per million British thermal units (Btu). Khadduri (2011) also reports that in August 2009, the Israel Electric Corporation (the primary consumer of gas exports from Egypt) approved an adjusted price of 4 to 4.5 dollars per million Btu. Approximately 425 BCM of natural gas was discovered in 2009 and 2010 close to Israel’s Mediterranean coastline in different fields namely, Tamar, Dalit, and Leviathan. According to IsraelStrategist (2011), the Tamar field was the largest natural gas discovery in the world that year and is expected to meet Israel’s gas needs for up to the next three decades. The Leviathan field was discovered in December 2010 representing the largest natural gas discovery in the world in the past decade, and is predicted to satisfy Israel’s domestic gas needs indefinitely and will potentially be used for export. The start of production of the two fields is expected in 2013 and 2016, respectively (Ratner, 2011). With the newly discovered fields of Natural gas, Israel could get into a situation where it displaces its gas imports from Egypt, which would according to Ratner (2011) bring benefits for both countries. First, there is public discontent in Egypt against the sales of gas to Israel particularly after the January revolution as Israel pays below market prices for the natural gas it imports from Egypt (Ratner, 2011). As a consequence, the gas pipelines used for transporting the Egyptian gas to Israel have been attacked more than ten times since the Egyptian revolution in January 2011, causing Israel’s gas supply to be temporarily cut off (Afify and Fahim, 2011; Elyan, 2011). Therefore, ending exports to Israel would have political advantages, while sustaining natural gas exports to Israel seems doubtful in post-revolution Egypt. In addition, there might be the option of changing the agreement between the two countries in a way that increases the price paid by Israel for the Egyptian gas, which could improve Egypt’s trade balance (Ratner, 2011). As a second option, Israel may decide to continue importing the cheaper Egyptian gas and using the additional production for exports to destinations such as Europe or even countries in the middle east such as Jordan. This is expected to improve Israel’s energy security and generate economic benefits. 2 Objectives/ Research questions This paper uses a global applied general equilibrium model that links the Israeli economy with the rest of the world including Egypt to investigate the economic implications of different gas scenarios on the Israeli economy: • What are the macroeconomic implications of increasing the price of Egyptian gas exports to Israel and equalize it to the price of gas paid by countries in the region such as Jordan? • The recent discoveries of the three major fields of gas in Israel (Tamar, Dalit and Leviathan) are expected to begin production in 2012-2013, 2013-2013, and 2016-2018, respectively (Ratner, 2011). What are the implications this may have on the Israeli economy at large, and on the livelihoods of different household groups? • At which level of domestic gas output would Israel (1) reach the self-sufficiency in gas, (2) start exporting domestic gas to other regions, and (2) eliminate its gas imports from Egypt? • How would the impact on the Israeli economy of the three scenarios mentioned above differ, should some rigidity be introduced in the model according to which Israel’s ability to re-source its imports of gas to regions other than Egypt would be limited? 3 Methodology We use an applied general equilibrium model that links the Israeli economy with the rest of the world including Egypt. The newly developed MyGTAP Model (Minor and Walmsley, 2012) is an extension to the GTAP model (Hertel, 1997) that modifies the original single regional household to allow for multiple households. The new specification improves the treatment of government income and expenditures, which helps to better track the effects of the gas-related simulations on the government accounts. In order to be able to use the MyGTAP model, the GTAP Data Base will be modified to break out the one regional household into multiple households following the work of Minor and Walmsley (2012). We do this using the newly developed Israeli Social Accounting Matrix, which has information, on 10 different household groups classified according to ethnicity to Jewish and non-Jewish and according to income level to five quintiles for each ethnic group (Nwafor et al. 2010). The structure of MyGTAP also draws the important linkages among household groups and production factors by assigning the income of the different factors of production to the designated household group through the ownership of factors by household groups. This advantage is particularly useful in the Israeli context because of the very detailed nature of the production factor’s account in the Israel SAM (Siddig et al., 2011). The SAM breaks down the factor account to 38 subaccounts including land, capital and 36 different labor categories. The latter classifies labor according to skills, ethnicity, and gender, besides being legally or illegally employed . Despite the fact that MyGTAP provides many country-specific features, it also lacks some of the major feature of the standard model (Hertel, 1997) because it is still in the development process. The welfare decomposition module of the standard GTAP model is not yet incorporated in MyGTAP as it relies completely on the regional household concept, which is broken down to private households and government accounts in MyGTAP. Therefore, it was found essential to incorporate the standard model as well, so as to report major parts of the results of this study. One other important feature of this study that needs the standard model is that it runs a couple of pre-simulation scenarios to update the database so as to better reflect the structure of the gas sectors in Egypt and Israel and afterwards, it uses the updated database as a new base. Such a feature is still to be incorporated in MyGTAP model. 4 Data adjustments This study uses an adjusted GTAP database prepared by Siddig and Grethe (2012) for an impact assessment of gas scenarios on the Egyptian economy. Siddig and Grethe (2012) aggregated the standard GTAP regions and commodities to 45 and 40, respectively. Afterwards, they adjusted the structures of the gas sector in the database for Egypt and Israel and made it reflecting its state in 2010 based on different sources of data including BP (2011), ICBS (2011), and CAPMAS (2011) among others. For the purpose of this study, the regions and sectors of Siddig and Grethe (2012) are further aggregated to 24 and 16, respectively. The mapping between the 24x16 and 45x40 aggregations for sector and regions is shown in Appendix (1) and Appendix (2), respectively. The most relevant sectors besides gas such as crude and refined oil, gas manufacturing and distribution, and electricity are represented separately in the sectoral aggregation. Agriculture is represented by three major aggregates, namely, ‘agricultural crops’, ‘meat and livestock’, and ‘forestry and fishing’. Another three major aggregates reserved for services, four major aggregates for industries, and the rest of mining is aggregated in one sector. As shown in Appendix (2), regional aggregation separates regions for Israel, Egypt, and the rest of MENA together. In addition there are regions for each of the major players in gas trade such as the USA and Russia, while separating the major importers of the Egyptian gas each in a region such as Italy and Belgium. After the setup of the final aggregation of the database, a pre-simulation is applied to generate a new database following the “Altertax” approach of Malcolm (1998) . Atertax is applied to introduce the difference between the average world price of gas and the preferential price that Israel pays for its imports of gas from Egypt in 2008 . the updated database afterwards represents the base for our simulations, to which any changes are compared. 5 Simulation scenarios Four simulation scenarios are simulated in this study in connection to the research questions raised in section 2 of the paper. Each of the four scenarios is run twice, once in the standard GTAP model and in addition in the MyGTAP model. This makes the findings of the study more comprehensive as it benefits from the advantages of both models and considers them complements to each other. The specific scenarios of the paper are the following: Scenario1: increasing the price paid by Israel for its imports of gas from Egypt and equalizes it to that paid by other importers such as Jordan; this is done by removing the designated subsidy that was introduced in the Altertax pre-simulation. Scenario2: increasing the production of domestic gas in Israel by 100%, which is a conservative projection for the production in the next 2 years based on Ratner (2011) and Nobel Energy (2010). This simulation is introduced by augmenting the technology parameter of the production factors in the gas sector, based on the fact that the reserves are natural resources and would be exploited by contracts with foreign companies including but maybe not limited to Nobel Energy (Ratner, 2011). Scenario3 and Scenario4 replicates Scenario1 and Scenario2, respectively using a version of the models that introduces the Israeli geopolitical situation in a form of rigidity in the trade parameters, i.e. Armington elasticity of imports of gas from different regions. 6 Preliminary findings Preliminary findings of the price scenarios, namely Scenario1 and Scenario3 are found to generate negative welfare impact on the Israeli people despite the improvement that they bring to the Israeli trade balance with the latter being due to the decreasing imports of gas from Egypt. Introducing the rigidity to the gas trade was found to have a significant impact particularly on the welfare figures produced by the models. While Scenario1 generates a welfare loss of US$ million 157, Scenario3 would make it US$ million 362. The positive change in the trade balance would be US$ million 102 and US$ million 239 for the two simulations respectively. Nonetheless, the impact of the two simulations on the Israeli GDP is quite small as they lead to a slight decline in GDP value index by 0.10% and 0.22% due to Scenario1 and Scenario3, respectively. Results of the domestic production scenarios (i.e. Scenario2 and Scenario4) on the other hand tell a slightly different story at least on the most aggregate level represented by overall welfare, overall trade balance and GDP. Welfare gains of US$ million 548 and US$ million 544 are generated due to the two scenarios respectively, while negative changes of US$ million 96 and US$ million 127 are shown for the trade balance. The difference between the model parameter being flexible or rigid is the context of the production simulations is found to be less influential compared to the price simulations due to direct connection to the trading sector in the latter case. The impact of the two simulations on GDP is also low: the percentage increase of the GDP value index is 0.45% and 0.44% under Scenario2 and Scenario4, respectively. Keywords: Natural gas, discoveries, Israel, Egypt. 7 References Afify, Heba and Fahim, Kareem (2011): Gunmen Attack Sinai Gas Pipeline. The New York Times. Published: July 30, 2011. Accessed on January11, 2012.http://www.nytimes.com/2011/07/31/world/middleeast/31egypt.html?_r=2. BP (2011): British Petroleum Statistical Review of World Energy. June 2011. bp.com/statisticalreview. Accessed on January 2, 2012. BMI (2009). Business Monitor International. Egypt Oil and Gas Report 2010. Part of BMI’s Industry Survey & Forecasts Series. ISSN 1748-3948. Published by Business Monitor International Ltd. CAPMAS (2011): Central Agency for Mobilization and Statistics, Egypt in Figures. http://www.capmas.gov.eg/pdf/egypt10/indst10/51.pdf. Accessed in January 2, 2012. 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