Coronavirus set to bring down Israeli electricity prices

Yiftah Ron-Tal, IEC chairman, photo: IEC PR

As energy prices fall, and China cancels liquefied natural gas purchases, the Israel Electric Corp. is snapping up cheap gas on the spot-market.

Electricity consumers in Israel are likely to profit from the plunging global prices for liquefied natural gas (LNG) resulting from the coronavirus outbreak. Sources inform "Globes" that in its latest meeting, Israel Electric Corporation's (IEC) (TASE: ELEC.B22) board of directors authorized the company to buy LNG consignments on short notice in order to take advantage of the unprecedentedly low prices. The sources added that the company had recently contracted the purchase of two LNG cargoes for supply in August at an estimated price of $3.50 per British thermal unit (BTU), but the company now has the option of buying more cargoes at even lower prices. The likely losers are the local gas suppliers, and especially the Leviathan gas field, which is offering IEC gas at $4.79 BTU.

Last week, the Chinese government-owned energy companies announced that they were invoking the force majeure clauses in their contracts, and were halting their purchases of LNG, due to the dramatic and unexpected decline in demand for natural gas in the world's second largest economy. The cause of the decline is the coronavirus outbreak, which is having a severe negative impact on the Chinese economy. The announcement is expected to push down spot LNG prices, which were already at an all-time low because of the warmer-than-expected winter in Asia. In the US, where gas production is rising from year to year, the large gas surpluses drove Henry Hub prices below $2 per BTU. Now, following the halt in shipments to China, a further drop in prices is expected, and gas shipments already on their way to China will be left with no buyers. This is creating an opportunity to buy LNG at especially low prices.

IEC currently pays $6.30 per BTU for the gas it buys from Tamar under an agreement from 2012. The connecting of Leviathan to the Israel shore last December enabled IEC to reduce the quantity of expensive gas that it buys from Tamar by 75%. IEC received an offer from Leviathan to buy the rest of what it needs at $4.79 per BTU. This switch alone will lower the gas rate in 2020 by 3.3%.

Now, however, IEC has a chance to bring the price of electricity down even further by buying LNG instead of what it planned to buy from Leviathan. The option of importing LNG to Israel is a result of an LNG buoy, which can be used for imports from anywhere in the world. The buoy was built 10 kilometers off the Hadera shore at a cost of NIS 500 million to the state budget. The aim of the project was to ease, if only temporarily, the severe shortage of gas after Egypt stopped the supply of gas to Israel through Sinai until gas began to flow from Tamar.

In addition to the buoy, IEC has rented an LNG floating storage regasification unit (FSRU) to turn the LNG back into gaseous form. Since 2012, IEC has used the buoy to import LNG cargoes in deals on the market. IEC buys these cargoes from international customers, some of them occasional customers. LNG tankers meet the FSRU near Cyprus and stream LNG onto it. The FSRU then returns to the buoy, restores the LNG to a gaseous state, and streams it via the buoy to the national gas transportation system.

Attractive prices in the market

When the buoy was first put into operation in 2012, the price of LNG was $18 or more. Because of the high price, the buoy was used only at peak energy consumption times during the summer, when the quantity of gas from Tamar was inadequate to supply the demand.

In recent years, however, LNG prices have gradually fallen, enabling IEC to obtain gas at prices competitive with those of Tamar. Last April, for example, IEC managed to buy one cargo at $4.80 per BTU, and bought a total of 10 cargoes in 2019. The total amount purchased was 800 million cubic meters (IEC's annual gas consumption is around five billion cubic meters).

The attractive market prices are giving rise to the question of why the state is not making more extensive use of the buoy in order to increase competition in the gas sector and lower the price of electricity for the consumer. After additional buoys were planned, including one off the Tel Aviv coast, there have recently been calls for halting the use of the buoy because of its high operating costs, or using it only in emergencies.

IEC said in response, "The IEC board of directors approved the purchase of two LNG shipments in order to maintain the quality of the natural gas on the FSRU and adapt it to the gas supplied from the Israeli gas fields. The board of directors also approved purchases of LNG cargoes on short notice, according to need."

The company added that despite the current low price of LNG, it should be kept in mind that it was likely to change in accordance with the prevailing market conditions.

Published by Globes, Israel business news - en.globes.co.il - on February 9, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Yiftah Ron-Tal, IEC chairman, photo: IEC PR
Yiftah Ron-Tal, IEC chairman, photo: IEC PR
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