Last Wednesday, the state presented Delek Group Ltd. (TASE: DLEKG) and Noble Energy with the outline of a compromise for establishing a structure for the natural gas industry. The result the state is trying to achieve is the creation of five or more gas suppliers, mainly by splitting the partnership in Leviathan into three different suppliers. Under the proposed model, the three partners in Leviathan - Delek Group, Noble Energy, and Ratio Oil Exploration (1992) LP (TASE:RATI.L) - will each contract separate agreements with customers in Israel (separate selling).
Today, however, only a few days later, government sources revealed that the proposal is not final, and that the model with separate marketing from the Leviathan reservoir will not work. They assert that the state already realizes that it will have to retract this demand. "It will not work, for several reasons," claims former Israel National Gas Authority chief economist Miki Korner, currently an independent consultant in the field. "There will be one gas pipeline connecting Leviathan to the shore, so the three suppliers will have to coordinate all the technical details between them in advance, such as a place to reserve in the pipeline for each company.
"But it's more complicated than that, because the gas agreements are complicated, and include many clauses, such as the maximum daily quantity of gas, the minimum daily quantity, the maximum monthly quantity, etc. How exactly will three suppliers coordinate all these details, while at the same time competing with each other? It works in a country with many suppliers, many customers, and extensive infrastructure. In Israel, the separate selling model will add only headaches."
Korner adds another difficulty: "The state's whole idea was to encourage competition in the domestic market, so it proposed that in agreements with customers in Israel, the three companies in Leviathan will compete with each other, but exactly what domestic economy exists in Israel? The gas for consumers is already being supplied, and will be supplied, mainly from Tamar, and at most 2-3 BCU a year will be supplied from Leviathan. So three suppliers will compete for this amount? That's ridiculous."
If the state does decide to promote a separate selling model for Leviathan, the partners in Leviathan will have to sign what is called a balancing agreement, which the Antitrust Authority director general will have to approve. Such an agreement is signed in other places in cases of separate selling of oil, and is designed to arrange cases in which one of the partners sells more or less barrels of oil from its shares in the field. In a case like this, the companies conduct their accounting with each other until, they reach the correct balance between the number of barrels of oil sold by each company and its share of the reservoir. In the case of gas, on the other hand, such an agreement is less common, due to the complexity of gas contracts, which are signed for 15 years.
Published by Globes [online], Israel business news - www.globes-online.com - on February 22, 2015
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