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Battle of Drills: Israel, Noble Energy, and the Future of Israeli Gas

Interview with Hillel Schuster/By Avichai Korn

Over the past two years, natural gas findings in Israeli waters have garnered much negative publicity. Texas-based energy exploration and production company, Noble Energy and the Israeli government continue ongoing disputes over taxation, drilling rights and export quotas for Israel’s newfound resources. At the end of March, the Supreme Court rejected one clause in a newly proposed deal, a ‘stability clause’, committing the government to a ten-year deal with Noble Energy, which it deemed unconstitutional. But Hillel Schuster, Head of Corporate Finance at KPMG in Tel Aviv, remains optimistic that the two sides will break through the political deadlock.

Copyright: Andriy Markov

Credit: Andriy Markov

How much natural gas has been found and how does this amount compare to other findings in the world?

HS: They have found somewhere around 900 BCM (billion cubic meters). Based on current gas usage, we have somewhere in the range of 150 years of gas. According to more conservative estimates, we have 40-50 years of gas. Israel’s needs are rising dramatically because now that we have it, we’re beginning to switch from coal to gas. However, even with the recent gas discoveries, Israel won’t be among the natural gas leaders of the world, it is a tiny country with fewer needs than others.  .

In terms of moving the Israeli economy forward in coming years, what is the potential of these findings?

HS: The findings are immense. If you add billions of dollars’ worth of gas to an economy, which is already stable, you’ve done a great deal for Israel. In 2011, (following the Arab Spring) Egypt destroyed its gas lines to Israel and gas prices in Israel skyrocketed. The recent developments remove the risk of something like this happening again.

Should drilling at full capacity commence, what would be some of the foreign markets that Israel’s natural gas could reach?

HS: We could sell gas to Europe and compete with Russia. We could sell it to Turkey and make peace. We could pipe it down south and sell it to China. There are many geopolitical factors which hold this together. 

A large part of the story regarding the natural gas findings of recent years centers on deteriorating negotiations over rights to drill between Noble Energy and the Israeli Government. What is the cause of the contention, and is a resolution in sight?

HS: Prior to 2009, Israel didn’t have dependable laws regarding natural resource. The existing legal framework was from the 1950s. Noble Energy spent a lot of money and took a big gamble (just prospecting for natural gas costs around $100M) and feel they should keep the jackpot. Now the Israeli government jumps in and decides they need to tax this retroactively.

In a way, this was reasonable on both sides. It’s reasonable for Noble Energy to say: we drilled under certain laws, why are you changing the rules specifically for us? The Israeli government is saying: you can’t have assumed we would just let you drill without any sort of regulation. Then, just when everything seemed like it would be resolved (antitrust commissioner) David Gilo disapproved. The bottom line is, Israel does not want a situation where this deal somehow doesn’t happen. It has to reach a reasonable export agreement or they will have a problem, not only with Noble Energy, but with anyone who would potentially want to import the natural gas.

A graduate of Yeshiva University and Cornell Business School where he received his JD-MBA (1993), Hillel Schuster currently serves as Head of Corporate Finance at KPMG, a position he has held for over thirteen years.