Senior gas market sources said yesterday that the state’s policy on introducing natural gas to Israel had failed. A failure to correct it, in light of the outcome of negotiations with BG Group (NYSE: BRG; LSE: BG) (British Gas), would result in a similar outcome with Gazprom, EMG, and liqufied gas suppliers, they warned.
The sources were responding to an joint appeal by the Prime Minister’s Office and the Ministries of Finance and National Infrastructures to potential natural gas consumers, asking them to form a consortium that would begin negotiations with British Gas, after it announced it was abandoning talks with Israel and would now focus on selling from its gas wells on the Gaza coast, to Egypt.
The sources, who have been following the issue for some time, claim the state failed because it did not understand that the introduction of natural gas takes place in two stages: penetration, followed several years later by maturity. The penetration stage must, they insist, be conducted by a regulated monopoly, either state or privately owned, which will oversee all stages of the gas introduction chain, from procurement, to delivery and distribution, while meeting commitments on deadlines and prices to end consumers. Such a process would provide the essential security to both gas suppliers and users.
Once the introduction stage is complete and the natural gas supply chain has reached maturity, or in other words, when estimated consumption reaches the target figure of 8-9 billion cubic meters (BCM) a year, with a long term potential estimated at 11-13 million BCM, the monopoly would be disbanded and spun off into several privately owned distribution companies and one transport company. The latter would remain a regulated natural gas infrastructure monopoly, under either state or private ownership.
This is how the natural gas introduction process works throughout the world. But gas authority officials, as well as the Ministries of National Infrastructure and Finance, which oversee policy on gas supply, do not recognize the need for the penetration stage. “They want to implement the project immediately, meaning that every consumer, regardless of size, will be able to buy gas from any supplier,” claim the gas market sources, adding that the announcements at the beginning of the week by the Prime Minister’s Office and the Ministries of Finance and Infrastructure, calling on entrepreneurs to ask the government to incorporate them into a consortium that would buy gas from British Gas, were impractical. “There’s no such thing in the world as a ‘consumer consortium’, since you can’t expect any single company to vouch for multiyear gas procurements made by its consortium partner,” they insist.
This, apparently, is the main reason behind British Gas’s decision to opt for a contract with Egypt, with a long-term commitment to supply and price. These are the basic terms of any gas company, and not just those of British Gas. According to the market sources, a natural gas supplier wants to conduct commercial negotiations opposite one single entity that can guarantee procurement and commit to a long-term supply agreement.
Recently, the state also considered the option of indirect procurement. This would mean that gas sold by British Gas to Egypt would then be resold to Israel. “Nobody is happy about this option but we can live with it if there’s no other choice,” say government energy officials.
The Ministry of Finance said in response, “The government of Israel will continue to pursue to the full the option of marketing natural gas from British Gas’s reserves off the Gaza coast. The government will ensure that the parties - supplier and consumers - reach a fair arrangement on the commercial aspects of the supply. Israel will maintain its rights under the political agreements with Egypt on the supply of gas from Egypt to Israel.
Commenting on recent events, international natural gas expert Yossi Ram said, “Israel is a pipeline customer and Egypt is the ultimate supplier due to the short distance and the large reserves. Having said this, the dependence on Egypt as a sole supplier creates unease in the energy economy. Therefore, if the government of Israel is really interested in securing the future of the energy economy, it should buy British Gas’s entire 30 BCM gas reserve, which amounts to the average requirement for the state for five years, and hold on to it as a strategic reserve. With a contingency supply of this size, there will no problem in continuing to live with Egypt as a sole supplier.”
Published by Globes [online], Israel business news - www.globes.co.il - on May 18, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006