The decision taken today by Antitrust Authority director general David Gilo is correct: narrow and purely legal logic, which is supposed to dictate the regulator's decisions, does not allow a situation in which two private entities own cross holdings controlling interests in Israel's two main natural gas reservoirs. This decision should have been taken a long time ago, perhaps during the term of Ronit Kan, the preceding regulator.
This is where the tough questions come in, however. Why has Gilo changed his mind at such a late stage, and on such short notice? Why did it take him two years to make a decision, and another year to retract it? Will liquidating Tshuva and Noble Energy's holdings bring about competition in the electricity sector and lower consumer prices, or will it cause much greater economic damage? Did Gilo behave irresponsibly by ignoring the far-reaching effect of his decision on the economy, state revenue, and even Israel's foreign relations? Did he give in to popular pressure and act out of narrow concern for his public image?
In September 2011, the Antitrust Authority announced that it had begun to examine suspected restraint of trade involving the Leviathan natural gas reservoir. It was suspected that the Noble and Delek Group Ltd. (TASE: DLEKG), which controlled the Tamar gas reservoir, had not requested an exemption from restraint of trade regulations in 2007, when they acquired 85% of the rights to the gas exploration licenses in the area where the world's largest natural offshore gas reservoir was discovered three years. This suspicion was no trivial matter: in the deals for acquisition of the rights in the licenses where the Tamar and Mary B (Yam Tethys) reservoirs were later discovered, requests for exemptions from restraint of trade regulations were filed and approved. What should have been queried was why no such request was filed in the Leviathan deal, when Ronit Kan was director general. Gilo, who took up his position in April 2011, had to deal with the difficult legacy that Kan left him.
Already when he announced the beginning of his inquiry, it was obvious to Gilo what the correct result was. In legal language, this is called splitting off the cross holdings of Noble Energy and Delek Group in the Tamar and Leviathan reservoirs. In practice, it means that Tshuva and Noble will have to choose whether to sell their holdings in Tamar or their holdings in Leviathan, just as "Globes" reported three years ago.
Gilo sought to achieve this result through a compromise agreement, but made it clear that in the absence of any alternative, the last result would be a forced sale through an order issued at the request of the Restrictive Trade Practices Tribunal. For two years, Gilo and his men conducted lengthy businesslike negotiations with the lawyers of Noble Energy and Delek Group, led by Adv. Zvi Agmon. During the negotiations, it became clear to Gilo that his original goal could not be achieved. In its place, he formulated a compromise settlement based on the sale of two smaller gas reservoirs, Karish and Tanin, which together with an additional quantity of gas from Leviathan, would create a block of 70 BCM - an amount equal to Israel's gas consumption over 10 years (at the current level of demand).
Gilo did not conceal his opinion that this compromise was not an ideal solution. "I would prefer to get Delek Group and Noble Energy out of Leviathan immediately, thereby facilitating immediate competition between Tamar and Leviathan," he said in a discussion at the Knesset Economic Affairs Committee a year ago. "I have no legal authority to physically remove them from there. What I can do is declare that the fact that they are entering there is a violation. In such proceedings, only a court is authorized to issue an order ordering them to leave there physically. That requires a very complicated and lengthy legal hearing, which the parties have an interest in prolonging. Even at the end of the long legal hearing, if we win, it will be necessary to find a buyer for Leviathan to take Noble Energy and Delek Group's place - a proceeding that will also take a long time."
In internal discussions, the government predicted that the confrontation with Noble Energy and Delek Group would delay development of the Leviathan reservoir by five years, according to the following rough calculation: one year for the parties to complete the hearing procedure and get to court and two more years for the court hearing and appeal of the ruling to the Supreme Court, only after which would the process for the sale of the reservoir begin a process that would take at least two additional years. Such a delay could cause many billions of dollars in direct economic damage, and additional diplomatic damage, damage to Israel's credit rating, and damage to Israel's image among foreign investors.
Why Gilo changed his mind
For an entire year, Gilo defended the compromise arrangement in every forum to which he was invited. He suffered the slings and arrows of popular opinion, which has no patience for regulators acting "for the benefit of the tycoons" against "the public good." Last Thursday, the Antitrust Authority was still talking about submitting an agreed order to the court. Then, on Sunday, the developers' lawyers were summoned to an urgent meeting the following day, with the explanation that "The director general is reconsidering the compromise agreement."
What happened to Gilo over the weekend? It is hard to say. At the Antitrust Authority, someone well acquainted with Gilo is convinced that the violent criticism in the Knesset and the media affected him. No less important was the position of the professional echelons in the Antitrust Authority, headed by legal advisor Ori Schwartz, and his colleague, Deputy Attorney General Avi Licht. Another legal figure mentioned in this context is Public Utilities Authority chairperson Orit Farkash Hacohen, who regards herself as a candidate for the next Antitrust Authority director general. She has consistently expressed "correct" opinions that have won her more than a little praise from Labor Party MKS Avishay Braverman and Shelly Yachimovich. The economists, on the other hand, were not in on the secret. Ministry of Finance director general Yael Andorn, for example, held urgent conversations yesterday in an attempt to understand the consequences of the dramatic development.
Another consideration that probably played a role in the background was early elections, which have now made Gilo immune to pressure from politicians. The economic leadership in the Ministry of Finance and the Prime Minister's Office is about to finish its term, and even frenzied telephone calls from senators in Washington did not manage to convince Netanyahu to exert pressure on Gilo.
Will the gamble succeed?
It was hypothesized today that Tshuva would agree to sell his holdings in Tamar in order to remain a partner in Leviathan. In my opinion, even if this is a real possibility, rather than just media spin, it still does not solve the problem. Noble Energy, the US company that discovered and developed the gas reservoirs in Israel, is unwilling to discuss compromise proposals. The company has already swallowed one bitter pill in the Sheshinski Committee, when it discovered that the Minister of Finance's verbal promises were worthless. They will not remain quiet this time in the face of maneuvers by the Israeli regulator. Noble Energy has an agreement dated March 27 and signed by Gilo, and it plans to fight for its rights in the courts, whether in Israel or overseas.
Such a widely publicized legal dispute between Israel and its largest foreign investor to date, except for Intel, will not only severely damage the country's business image. Whether you like it or not, Noble Energy holds Israel's entire natural gas sector in its hands. Without it, there is no one to operate the gas platforms, pumps, and control rooms.
Yachimovich, who, to our ill fortune, has become a guru for gas affairs, is sure that foreign investors will swarm in to take Noble Energy's place. "The economy will suffer no damage as a result of Gilo's decision," she stated today with her typical demagoguery. The way it looks now, however, the economy will be the big loser from Gilo's decision, at least in the short term. Gilo has taken a gamble with the economy's future, but has won a place in the grand society of regulators who are not about to let anyone put one over on them. The consumer may pay a lot more for his electricity in the coming years, but who cares about that?
Published by Globes [online], Israel business news - www.globes-online.com - on December 23, 2014
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