Israel Corp drops Tamar, signs with EMG

The loss is a sharp blow to the Tamar partners.
"Tamar delays made us buy Egyptian gas"

In a sharp setback for the partners developing the Tamar natural gas lease in the Mediterranean Sea, several Israel Corporation (TASE: ILCO) subsidiaries today signed long term natural gas supply contracts with Egyptian supplier East Mediterranean Gas Company (EMG).

The gas supply is for three power plants that the group intends to operate on natural gas at three companies: Israel Chemicals Ltd.'s (TASE: ICL) wholly-owned subsidiary Dead Sea Works Ltd., Oil Refineries Ltd. (TASE:ORL) and OPC Rotem Ltd.

EMG shareholder (12.5%) Ampal-American Israel Corporation (Nasdaq: AMPL; TASE:AMPL) said that EMG has signed a total of five gas sale agreements. It also listed IC Power Ltd. (Israel Corp's energy arm) among the customers. Ampal said the agreements are for a total quantity of 1.4 billion cubic meters (BCM) annually for 20 years, with an option to buyers to increase the total quantity up to 2.9 BCM annually. The total value of the five contracts according to Ampal is $5-10 billion. Gas delivery is scheduled to commence between the first and second quarters of 2011.

The gas supply contracts follow the difficulties that the Tamar gas field developers have been facing lately, and the warning that they announced after the market closed last night.

OPC Rotem will purchase 300 million cubic meters of gas a year for its planned 440-megawatt power plant. The value of its gas purchases can reach $3.2-4.3 billion.

IC Power has an option to buy 300-600 million cubic meters of gas per year, as it is considering also building a 440-megawatt power plant.

Israel Chemicals' gas supply contract is through 2030. The company said that the move is in addition to its contract with Yam Tethys, signed in 2008, and the hook-up to the natural gas pipeline in December 2009. The new contract guarantees gas supplies to the company's plants, which switched to gas for their electricity production a year ago. Israel Chemicals subsidiary Dead Sea Works Ltd. will buy 200 million cubic meters of gas a year from EMG for its power plant planned for Sdom. Israel Chemicals has an option (through March 31, 2011) to buy an additional 530 million cubic meters of gas for industrial use and power production. The purchase of gas for the new power plant is subject to a decision on its construction and the obtaining of building permits, which are due by June 2012.

Israel Chemicals' contract is worth $370-460 million through 2030, not including the option, depending on the final terms. The contract includes a floor and ceiling price.

ICL Fertilizers CEO Dan Chen said, "The switch to natural gas greatly improves the environmental protection of energy production by the plants in the south, and greatly reduces the cost of energy. The new contract is an important step toward guaranteeing Israel Chemicals' energy supply through 2030."

Oil Refineries (in which Israel Corp. holds a 37% stake) signed a 20-year gas purchase contract with EMG for its refinery and for its subsidiaries Carmel Olifins Ltd. and Gadiv Petrochemicals Industry Ltd. Oil Refineries said that the switch from heavy industrial oil to natural gas as the company's primary source of energy will save it $130 million in direct energy costs.

Oil Refineries also expects savings in energy consumption, maintenance costs, and improved operating efficiency. The switch to natural gas will also greatly reduce emissions.

The price of the gas will be set by a formula based on the price of oil, and includes a floor and ceiling price, and a take or pay commitment for the minimum quantity of gas, in accordance with the mechanism set out in the contract.

Oil Refineries' contract is worth $1.8-2.9 billion over 20 years. The actual amount will depend on the amount of gas purchased, the terms set, and price of oil. Delivery will begin when the National Gas Pipeline reaches Haifa Bay, which is scheduled for the first quarter of 2011. Oil Refineries has already completed the installation of the necessary hook-ups to the pipeline and receipt of the gas.

Oil Refineries CEO Yashar Ben-Mordechai said, "We continue to invest in activities to strengthen the company. This contract and completion of the switch to natural gas as Oil Refineries' primary source of energy, together with many other investments, will position the company has one of the leading and environmentally friendly refining and petrochemical companies in the Mediterranean Basin and in compliance with Western European standards. This is a strategic step that meets immediate needs for the rapid transition to natural gas use."

A source at a Tamar partner told "Globes", "Minister of Finance Yuval Steinitz has buried Tamar".

Delek Group's share price fell 0.1% in early trading on the TASE to NIS 940, Avner's share price fell 3.6% to NIS 2.45, and Delek Drilling's share price fell 1.5% to NIS 13.50. Isramco's share price fell 2.3% to NIS 0.43.

Published by Globes [online], Israel business news - - on December 13, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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