On Friday, Petroleum Council member Yonatan Friedman resigned because the council is a toothless entity that does not participate in important decisions by the Ministry of National Infrastructures. Friedman, an advisor to former Minister of National Infrastructures Uzi Landau, was furious that the council was not updated about nor participated in the process for granting the license note for Leviathan.
The Oil Law requires obtaining the Petroleum Council's approval for transferring even a tiny fraction of valueless royalties or licenses, but the council's members learned about documents defining the rights and duties of the partners in Israel's largest gas field for the next 30 years from the media. Ministry officials told Friedman to read the Oil Law (5712-1952), which states that the Petroleum Council is only a consultancy body to the minister.
Nonetheless, criticism of the Oil Law can be found among Ministry of National Infrastructures' officials, who say that without an up-to-date law and regulations, the ministry has become a weak and passive body that cannot promote a plan or clear vision for the future development of Israel's oil and gas industry.
The license to the partners in Leviathan - Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG), and Ratio Oil Exploration (1992) LP (TASE:RATI.L) - was granted after marathon talks that lasted right up to the morning it was issued. The talks faced a deadline: on March 27, the partners were due to sign the farm-out agreement with Australia's Woodside Petroleum Ltd. (ASX: WPL) for the sale of 25% of the license. That agreement was not signed.
It is much less well known that the deadline was artificial. Even if the agreement had been signed, the Oil Law gives the Petroleum Commissioner the right to wait two years from the announcement of a discovery before issuing a license. But Petroleum Commissioner Alexander Varshavsky preferred to cut to the chase and close the matter. During the critical meeting in the negotiations, he took a pragmatic position that sometimes contradicted the position of the ministry's legal advisers when he thought that they were insisting on immaterial matters.
The license that was published was praised by Ministry of National Infrastructures critics, but even the officials who wrote the license admitted that the government made concessions to Leviathan's licensees on substantive issues, because it lacked the legal authority to impose its will.
Hewers of wood and drawers of water
One of the innovations involved the development of an Israeli oil and gas industry. $3.5 billion was invested in developing the Tamar gas field, but the engineering work went to foreign companies because Israel has no oil and gas services industry. In a modern version of "hewers of wood and drawers of water", Israeli mainly provided catering, security, and helicopter services.
$5 billion will be invested to develop the first stage of Leviathan alone. A comprehensive study by the Ministry of National Infrastructures found that there is a global norm of requiring energy companies to give preference to local companies. The result was a chapter in the Leviathan license devoted to the development of a local oil and gas services industry. The plan is based on three pillars: guaranteeing equality and even preference for Israeli companies in tenders; a commitment by the developers to buy and promote Israeli knowhow and hire Israelis at the facilities that will be built.
As expected, Leviathan's licensees objected to this chapter, on the grounds that it was in their own interest to promote a domestic oil and gas industry and the demand was unnecessary. Unfortunately, the authority to require energy companies to buy local content appears in the Gas Industry Law, but not in the Oil Law, which was enacted in 1952. The Ministry of National Infrastructures' legal advisers therefore believed that on such a substantive issue as encouraging a local oil and gas industry, the Petroleum Commissioner did not have the legal authority to enforce his plans.
The ministry's legal advisers preferred to focus on extracting a $100 million bank guarantee from Leviathan's licensees, and leaving the Petroleum Commissioner with only a promise to promote an Israeli oil and gas industry. The ministry now hopes that the creative and innovative Israeli market will close the gap and gain a foothold in the development of the country's gas fields without government aid.
The Petroleum Council said in response, "The Petroleum Council is an advisory council that operates under the Oil Law, fulfilling its duties set out in the law and advising the minister and the petroleum commissioner on matters mentioned in the law. Granting a holding is not one of the issued mentioned in the law. The council convenes often enough, in accordance with the requests submitted to it."
Published by Globes [online], Israel business news - www.globes-online.com - on April 27, 2014
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