The multibillion dollar gas supply contract between the Tamar partners and Israel Electric Corporation (IEC) (TASE: ELEC.B22) is liable to collapse due to the changes demanded by the Public Utilities Authority (Electricity) and the Antitrust Authority, IEC CEO Eli Glickman warns. The regulators have deep misgivings about the $15 billion contract, arguing that it harms competition in the energy market, and rolls costs onto electricity consumers.
Glickman told "Globes" in an interview that the changes demanded by the regulators are insignificant compared with the damage liable to result if gas deliveries from Tamar are delayed by the reopening of the contract.
"Globes": What is the risk that the contract will collapse?
Glickman: "We're still studying the Public Utilities Authority's decision. At the moment, it seems that the Authority is telling us: Don’t touch the contract, but change the options clause (the contract includes an options clause to increase gas deliveries - A.B.). If this demand forces us to return to negotiations, there is definitely a chance. The moment you begin negotiations, there is no way to know how they will end."
Sources says that, in the worst case, Tshuva's stake in Tamar will be diluted.
"The Israeli partners need this agreement to obtain bank financing for the development of Tamar. The banks are already demanding additional guarantees. Tshuva, well, you know his condition. I believe, based on reading the papers, that he cannot provide more guarantees. Noble Energy has bought a huge gas field for billions of dollars, and its pockets are not as deep as they once were, and they're beginning to count every penny. I don’t know whether they have money to buy Tshuva's stake, if he wants out. I also don’t know whether the Antitrust Authority director general would allow such a deal. Every day of delay in the arrival of gas from Tamar costs us NIS 100 million (on peak demand days - A.B.). Everything could blow up in our faces."
Noble Energy Inc. (NYSE: NBL) owns 36% of Tamar, Delek Group Ltd. (TASE: DLEKG) subsidiaries Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling LP (TASE: DEDR.L) each own 15.625%, Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) owns 28.7%, and Dor Alon Energy in Israel (1988) Ltd. (TASE:DRAL) unit Alon Natural Gas Exploration Ltd. (TASE: ALGS) owns 4%.
Two days ago, the Public Utilities Authority demanded that the Tamar partners amend the IEC gas supply contract, and a day after the joint energy price controls committee of the Ministry of Finance and Ministry of Energy and Water Resources placed price controls on natural gas, and Antitrust Authority director general David Gilo demanded that the IEC gas contract be shortened from fifteen years to nine.
The regulators are saying they are only doing their jobs to protect consumers.
"Were that true, the regulators would have acted two years ago, before the negotiations began. Why wait until I close the price? Because it's more convenient for them to rely on our work. It's the easiest thing to criticize retroactively. Why come now, after three years, and say, 'I have criticism'?
"I greatly appreciate the directors of the Public Utilities Authority and the Antitrust Authority. I invite them to join the negotiations. Come, let us negotiate for another 2-3 yeas, but don’t come afterwards with claims that the price of electricity has soared and we're polluting the air."
Glickman is cynical because he believes that the contract IEC signed is the best that could be obtained. "As far as the average consumer is concerned, we made a good deal," he says. "No one believes that we'll get a price of $5.04 per million BTU. Everyone thought we'd close at $5.50. But the biggest achievement isn't the price, but the flexibility. If there were more gas suppliers, I could lower the quantity of gas from Tamar to 30% of our needs, and give the rest to the others. Obviously, the new suppliers will have to give me a lower price than Tamar's price, so this agreement lets me sharply lower electricity rates. There are few companies in the world with our expertise, with the experience in gas contracts we've accumulated over the past ten years. We also brought in a consultant (PDC - A.B.), a foreign expert (Nick Butler - A.B.), an antitrust expert (former Antitrust Authority chief economist Menachem Pearlman - A.B.), and an expert in games theory. We negotiated for over a year, and for another 3-4 months until the board of directors approved the deal."
Why did you agree to the linkage formula, which is called "extraordinary", and which does not let the price of gas fall?
"We asked for the linkage formula, not Tamar. We thought to link the price of gas to the shekel, but the price of gas is set in dollars. We did not want linkage to the price of oil. Oil now costs $110 per barrel. If we go to war against Iran, the price could jump to $300 per barrel. One day, the price rises by $100 and the next day it falls by $100. It's unreasonable to drive Israelis crazy, as they already hate IEC every time the electricity rate goes up. We decided to use the US Consumer Price Index (CPI). We went back and examined the past 10, 20, and 30 years - it's the most stable index there is. The US is still the number one economic superpower."
What about the extra interest rate that the Public Utilities Authority now wants to reduce?
"That was a compromise. In negotiations, you compromise. If it is now reduced in the contract, I'll be happy, but we're only talking about NIS 500 million. But $150 million of a $15 billion contract is insubstantial. The Antitrust Authority's demand to include an exit point after nine years is excellent as far as I'm concerned, but if this condition blows up the contract, don’t blame me."
Delek Group share price fell another 4.5% today to NIS 651, Avner's share price fell another 3.3% to NIS 2.27, Delek Drilling share price fell 3.4% to NIS 12.37, and Isramco share price fell 3.5% to NIS 0.49.
Published by Globes [online], Israel business news - www.globes-online.com - on May 23, 2012
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