Energy market skeptical on antitrust proposal

Tamar

Senior industry source: The prices dictated by the state will make it hard for Israel to find a buyer for the Tamar field.

Two months after the Israeli Antitrust Authority director general ordered the dissolution of the Leviathan natural gas partnership, the state today presented a compromise proposal for the gas industry to the gas developers: Yitzhak Tshuva's Delek Group Ltd. (TASE: DLEKG) and US company Noble Energy. An inter-ministerial team from the Ministry of Finance; the National Economic Council; and the Ministry of National Infrastructure, Energy and Water Resources presented the proposal, which will also be presented to senior Noble Energy executives scheduled to visit Israel next week. The state's solution for the break up of the gas monopoly caused a big stir in the gas sector.

"It will be hard to find a purchaser to by Delek Group's holdings in Tamar. Furthermore, it won't be easy to find a buyer for the reservoir at the price level the state is willing to allow over the next five years," a senior gas industry source told "Globes." The source also referred to Israel Electric Corporation (IEC) (TASE: ELEC.B22), calling it "the biggest gas consumer," which he said was a victim, because it was paying an estimated $5.75 per energy unit, while the conventional electricity producers could now sign an agreement at a maximum price of $4.80. He said it was true that under the existing option, IEC could already choose to buy gas from several suppliers, but added that it would be several years before this was the case.

Mathias Rigas, CEO of Cypriot company Energean, which last June signed an agreement with the partnership in the Myra and Sara gas exploration licenses to serve as an operator, also responded today, saying, "We're still interested in doing business in Israel, but we'll have to be more careful and meticulous now. We want to start doing business in Israel and also become active in other exploration licenses, but we'll have to wait and see how things develop, and decide only then." Rigas added, "There's no doubt that the Israeli government has changed the rules of the game. Certainty is the most important thing for investors. Any such change is a risk that we have to take into account, and if the risk eventually turns out to be too great, it may no longer be worth drilling in the gas license prospects."

Choosing between several suppliers

The result being sought by the state is a situation in which new customers and customers with an option in their gas contract to buy an additional quantity of gas can choose between several suppliers, in contrast to the current situation, in which they can buy from only one supplier: the Noble Energy-Delek Group partnership. The state has therefore created competition between the five controlling players in three main reservoirs: one in Tamar, one in Karish and Tanin, and three in Leviathan.

The state is also seeking to intervene in the developers' prices over the next five years. While creating competition, the state tried to provide regulatory certainty. The proposal therefore includes solutions for a range of unsolved questions in relations between the state and the developers the question of additional gas exploration licenses, taxation problems, and storage of gas in the Yam Tethys reservoir.

The final proposal will be submitted for government approval, and if the companies do not agree to it, a legal proceeding pitting the state against the partnership in the Leviathan reservoir will begin. The road to achieving a final result, which is slightly more complicated, is as follows: Delek Group will sell all its holdings in the Tamar reservoir to a third party, and Noble Energy will also have to sell a certain percentage of its holdings, but will remain active in the reservoir. The percentage the Noble Energy will have to sell is unknown, and depends on many factors.

What is definite, however, is that that in the Tamar reservoir, Noble Energy will have no influence on the sale of gas to the local economy. The amount of available gas is estimated at 100 BCM, consisting of the quantity of gas for which no contract has yet been signed, and the quantity of gas that will be used as an option in the gas contracts that have already been signed. The contracts with an option to purchase an additional quantity of gas include, for example, the contract with IEC and the contracts with private power stations Dalia, OPC, and Dorad.

In other words, the 100 BCM in the Tamar reservoir is "competitive," and will be sold to the local economy by Isramco Negev 2 LP (TASE: ISRA.L) and a third player. Noble Energy will no longer have any influence on this gas. In the Leviathan reservoir, the state has found a different format for generating competition, with the overall goal being to ensure that development of the reservoir will not be delayed, and that the gas will flow quickly to the local economy.

According to the proposal, each of the partners will therefore be able to retain its holdings. The way to create competition in this reservoir is through a separate selling model, meaning that each of the partners will negotiate with Israeli customers for its relative share of the gas already in the immediately future.

This method will create three different suppliers from the Leviathan reservoir. Delek Group and Noble Energy will have to sell their holdings in the Karish and Tanin reservoirs (the Alon A and C exploration licenses) within 12 months. Delek Group and Noble Energy's export quotas in these reservoirs will be added to their export quotas in Leviathan, thereby enabling them to increase their gas exports from the main reservoir, but only after Tanin and Karish are developed and hooked up to the shore. The purchaser of these two reservoirs will also receive the old exploration license, Alon B, and if gas is found in it, will be able to exports some of the gas according to the government's rules for gas exports. Beyond the proposed changes, the state has decided to intervene in the price of the gas sold by the developers over the next five years.

This will last until the gas sector is competitive enough to eliminate the need for intervention. Under the proposal, a different maximum price will be authorized for different electricity producers. The conventional electricity producers will enjoy the lowest price ceiling: $4.80 per MMBtu. Industrial electricity (line generation) producers will pay a maximum of $5.10, and industrial enterprises and marketers on the distribution grid will pay a maximum of $5.20. IEC currently pays Tamar $5.75 per MMBtu, while smaller gas consumers pay $6-7 per MMBtu.

Published by Globes [online], Israel business news - www.globes-online.com - on February 19, 2015

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

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