Minister of Energy and Water Resources Uzi Landau has awarded the gas storage license to the joint subsidiary Yam Tethys of Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, and Noble Energy Inc. (NYSE: NBL) without a tender. The license will allow the companies to continue holding the empty Mari B gas reservoir offshore from Ashdod and use it as a strategic reserve, for pay.
Some Ministry of Energy officials, including its legal adviser, opposed the granting of the licenses without a tender. However, other officials, including Natural Gas Authority director Shuki Stern, and Petroleum Commissioner Alexander Varshavsky, support granting the gas storage license to Yam Tethys, irrespective of profits by its owners. The ministry estimates that the gas storage could save the economy NIS 1.3-7.5 billion, and that Yam Tethys's profits could reach $100-150 million at the most.
Ministry of Energy sources say that publishing a tender would delay the project by years, and render the storage irrelevant.
Yam Tethys's Mari B reservoir is Israel's only operating natural gas field. The field, discovered in 2000, originally had 31 billion cubic meters (BCM) of gas, and since 2004, it supplied two-thirds of Israel Electric Corporation's (IEC) (TASE: ELEC.B22) gas consumption. The Natural Gas Authority estimates that the reservoir still has 7 BCM of gas, but the drop in pressure is already making production more difficult, and will render the field not worthwhile economically within months. In April, gas deliveries from the Tamar field (also owned by Delek and Noble Energy, together with Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) and Alon Natural Gas Exploration Ltd. (TASE: ALGS)), which will render the Mari B field unnecessary.
That said, there is still great economic value in the depleted reservoir, as it is common practice to use them to store natural gas as a reserve in case of serious disruptions. In the case of Mari B, these advantages could be even greater, because of Israel's total dependence on Tamar. This first advantage is in case of an emergency.
A breakdown in the gas production system at the Tamar wells, or along the 200 kilometers of undersea pipelines to the Mari B production platform and then to the Ashdod terminal, could be devastating. Repairs at sea can easily take months, and the cost to the economy of no gas deliveries is estimated at NIS 1.8 billion a month. The Natural Gas Authority estimates the savings from the option of using the Mari B reservoir as alternative supply in such an event at up to NIS 5 billion.
The second advantage of storing gas at the Mari B reservoir is even more important than the first. In 2014, just one year after the Tamar field will be linked to Israel, the country will face a gas shortage, as peak consumption will reach 2 million cubic feet per hour, compared with the 1.1 million cubic feet per hour that Tamar can supply. The shortfall is because gas flow projections from Tamar to Israel were made when gas supplies from Egypt were considered secure.
Consequently, the gas pipeline from Tamar lacks the capacity to meet all of Israel's gas needs, and all solutions for boosting the gas flow require using Mari B as an operational storage reservoir. According to Noble Energy's proposed alternative, the compressors pumping gas from the Mari B field will also boost gas flow from Tamar, boosting its delivery rate by 25%.
The Natural Gas Authority prefers a different solution: laying a second pipeline from Mari B to Ashkelon, which it believes will boost gas deliveries by over 60% from the current supply rate. It is unclear which solution is better, but it is clear that increased gas deliveries will save the economy billions of shekels by reducing the need to use diesel (which costs five times as much as natural gas) or import liquefied natural gas (LNG) (which costs three times as much as gas). Noble Energy's solution would save NIS 2.5 billion compared with diesel and NIS 1.3 billion compared with LNG imports. The savings from a second pipeline will be much greater.
There is no choice
Given all the major advantages of gas storage, there still remains the question of why it was worthwhile for the state to give Yam Tethys's owners the license without a tender. Delek and Noble Energy already have a monopoly on gas supply and gas delivery infrastructures. Why should the state also give them a monopoly on gas storage for free? In other countries, gas suppliers are usually not given storage licenses, which are usually given to anchor customers or gas transportation companies.
The Ministry of Energy says that there was no choice in exempting the license from a tender. Taking the gas storage license away from Delek and Noble Energy and handing it to a third party would incur considerable legal, technical, and bureaucratic problems. Preparing a gas storage tender, which is unknown in Israel, would take over a year - and this would probably be the easiest and fastest part of the tender process.
Converting the Mari B reservoir for gas storage involves substantial investment. First, its eight currently operating production wells have to be sealed, at a cost of tens of millions of dollars, otherwise the stored gas will escape. Afterwards, the reservoir has to be filled with a very large quantity of gas to boost its pressure back to a level to enable routine operation of the reservoir. The Natural Gas Authority estimates that this will take two years and at least 4 BCM of gas to create sufficient cushion for the reservoir to function as an operational storage facility. The storage licensee would have to buy the gas from the Tamar partners at an estimated cost of $800 million.
It will also be necessary to pay Yam Tethys for use of its production platform, without which it would be impossible to produce gas from the reservoir, and for the pipeline to shore.
The tender's chances of success are not bright when the need to invest $1 billion to convert the reservoir for storage, the regulatory risks, and legal and bureaucratic problems are taken into account. The Ministry of Energy estimates that it would take ten years (!) to establish an operational storage reservoir if the license went through the tender process.
"Granting Yam Tethys the license means that we will get the strategically important storage reservoir almost immediately and at no cost," says Natural Gas Authority deputy director Constantine Bluz in an internal document.
The immediate and biggest beneficiaries of the storage license are the Tamar partners, which will earn an extra $800 million at almost no expense for the gas that they will sell to fill the storage reservoir's safety cushion at Yam Tethys, which is owned by two of the partners. For their part, Yam Tethys's owners will have to wait a long time to make a return on their investment to convert the reservoir for storage. The Ministry of Energy estimates that Yam Tethys's profit will be $100-150 million.
The gas producers said in response that they would be pleased by such a profit. "In view of all the risks of this project, we'd be happy to make any profit at all," says Yam Tethys. Sound familiar?
PPP tenders must not be budget bypassing tools
"Public private partnership (PPP) tenders must not be used as tools to bypass the budget," says BDO Ziv Haft president Shlomo Ziv, who helped introduce the method in Israel. The method, best known in Israel through BOT (build, operate, transfer) tenders, enables the government to hand over the implementation, financing, planning, and operation of large infrastructure projects to the private sector.
Road 6 (the Cross-Israel or Yitzak Rabin Highway) toll road is the best example of such a project, which has generated more than a NIS 1 billion in profits for the contractors and the government. There has been a retreat from PPP tenders in recent years, best seen in the nationalization of multibillion shekel projects such as the Tel Aviv light rail's Red Line, and Road 531, following disputes with the participating companies.
The latest wave of budget cuts has renewed interest in PPP tenders, because they are off the budget. Current PPP project proposals include the construction of Road 16 (the new road to Jerusalem) and the widening of Road 90 in the Arava by the Ministry of Transport. "There are two ironclad rules that dictate which projects are suitable for PPPs and which are not," says Ziv. "One rule is to take only projects with surplus economic benefits over the budget method, and the second is not to use PPP as a way to bypass budget cuts."
"Globes": Why is that so bad?
Ziv: "The project does not save the public expense, but spreads it out over more years. The people making the decision today lock in their successors by creating budget rigidities or public commitments for fixed expenditures over several years. A rule of thumb says that each NIS 1 billion in a PPP project budget creates a lock amounting to 10% a year. We estimate that out of NIS 20-25 billion in public investment in infrastructures a year, NIS 3 billion can be issued as PPP projects on a regular basis."
What can be done in the face of budget cuts?
"In times when it is necessary to increase investment despite budget restrictions, it is possible to make a temporary increase, with an emphasis on temporary, in the rate of PPP projects. In principle, it is possible to have 3-4 PPP projects for each budget project."
Published by Globes [online], Israel business news - www.globes-online.com - on December 26, 2012
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