The price of electricity in Israel could fall by between 1% and 1.5% as a result of the expected freezing of the price of natural gas from the Tamar reservoir. In an amendment to the gas supply agreement of 2012, the price of gas that Israel Electric Corporation (IEC) buys from Tamar will be frozen for a little over two years (until July 2021). It is assumed that the amendment will be signed in March, after the regulators, the Israel Public Utility Authority for Electricity and the Government Companies Authority, approve it.
Tamar partners Delek Drilling, Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), and Alon Natural Gas Exploration notified the Tel Aviv Stock exchange this morning that understandings had been reached on amending the 2012 agreement with IEC.
A draft of the agreement was approved on Thursday by the IEC board and the Tamar partnerships. IEC has approached the Israel Public Utility Authority for Electricity and the Government Companies Authority for approval. The assessment at IEC is that there should be no difficulty in obtaining approval since the agreement is beneficial to IEC.
Negotiations with IEC have been taking place for over a year with the aim of finding an arrangement that will be convenient for both sides, regardless of the first date for updating the gas price set for July 2021, within which it will be possible to reduce the original price in the 2012 agreement by up to 25%. The negotiations moved into higher gear in the past month, and took place directly between CEO Ofer Bloch and legal counsel Yael Nevo for IEC and Delek Drilling CEO Yossi Abu, representing the partners in Tamar.
As a result of the amended agreement due to be signed by IEC and the Tamar partners, the price of gas to IEC will remain at $6.1 per MMBtu, while the electricity tariff is based on a price of $6.3 per MMBtu. The cost saving for IEC from the freezing of the gas price will be NIS 350 million in 2019-2020.
In return, IEC will agree to lower the capacity guaranteed to it in the Tamar pipeline from 6.75 BCM in the current agreement to 5 BCM. This will enable the Tamar partners to harden its contracts with other customers who up to now have bought gas from Tamar on an occasional basis, such as Dorad, Oil Refineries, and the OPC power plant, until gas starts to flow from the Karish and Tanin reservoirs. The Tamar partners will also be able to free up 1.75 BCM for the gas supply agreement with Egyptian company Dolphinus.
The agreement has interesting legal significance in the class action against the Tamar partnerships in the Tel Aviv District Court. The agreement has two implications: firstly, it represents a kind of ratification of IEC's consent to the original agreement in 2012, which the petitioners in the lawsuit claim was given under monopolistic pressure by Tamar; and secondly, it demonstrates that the gas price in the agreement reflects a price for infrastructure and not just for the fuel. The net price of the gas, that is, the price minus the element that IEC paid for guaranteed pipeline capacity, is comparable to the prices obtained from Tamar by the private power producers in the agreements they signed after the agreement with IEC.
Published by Globes, Israel business news - en.globes.co.il - on February 17, 2019
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