Antitrust Authority disappoints on gas competition

In a few weeks, Antitrust Authority director general David Gilo will make a big announcement. "I have reached a deal with Leviathan's partners, which will allow the entry of another player into the Israeli oil and gas exploration market," he will declare.

Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva, and Noble Energy Inc. (NYSE: NBL), which dominate all of Israel's natural gas fields have agreed to sell some of their new discoveries to other companies, which will compete against the Tamar and Leviathan gas fields for domestic customers.

If Gilo expects that his announcement will be welcomed by other Israeli gas exploration companies, he will be disappointed. Details of the pending agreement, which were published a few days ago, bitterly disappointed gas exploration companies, which had hoped that Gilo would create conditions for real competition in the industry - but that won't happen. The only new company that will have to compete against Tamar and Leviathan will own less than 8% of Israel's total natural proven gas reserves. It will have to invest in building pipelines from the offshore fields to the shore and find an onshore terminal. It will not be allowed to export the gas, or sell oil or condensate discovered at or proximate to the fields.

Most seriously of all as far as we are concerned, the new competitor will only be chosen in two years, long after Tamar and Leviathan will close the deals for their gas to every possible customer in the Israeli economy. Even Israel Electric Corporation's (IEC) option to purchase additional gas will only expire in April 2015, less than a year and a half away.

"Gilo has demonstrated that he knows nothing about oil and gas exploration," an energy explorer said this week. "Who could have believed that the Antitrust Authority director would be the man to hammer the last nail in the coffin of competition in the oil and gas exploration market?"

No antitrust case

The pending result in the agreement with Delek and Noble Energy is very far from the objective Gilo set two years ago. At the time, his aides explicitly said that he intended to break up the two companies' cross holdings in Israel's two biggest gas fields. The two companies together own 67% of Tamar and 85% of Leviathan, which together account for over 90% of Israel's gas reserves. Little imagination is needed to realize that this holding creates substantial added value for the owners. On the basis of its rights in Leviathan, in 2012, Delek was able to finance its share of the development of Tamar, by putting a lien on the rights as collateral for a $500 million loan from HSBC Holding plc (LSE: HSBA; HKSE: 005; NYSE, Paris: HBC).

In September 2011, Gilo announced that he would declare Tamar a monopoly in natural gas supply and Leviathan as a cartel - subject to a hearing. Specifically, he alleged that the 2007 deal in which Delek and Noble Energy acquired 85% of the rights in the exploration permit where the Leviathan field would be discovered, was a cartel. On this point, too, Gilo initially expressed determination, and even hinted that he was prepared to go to court to force Delek and Noble Energy to sell their stakes in Leviathan if no other solution was found to guarantee real competition.

Gilo's aggressive stance had broad public backing. It seemed obvious that Leviathan was a cartel to anyone with an understanding of antitrust law. Legal experts, however, immediately said in response that Gilo had gone out on a far limb and that his case against Leviathan's partners was extremely weak, if there was a case at all.

A classic restraint of trade offense involves business collusion between competitors. The main legal difficulty was to show that Ratio Oil Exploration (1992) LP (TASE:RATI.L) was a competitor of Delek and Noble Energy, because at the time of the deal, Ratio owned no gas field at all; it only held provisional offshore exploration rights where gas fields might be discovered. The Leviathan field was discovered three years after the deal, in late 2010, and only at that point did Ratio become a potential rival of Delek and Noble Energy. Ratio originally sold 75% of the rights to Delek and Noble Energy, but sold an additional 10% when it was unable to secure the $250,000 needed to finance its share of the seismic survey of the prospects.

Gilo's aides said that the legal definition of a cartel was sufficiently broad to include a deal that in retrospect became a cartel, and that the offense was not limited to collusion between competitors in the same industry. "It's like Osem Investments Ltd. (TASE: OSEM) colluding with Coca-Cola not to enter the soft drinks market," said a legal expert affiliated with the Antitrust Agency. "It's like Ms. Cohen of Hadera agreeing with Coca-Cola on non-competition," replied a lawyer for the gas field developers.

Tshuva and his partners' second argument was why the Antitrust Authority said nothing during the entire period, nor said that there was a problem. This argument is also relevant for the two years after the Leviathan discovery, when the conditions that Gilo objected to emerged.

The price of image

The negotiations between the parties, which have lasted for over two years, have mostly gone calmly. The only important turning point was the string of dry holes by Delek and Noble Energy's competitors during 2012: Myra, Sarah, and Ishai. After the hope of new gas producers died, Gilo raised the price for Delek and Noble Energy. The Karish field was consequently added to the deal, which until then only included the Tanin field.

Delek and Noble Energy agreed to pay Gilo's price even though they believed he had no case against them, because declaring Leviathan a cartel could have far-reaching consequences for the companies. This would be an offense that would make possible class-action suits against the members of the cartel for compensation and damages, or even criminal action (an impractical possibility in the case of Leviathan).

"Even if the chances of a cartel being declared were extremely low, it was not zero, and who knows what the final judgment might be," said an antitrust legal expert this week. Furthermore, a court case would greatly delay the project and the signing of the deal with Australia's Woodside Petroleum Ltd. (ASX: WPL). Another consideration for Delek and Noble Energy was their image: it is very important for Tshuva to show that he was allowing a competitor into the market to sell gas that he had discovered. It is important for Gilo to show that he had brought in a competitor, even if he knows that this is no more than a slap on the wrist for Delek and Noble Energy.

Whether pragmatism or cynicism won the day depends on who you ask.

A source close to Gilo said yesterday, "We won't be satisfied with Tanin and Karish. If our demands for competition are not met, the case will go to court."

The main points of the agreement between the Antitrust Authority and Delek and Noble Energy:

Delek and Noble Energy will sell the Tanin and Karish gas fields and a quantity of gas from Leviathan (70 billion cubic meters altogether) within two years;
Delek and Noble Energy may explore for gas and oil in prospects proximate to the gas fields that will be sold;
Delek and Noble Energy will sell the condensate from the fields that will be sold;
The buyer of the fields may not export the gas, and the export rights will be assigned to Leviathan.

Published by Globes [online], Israel business news - www.globes-online.com - on January 8, 2014