Leviathan gas: The good, bad, and downright confusing

Leviathan gas reservoir / Photo: Albatros

The gas from Leviathan came ashore on time, exports look set, but Israeli factories still await hook-up, and no-one even knows who should decide on conflicts with Tamar.

The degree to which the government's gas plan provokes disputes and arouses emotions has become very apparent in recent days. The gas from the Leviathan reservoir, which will provide billions of shekels to the State of Israel, barely began to flow before a media controversy was ignited.

The turbulence is multi-faceted: struggles between tycoons, a legal imbroglio threatening to reach the Supreme Court, enterprises waiting to be connected and receive gas, electricity consumers still paying excessive prices, and the sovereign wealth fund promised to Israelis that is still empty. The roiling gas sector is creating new scandals, but the overall picture is far from clear. "Globes" attempts to make sense of the situation.

Prices will fall, but when?

The main question about gas in the past few days has been whether the gas plan has been breached, and if so, what should be done about it, and who is authorized to decide whether or not it has been breached.

For the first time since it was approved, the controversial gas plan is has created a serious dilemma for the state. For the first time, questions are being raised that the Attorney General, the Israel Competition Authority director general, the Ministry of National Infrastructure, Energy, and Water Resources, and the Ministry of Finance are having difficulty answering. In the background is a real chance that genuine competition will emerge between the Tamar and Leviathan reservoirs that will substantially lower the price of gas for consumers.

It all began with an appeal to Competition Authority director general Adv. Michal Halperin by a group of partners jointly holding 53% of the rights in the Tamar reservoir, who complained that their partners in the reservoir, Delek Drilling and Noble Energy (who jointly hold the other 47% of the rights in the reservoir) were preventing Tamar from competing with Leviathan because of a conflict of interest.

The parties who filed the complaint, headed by Isramco and Jackob (Kobi) Maimon, asked Halperin to intervene and order Delek Drilling and Noble Energy to allow the signing of an agreement allowing Israel Electric Corporation (IEC) to buy gas from Tamar at a reduced price of $4.20 per BTU, instead of the $4.79 price at which it undertook to buy gas from Leviathan. Delek Drilling and Noble Energy say that such intervention by Halperin will violate the provisions of the gas agreement approved by the government four years ago.

Delek Drilling and Noble Energy are preparing a counter-offer based on a retroactive lowering of the price of gas from Tamar. Sources inform "Globes" that Halperin is uncertain about what to do, and has consulted the Attorney General and the relevant government ministries on the matter. The problem is that every day that the director general spends thinking about what she should do, electricity consumers in Israel are paying an excessive price for gas amounting to nearly NIS 1 million a day.

This imbroglio involves a clash of titans between Israel's two large gas reservoirs over a NIS 3 billion contract with IEC. "There is a world war going on between Tamar and Leviathan," IEC chairman Yiftah Ron Tal told "Globes" two weeks ago. World war or not, what is really surprising about this conflict is the fact that it broke out at all, contrary to all expectations.

In order to understand what happened, we have to go back to the period preceding the gas plan. Delek Drilling, controlled by Yitzhak Tshuva, and US company Noble Energy controlled Tamar and Leviathan, the two gas reservoirs containing over 90% of Israel's proven gas reserves. Their holdings included 67.5% of the rights in Tamar and 85% of the rights in Leviathan.

Then-Antitrust Authority director general David Gilo argued that true competition between the reservoirs required cancellation of their cross ownership by Delek Drilling and Noble Energy. The gas agreement reached over Gilo's head, however, created an odd compromise - it left Noble Energy in a key position as the operator of Tamar and Leviathan, but forced it to reduce its holdings in Tamar from 36% to 25%. At the same time, Delek Drilling was forced to completely relinquish its holdings in Tamar, but was given six years to complete the sale of its 31.5% holding. A year from now, Noble Energy will be left with 25% of Tamar, while Delek Drilling will own none of it.

The bottom line is that in a choice between Tamar and Leviathan, Noble Energy and Delek Drilling clearly prefer Leviathan. First of all, they own more of Leviathan (85%). Secondly, they have a tax consideration. Leviathan is a more recent discovery, and was connected to the shore only last week. It will be exempt from the special tax on its profits until 2025. Tamar, the older reservoir, which began supplying gas almost seven years ago, will start paying the tax this July.

The conflict of interest of Delek Drilling and Noble Energy in Tamar has not gone unnoticed by their partners in the reservoir, and the subsurface tension created by the gas plan built up. In late 2018, IEC published a tender for the purchase of gas to the tune of NIS 3 billion by mid-2021. In an attempt to prevent competition between them over the attractive contract, Tamar and Leviathan submitted identical price bids, in the hope that IEC would agree to divide the spoils equally between the reservoirs.

IEC, however, did not agree to split the contract, and decided to award the full amount to Leviathan. The Tamar partners tuned to the courts, but their suit was dismissed.

Isramco and its partners could not accept this painful loss, and made IEC a tempting offer: instead of the gas that IEC agreed to buy from Leviathan at $4.79 per BTU, they offered it gas from Tamar at an estimated price of $4.20 per BTU if IEC would agree to buy a minimum quantity and make concessions to Tamar over unused pipeline capacity. IEC jumped at the offer, but then it turned out that Delek Drilling and Noble Energy were preventing approval of the deal.

This situation made the Isramco group appeal to Halperin and ask her to intervene. The legal argument of Isramco and its partners is that Noble Energy is violating Section 12 of the gas agreement, which bars it from exercising veto power and thwarting deals to sell gas by its partners in Tamar. The Competition Authority was unimpressed by this argument, pointing out that this ban applies only when Noble Energy is the only party opposing an agreement. Since Delek Drilling also opposes the agreement, Section 12 does not apply. The Isramco group's lawyers did not give up, however; they investigated, and found that Delek Drilling was also barred from exercising a veto under the terms of the exemption from the ban on an agreement in restraint of trade granted by then-Antitrust Authority director general Ronit Kan in 2006.

The lawyers representing Delek Drilling and Noble Energy are scheduled to deliver their answer to Halperin in the coming days, but sources close to them say that the offer made to IEC by the Isramco group changes the agreement between IEC and Tamar, the reopening of which is forbidden by the gas agreement. Furthermore, sources inform "Globes" that Delek Drilling and Noble Energy have begun promoting a counter offer to the one by the Isramco group, based on an improved version of a deal to freeze the price of gas from Tamar that was agreed with IEC but that never went ahead. This improved version is designed to make the gas price for the consumer equal to the price in the Isramco offer, but without the requirement to purchase a minimum quantity of gas from Tamar.

Halperin is the eye of the hurricane. On the one hand, the Competition Authority is convinced that the Isramco group's offer is really better for the consumer than the current price from Leviathan. The possibility that a green light for this offer will set off another round of competition and price cuts is real and likely. On the other hand, Halperin is committed to the provisions of the law and the gas plan.

What makes the situation even more complicated is the fact that it is by no means clear whether Halperin has the authority to intervene in the matter by ruling, for example, that the gas plan has been breached. The gas plan was concluded by Prime Minister Benjamin Netanyahu as Minister of Economy and Industry, not by the Antitrust Authority director general. Netanyahu signed the plan in 2015 under Section 52, thereby bypassing the regulator. The problem is that the authors of the gas agreement did not bother to determine who is authorized to decide whether the plan was violated. As Halperin understands it, the same parties responsible for the gas plan are also those who can rule whether it has been violated. It is certainly possible, however, that the Supreme Court will again be asked to say the final word in the matter.

What should ordinary people think about this contest? The consumer's interest is clearly to pay as little as possible, which will increase the pressure on Halperin to decide. Consumers are paying NIS 700,000 too much for gas every day.

Timetables: A complete success so far

Besides the unexpected success in creating competition between Tamar and Leviathan and the chance of a substantial reduction in the consumer price of gas, the gas plan is doing quite well in meeting the timetables set for it. The biggest success was in the development of Leviathan, with the flow of gas beginning on exactly the planned date.

Before the gas plan was approved, many people doubted whether the reservoir would be developed on time, or even developed at all. Others said that the plan had erred by not requiring the owners of Tamar to build another pipeline that would reduce the economy's dependence on a single gas pipeline. The fact that the reservoir works and is streaming gas proves that another gas pipeline was not needed. The private market proved that it was capable of meeting the state's expectations, and doing it without deviating from the budgetary and time frameworks.

What next? The next important milestone in implementation of the gas plan comes at the end of 2021, when Delek Drilling will have to complete the sale of all of its holdings in Tamar. Delek Drilling has so far reduced its rights in Tamar from 31.5% to 22% by selling its shares to Tamar Petroleum. Tamar Petroleum's share, in which trading began in July 2017, has since lost 57% of its value, causing heavy losses to those who hold it. If Yitzhak Tshuva assumed at the beginning that he would have no problem selling his holdings to investment institutions, his assumption now appears far less certain.

Gas exports: Fewer options - a partial success

The contest between Tamar and Leviathan should be viewed in the light of a market in which competition is becoming increasingly intense. 85% of Leviathan's gas contracts are for export to customers in Jordan and Egypt. The fact that most of the gas from Leviathan is designated for export especially enrages the people living close to the production platform, who claim that they will be exposed to health hazards because of gas that will contribute very little to the economy.

The state is also pinning great hopes on exports. Ministry of Finance chief economist Shira Greenberg says that the economic growth forecast assumes that gas exports will contribute 0.3% to growth in 2020. The problem is that expanding exports beyond the contracts that have already been signed is appearing more and more difficult. The small Jordanian market does not need much more gas. The Turkish market is closed to Israeli gas because of political tension. The Egyptian market is capable of absorbing gas, but Egypt itself produces gas, and has a dubious record in honoring agreements once they no longer serve its interests.

The viability of the megalomaniac project of building a pipeline to Europe, which Israel is promoting jointly with Greece, Cyprus, and Egypt, appears to be poor. Gas prices in Europe are too low, and opposition to gas for environmental reasons is increasing daily. As time passes, it appears that the only market in which there are still buyers for Israeli gas is here in Israel.

The domestic market: Industrial plants waiting for gas - a negative rating

The hopes of Tamar and Leviathan are concentrated on the construction of additional gas-fueled power stations. IEC is planning four more such power stations, and the private market is promoting the same number. At some stage, the question will arise of who needs so many gas-fueled power stations. Meanwhile, another sector that wants gas - industry - is not getting it. Only 80 industrial plants in Israel are connected to the natural gas distribution network, out of a target of 370. Some of the plants waiting to be connected signed contracts five or more years ago.

The Manufacturers Association of Israel estimates that dozens more industrial plants are now waiting to be connected to the gas network, which will give them cheaper and cleaner energy for their production processes. This will save money on energy costs, reduce emissions and air pollution, improve industry's ability to compete, lower the cost of living, and reduce dependence on imported energy. A report by the State Comptroller in 2017 on the Israel Natural Gas Authority and connecting consumers to the gas distribution network indicated that the Natural Gas Authority's measures had not systematically addressed the problem of connecting consumers to the gas distribution network, and had not supervised progress in deploying the network as dictated by the distribution companies, which for their part had to cope with bureaucratic difficulties.

The State Comptroller also found that potential consumers who examined the economic viability of being connected to the gas distribution network frequently encountered bureaucratic obstacles, new demands, and unexpected delays in implementation of the plans.

Manufacturers Association sources said that even now, the obstacles mentioned in the State Comptroller's report were still delaying the connecting of industry to the gas distribution network.

Published by Globes, Israel business news - en.globes.co.il - on January 9, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Leviathan gas reservoir / Photo: Albatros
Leviathan gas reservoir / Photo: Albatros
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018