If a camel is a horse designed by a committee, then the state's proposal to the natural gas developers is a camel with three humps: a price control hump, a competition hump, and a gas reservoirs development hump. The proposal cannot be accepted, and was not designed to be accepted.
The budget whizz kids at the Ministry of Finance who led this measure were not aiming it at the gas developers - Yitzhak Tshuva and his partners. It is an internal measure designed to delineate a line with which all the regulators who change their minds every two days and those dealing in internal wars can conform: the Ministry of National Infrastructure, Energy and Water Resources; the Public Utilities Authority (Electricity); the National Economic Council; and the Antitrust Authority. In order to do this, the devisers of the proposal included a grab-bag of interests designed to satisfy all the government players. The Ministry of Finance can now say, "We've done our part; the gas developers are the ones who are delaying development of the reservoirs."
Anyone who really wants to redesign the gas sector in Israel has to do it one of two ways: either by competition or by price controls. The state's proposal mentions both competition and price controls - but goes all the way with neither of them. In price controls, the state proposes to set a price ceiling for new gas agreements for five years. This measure is meaningless for the home consumer, because over 95% of the market in the coming decade is already covered by the existing gas agreements - and state is not proposing to change the prices in these agreements. The state's proposal may help the small electricity producers who have not yet signed agreements to buy gas, but these producers also have no reason for satisfaction, because the price linkage mechanism in the proposal is unclear, and it is very doubtful whether it will provide peace of mind for the banks providing the financing.
The competition is restricted by both the price and the characteristics of the reservoirs. The state hopes that someone will agree to buy the small Tanin and Karish reservoirs in order to compete with Leviathan, but how can such a buyer compete with Leviathan when there is a price ceiling in the market? The state hopes that separate selling will generate internal competition between the partners in the Leviathan reservoir, but how can the partners avoid coordination between themselves when they have to build and operate a joint pipeline system to transport the gas to the Israeli shore? How can competition be ensured between Tamar and Leviathan when Noble Energy continues to operate both reservoirs?
One thing is clear: the gas developers will not accept the state's current proposal. The last thing they need now is to reopen the gas prices in the export agreements, when as of now oil prices have been halved since the letters of intent were signed. Furthermore, in their previous round of talks with the Antitrust Authority director general, the developers discovered that any compromise agreement with the government merely becomes a basis for further negotiation. One month before the elections, that is what will happen with the current proposal.
Published by Globes [online], Israel business news - www.globes-online.com - on February 22, 2015
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