Israel's gas sector counts the cost and waits

Amiram Barkat

The new government must give top priority to making a decision about the ownership structure of Israel's gas fields.

The future of Israel's natural gas exploration and production industry will be at the top of the pile of the economic decisions that the new government will be required to take. This will be an urgent decision because each day's delay in its implementation costs money. Entrepreneurship is the art of making the impossible possible. Regulation is the art of making the possible impossible - this saying was probably made with the Israeli natural gas market in mind.

The development of Israel's gas fields and natural gas sector, and private electricity production as well, has been frozen following a decision by the head of the Israel Antitrust Authority Prof. David Gilo in December 2014.

Gilo decide to retract a compromise agreement with the Tamar and Leviathan owners Delek Group Ltd. (TASE: DLEKG) controlling shareholder Yitzhak Tshuva and US company Noble Energy Inc. (NYSE: NBL). The agreement was designed to clear up the suspicion that Delek and Noble formed a cartel by purchasing the license to the rights to the Leviathan field in 2007. Gilo spent two years in talks with the developers to reach the compromise agreement, then a further nine months to decide that he had made a mistake and that he would not be able to defend the agreement in court. The three years of painful learning that we have paid for are probably just the start.

In the next stage, Gilo will probably have to again decide whether to open court proceedings against the gas developers in order to force them to part with Leviathan or try and reach a new compromise agreement. In the first instance there would be a delay of years in developing the field. In the second instance there would 'only' be a delay of six months.

For this delay there is a very clear and expensive price tag. Gas export deals worth billions that have been signed by Delek and Noble Energy with major Jordanian and Egyptian customers are disintegrating as the customers realize that there is nobody to talk to and they are rushing off to find alternative sources of supply. The process in which Israeli industry is converting to natural gas has ground to a halt. The developers of the new private power plants cannot move forward without holding agreements to buy the gas required to operate the plants. The timetable for developing the huge Leviathan field will be postponed for at least two years and the billions in tax revenues that the State had hoped to earn by 2018 will also be delayed.

The growing damage intensifies the pressure on the government to take a decision. There is already a "regulatory document," a position paper that was prepared by the Ministry of Finance, and which has the unique advantage in that all the relevant regulators (even Gilo) have agreed to it. The document, as is the way with committee documents, presents a new roadmap for Israel's gas sector, which is a complex plan, difficult to understand that ensures limited competition while setting ceiling prices for gas, but only for new agreements.

In the face of this document, the gas developers are not presenting a united front. Delek Group controlling shareholder Yitzhak Tshuva is being more flexible the more he has his back up against the wall. But in contrast his US partners are only toughening their stand, and threatening international arbitration, which would cause Israel irreversible damage.

The question being posed for the new government is about the way ahead: what is the correct way to develop Israel's gas sector. The Sheshinski Committee chose a path of cooperation with the developers. The State ensured for itself a majority percentage in dividing up the profits and encouraged the developers to move forward quickly and start making a profit.

The social lobby in the Knesset raised its voice and claimed that the ordinary citizen will be required to pay Tshuva (and the ministry of finance) an excessive price. Government officials began to zig-zag and the result was that Australian company Woodside, the only hope of creating real competition against Noble Energy, fled Israel as fast as it could.

Today Israel stands at a crossroads. Should it continue along the old route and take flak from the social lobby? Should it choose the competitive route and split the monopoly and hope that somehow genuine competition will be created here, or start out on a third way and impose supervised prices.

Meanwhile, a storm is raging on global gas markets. The price of liquid gas is plunging. Energy companies are reducing their operations and cancelling major projects. This storm can provide support winds for the government, if it knows how to put up the sails in the right direction.

Published by Globes [online], Israel business news - - on March 16, 2015

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

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018