Antitrust Authority fends off gas decision criticism

David Gilo

The Antitrust Authority says the cost of a monopoly is greater than the cost of delaying Leviathan's development.

The Antitrust Authority has been in the eye of the storm since its director general Prof. David Gilo announced that he was withdrawing the draft settlement with the Leviathan natural gas partners, allowing them to sell two small reservoirs and continue their ownership of Tamar and Leviathan, which contain 90% of Israel's natural gas reserves. The Antitrust Authority has been preoccupied in recent days with rebuffing the many criticisms made of Gilo. Its position on the arguments against it can be summarized as follows:

Argument: The declaration of an agreement in restraint of trade and the expected resulting legal struggle will delay development of the Leviathan reservoir by years.

The Antitrust Authority director general is willing to reach a settlement based on the sale of Delek Group Ltd. (TASE: DLEKG) and Noble Energy's rights in the Tamar reservoir. In the framework of such as settlement, Gilo is willing to guarantee that Delek Group and Noble Energy's rights in Leviathan will not be affected - a promise that will make it possible to avoid any regulatory delay in developing the reservoir and the completion of the commercial negotiations for signing gas sale agreements. The Antitrust Authority believes that if Delek and Noble Energy decide to reject the director general's offer, they should be regarded as deliberately delaying development of the reservoir, with all the consequences involving meeting the terms of the lease obtained from the state, in which they undertook to develop the reservoir as soon as possible. The Antitrust Authority blames Delek Group and Noble Energy for any uncertainty, and offers a unique tool - an exemption from the ban on restraint of trade by guaranteeing Delek Group and Noble Energy that no proceedings will be taken against them. Since Delek Group and Noble Energy preferred not to request such an exemption when acquiring the rights to what later became the Leviathan reservoir, they have only themselves to blame.

Sources close to Gilo argue that even if Delek Group and Noble Energy cause a delay in development of the reservoir, the consequences will not be so terrible, among other things because the demand for gas is rising more slowly than expected. While the Tzemach Committee predicted that the Israeli economy would consume 501 BTU of gas by 2040, this estimate has now been revised to 470 BTU.

Argument: Three years were required to formulate the consent decree; why was this decision taken now?

Sources close to Gilo assert that the violation of the law was discovered only three years ago, upon which the Antitrust Authority entered into a long and complex hearing procedure. The Antitrust Authority took seriously the threats by Delek Group and Noble Energy to delay the development of Leviathan, and therefore preferred to concentrate on finding a solution that would make competition possible and prevent damage to the economy liable to result from lengthy litigation. The draft agreement was presented for a public hearing, and as time passed, more data became available to the Antitrust Authority, which, together with comments from the public, tilted the scales against the agreement. Even if the Antitrust Authority believed when the draft agreement formulated with the Leviathan partners was signed that the agreement was of some use in bolstering competition, and that the consequences of delaying development of the reservoirs by Delek Group and Noble Energy were very significant, it had been realized in recent weeks that the settlement would bring about no real competition, and the price of failing to open the gas sector to competition was greater than the price of delay in the development of the reservoir.

Argument: No one will buy Tamar or Leviathan. The large companies that came Australian company - Woodside and British Gas - left in a hurry.

Sources close to Gilo argue that the current case is different, because gas is already flowing from the Tamar reservoir, and all the risks incurred in exploration, development, and finding customers no longer exist. The investment is a safe one: an active and developed reservoir, almost the entire gas contents of which have already been sold. It is a cash cow that yields a handsome return on capital, with almost no risks. To this can be added the assumption that the rights in Tamar will be sold at a discount, due to the fact that the sale proceeding is limited in time. It is true that the large entities in Israel lack the billions needed to finance the deal (the reservoir's value is estimated at $12 billion), but there are quite a few investment entities around the world for which Tamar is an interesting investment. The weak point in the Antitrust Authority's position is the possibility that other regulators will decide to impose price controls. In that case, the Antitrust Authority also admits, the attractiveness of the deal will be seriously affected.

Argument: Foreign investors will not come here, due to regulatory uncertainty.

Sources close to Gilo argue that every Western country has antitrust legislation, and that the US also understands that. Certainty is necessary, but that does not mean that the law should not be enforced.

Argument: Experience proves that a duopoly is not necessarily better for the consumer. Therefore, even if an international company buys one of the two reservoirs, consumer prices will not necessarily be lower.

The Antitrust Authority assumes that a duopoly will indeed lower the price, and points out that when Israel bought gas from both the Tamar reservoir and from Egypt, the prices were lower. While Israel Electric Corporation (IEC) (TASE: ELEC.B22) currently pays $5.70 per mmbtu, the price of gas when there were two suppliers - the Yam Tethys reservoir and Egyptian gas - was $4.25-$4.75 per mmbtu.

Published by Globes [online], Israel business news - www.globes-online.com - on January 4, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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