Gas agreement: Noble Energy stays in Tamar and Leviathan

Yuval Steinitz

Energy Minister Yuval Steinitz: This is the best agreement possible; if we delay, the damage will be severe.

The outline gas agreement between the State of Israel and the gas exploration companies, chiefly Noble Energy (NBL) and Delek Group Ltd. (TASE: DLEKG), was released for publication today. It was presented at a press conference held by Minister of Energy, National Infrastructures and Water Resources Yuval Steinitz National Economic Council chairman Prof. Eugene Kandel, Israel Tax Authority head Moshe Asher, Ministry of Finance Budgets Division head Amir Levy, Petroleum Commissioner Alexander Warshavsky, Director of the Natural Resources Administration in the Ministry of National Infrastructures, Energy and Water Resources Yossi Wurzburger, and Prof. Eytan Sheshinski.

Tamar reservoir: Delek will sell its holdings in the reservoir (31.25%) to a third player within six years, and Noble Energy will dilute its holding from 36% to 25%.

The rationale: Noble is the operator, and so cannot be divested of the reservoir, but it will not be the largest shareholder in it.

The criticism: This is one of the clauses in the agreement to which Antitrust Commissioner David Gilo most objected, because Noble Energy will still have cross holdings in the largest reservoirs, Tamar and Leviathan, and Delek's exit from Tamar will not bring about true competition - instead of a gas company buying Delek's holding, it will be bought by a financial investor, giving Delek Group controlling shareholder Yitzhak Tshuva a lucrative exit.

Leviathan reservoir: There will be no structural change in the ownership of Leviathan. In the short term, Noble Energy and Delek will not compete with each other for sales in the Israeli domestic market, but the state will be able to demand this from ten years after the reservoir is developed.

The rationale: Competition between three entities in one reservoir would delay its development, since a conflict of interests would be created. If one company did not sign sale contracts, what interest would it have in developing the reservoir? Once the reservoir is developed, this will no longer be a consideration.

The criticism: The Leviathan reservoir will remain a monopoly, and there will be no competition in the next 15 years.

Karish and Tanin reservoirs: Noble Energy and Delek will sell their holdings in Karish and Tanin within 14 months. If they fail to do so, their holdings will be transferred to a trustee who will sell the reservoirs within four months.

The rationale: The government hopes that a third player will buy these reservoirs within a few months and sign gas supply contracts even before they are developed.

The criticism: The Karish and Tanin reservoirs are small and cannot really compete with the large Tamar and Leviathan reservoirs. Nor is there any certainty that they will be sold within the next few months.

Development and exports

Bringing forward exports from Tamar: The partners will be able to export gas to Egypt in commercial quantities even before the Leviathan reservoir is connected to the shore.

The rationale: This clause is meant to make it possible to expedite the signing of a contract with Spanish company Union Fenosa, which has a gas liquefaction installation in Egypt. Such a contract would yield NIS 3.5-4 billion to the State of Israel.

The criticism: The government previously decided that there could be no exports from the Tamar reservoir until Leviathan was connected to the shore, to ensure enough gas for Israeli consumers. Bringing forward exports from Tamar might reduce the pressure on Noble Energy to develop Leviathan.

The Tamar partners will not receive a tax break on constructing a pipeline for exports to Egypt, but the state will recognize part of a another pipeline (known as "the third pipeline") that will connect the Tamar wells to the production installation. The partners will also have to build an additional gas pipeline from the production installation to Ashkelon.

The rationale: Laying an additional pipeline from the Tamar wells to the production installation will allow the export of gas to Egypt and greater capacity for supply to the Israeli market. Besides this, since the Yam Tethys reservoir cannot be used for storing gas, an additional pipeline will increase the Israeli economy's supply security.

The criticism: Recognizing part of "the third pipeline" will raise Tamar's market share at the expense of the Tanin and Karish reservoirs.

Postponement of the development of Leviathan: The state will allow Noble Energy to postpone the development of the reservoir from March 2018 to August 2019.

The rationale: The regulatory problems that have arisen in Israel in the past few months created uncertainty for the gas suppliers that delayed development of the reservoir, and they have therefore been granted an extension.

The criticism: A delay in developing Leviathan will leave Israel with one reservoir, Tamar, on which it will be dependent for a flow of gas. Besides this, there is no certainty that Leviathan will be developed even by the new target date.

Gas price

The gas companies will be obliged to offer their customers the following two options in future contracts:

One is called "The Israeli Father," meaning that the base price of the gas will be the average price in contracts signed in the preceding quarter, linked to the existing basket. Today's average price varies around $5.30 per MMbtu, linked to Brent (25%), the US Consumer Price Index (40%), and the Israel Electric Corporation (IEC) (TASE: ELEC.B22) production component (35%).

The second mechanism is the best Brent contract in the economy, with ceiling and floor prices. Sources in the industry estimate that the ceiling and floor prices in such a contract will be $7 and $5.2 per MMbtu.

Taxation of exports

In accordance with the recommendations of the Sheshinski committee, exports will be taxed according to a price that is no lower than the average price of gas in the Israeli economy.

The rationale: The state wishes to prevent tax avoidance schemes, and at the same time ensure that Israeli customers will receive a better price for gas than overseas customers.

The criticism: Because of the differences in the linkage mechanisms between export contracts (linkage mainly to the constantly changing oil price) and contracts in Israel (linkage mainly to the US Consumer Price Index and the production component in Israel Electric Corporation's prices), this provision is liable to make the Tax Authority's tax calculations highly complicated.

The gas companies will be able to offer new customers in Israel the same terms as are offered in export contracts.

The rationale: This clause is meant to solve the tax calculation problems arising from the previous clause, since, if the terms are the same, there is no need to calculate price differentials between export contracts and domestic contracts.

Steinitz: This the best possible and most realistic agreement

At a press conference today, Minister of National Infrastructures, Energy and Water Resources Yuval Steinitz said, "The real question that should be asked is what will delay mean? The fact that development of Israel's largest reservoir, Leviathan, has been held up for years is what should make us ask questions. Why has a reservoir discovered in 2010 not started to be developed? If we continue to delay, the damage will be severe. Our energy security will be in danger, and our ability to leverage the reservoir diplomatically and strategically will be put off, as will our ability to supply gas at reasonable prices to factories in Israel, and of course the large tax revenues from the gas - everything is in danger.

"Therefore, after years of delay, for which there were good reasons in government ministries and among the regulators, I decided as soon as I took up my post to invest my energy in reaching a breakthrough and an agreement that will put an end to years of arguments that have hurt Israel severely.

"The agreement we have reached is the best possible, the most realistic. There may be other agreements in imaginary worlds that are better, but we are in the real world and we need the gas to come. This agreement will finally lead to the development of the gas fields and will bring new companies that will search for gas and oil in our economic zone.

"This is a reasonable agreement, but it's a tough one for the energy companies because they have been compelled to accept difficult conditions, the most difficult in any Western country. It's good for the state because it achieves all our goals: NIS 100 billion that will flow to the state in the coming decades, a break-up of the gas monopoly within a few years, and the supply of gas to power producers and industrial factories at reasonable prices all around the country."

Prime Minister Benjamin Netanyahu commented on the gas agreement today before a meeting with Italian Foreign Minister Paolo Gentilloni: "Today, after years of discussions, we will present the outline that we formulated on extracting gas from the sea. It will be presented to all Israeli citizens, before the entire nation. This outline breaks up the gas monopoly and will put hundreds of billions of shekels into the treasury for Israeli citizens' social welfare, health, education and many other needs. Populism is surging around us. Nobody has really examined this outline and now it will be possible to do so.

"I have never given in to populism. I have enacted many reforms that saved the Israeli economy in the face of strong opposition and today, with the perspective of 10-15 years, it is possible to judge how the Israeli economy has jumped forward while other economies that have not enacted these reforms and did not act as we did, and capitulated to populism - how they have been shaken, some to the point of collapse. I can also say that for some of them the gas has remained underground. This cannot be allowed to happen here. I trust in the common sense of Israel's citizens and I expect the public's representatives to act responsibly. We will do our utmost so that the gas is extracted from the sea."

Published by Globes [online], Israel business news - www.globes-online.com - on June 30, 2015

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

Yuval Steinitz
Yuval Steinitz
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