Israel Electric set to sign new Tamar gas deal

Tamar field Photo: Albatross

The gas price in the new agreement has been lowered to $4.30 per BTU for 18 months.

Israel Electric Corporation (IEC) is close to signing a new agreement with the owners of rights in the Tamar natural gas reservoir. The gas price in the new agreement has been lowered to $4.30 per BTU for 18 months, after which the agreement with IEC will be renegotiated. In effect, the agreement renews the competition between the Tamar and Leviathan reservoirs, because it enables IEC to buy gas from Tamar at a lower price than it obtained from Leviathan. The agreement is also an achievement for the Public Utilities Authority (Electricity), because it improves the terms in comparison with the previous agreement between IEC and Tamar, which the Public Utilities Authority refused to approve.

Leviathan won out over Tamar in a tender published by IEC for the purchase of variable quantities of gas beyond the minimum that it is obligated to buy from Tamar. The holders of rights in the two reservoirs offer the same price - $4.79 per BTU, but IEC management preferred Leviathan to Tamar.

If the new agreement is approved, IEC will be able to purchase an additional quantity of gas (beyond the minimum amount) from Tamar at 10% less than the price obtained in the tender won by Leviathan. The total amount of gas that IEC will be able to purchase from Tamar at a discount until 2021 is likely to reach 2-2.5 BCM. The resulting cumulative discount on the electricity rate (compared with the regular Tamar contract price) will reach NIS 300 million. The principles of the emerging agreement were presented to the IEC board of directors last week, and will be contingent on approval by the Government Companies Authority and the Public Utilities Authority (Electricity).

The Public Utilities Authority thwarted a previous agreement reached by IEC with Tamar in February this year. This agreement froze the price of gas for two years in exchange for releasing the capacity of the gas pipeline, which was reserved for IEC, but had not actually been used.

The price of gas from Tamar is the most sensitive issue in the gas sector. IEC currently buys almost all of the natural gas that it uses to produce electricity from Tamar under an agreement dating to 2012, so the price of gas in this agreement has a major effect on the electricity rate paid by consumers. Beyond the base price stated in the agreement, which is now considered very high, great criticism was aroused by a unique formula that linked the price of gas to the US Consumer Price Index. This formula increased the price of the gas purchased by IEC from $5.30 in 2013 to $6.10 in 2018, at a time when global oil and gas price were falling precipitously. The State Comptroller estimated that the price of gas and its linkage formula would cost Israeli consumers NIS 8 million extra in costs over the 15-year contract. The state tried to repair a little of the damage by setting a roof price in the gas plan.

In the February agreement, the partners in Tamar agreed to freeze any further increase in the price of gas beyond $6.10 per BTU in 2018 and $6.30 in 2019, plus further increases later until 2021, when the price in the agreement is due to be renegotiated and could fall by 25%. When the agreement was signed in February, IEC said that the freeze would save the company $85 million, resulting in a lowering of the electricity rates. The Public Utilities Authority (Electricity), however, which examined the agreement, found a number of problems with it, especially a clause stating that the freeze is not guaranteed, but will be discussed retrospectively during the negotiations on revising the price in 2021.

IEC said in response, "No detailed plan was presented; it was a general announcement of management's possible ideas for revising the agreement, which it plans on trying to promote with all the Tamar partners."

Published by Globes, Israel business news - en.globes.co.il - on September 23, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Tamar field Photo: Albatross
Tamar field Photo: Albatross
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