What does Israel Electric Corp actually pay for gas?

Hedy Cohen

If Israel wanted to assure its natural gas flow, it might be better off developing Karish instead of paying for an offshore LNG terminal.

The gas monopoly is charging Israel Electric Corporation exorbitant rates for natural gas,the press and media, inlcuding this site,reported on Wednesday after it was revealed IEC imports liquefied natural gas from Trinidad for14% lessthan it pays for gas from the domestic Tamar reservoir.

But that price does not include the costs of the infrastructure which allows for the gas import which totals hundreds of millions of shekels each year. And no one said a word when IEC was paying 4-8 times more than the Tamar rate.

The demand for the import of LNGstarted after the shortage of gas in Israel during 2011-2012 following the disruption of gas supplied from Egypt and the depletionof the Yam Tethysreservoir.

It led to the constructionof a buoy terminal some 10 kilometers west of Hadera and the hiring of an LNG tanker from Excelerate Energy.

IECbuys LNGfrom international companies like British Petroleum, which is transferred to the tanker.When no gas is flowing from Tamar or the grid cannot supply the demands of the domestic market, the ship can gointo operation within minutes to produce gas and send it ashore. The LNG and its offshore facility are the backup plan for the Israeli market.

The fact that only one reservoir Tamar currently supplies the Israeli market through one pipeline, and the unavoidable delay in the development of Leviathan due to the High Court of Justiceruling, only increases the importance of that backup plan.

As Globes revealed in March of last year, IEC has already considered the building of a second buoy in southern Israel, to allow a second LNG terminal to connect to the grid.

But the backup plan has a price and it is significant. On Wednesday, it was reported IEC paid BP $4.9 per mmbtu in the most recent transaction. The price is significantly lower than the rate IEC pays the Tamar partners: $5.6 per mmbtu. But the price does not reflect the overall cost of relying on that source of energy.

In order to open the LNG tap, state-run Israel Natural Gas Lines had to invest $150 million to build the offshore facility. IEC is alsopayingExcelerate $400-450 million for 5 years ending in October 2017. Last November, IEC asked to extend the agreement and received the permission of the Electricity Authority to prolong itfor two additional years, until 2019.

Dozens of millions a year

The price IEC pays the processing facility is not tied to the amount of gas it produces or its hours of operation. Whether the ship worked for two months or one hour IEC still pays Excelerate tens of millions of dollars a year.

In 2013, IEC purchased ten tanks of LNG from BP for $50 million per container. But during that year it only required half the tanks 0.51 BCM, selling the rest on the international market at a loss of $24 million.

In 2014, IEC only consumed 0.06 BCM of LNG because of the steady flow of supply from Tamar. According to the most recent IEC reports, it purchased 0.3 BCM of LNG in 2015. Sources inform Globes the company only consumed about half of that amount.

In other words, the LNG offshore facility supplies IEC with verysmall amounts of gas, totaling 0.5%-1.5% of the fuels used by IEC to produce electricity.

What, then, is the real price IEC pays for its LNG? A look at the companys reports provides an answer. The 2014 financial statements show it cost IEC NIS 1.36 to produce one kilowatt-hour from LNG a price which reflects a high cost of $45 per mmbtu. But it pays a much lower $5.4 per mmbtu for the gas it acquires from Tamar. Thus, there is an eightfold difference in the price.

In 2015, the price of production from LNG fell to $24 compared to the relatively high price of nearly $6 from Tamar, but that still meansa fourfold difference.

These prices include the total costs the company pays for its backup plan for both the tanks and the tanker. If we exclude the cost of the infrastructure and look merely at the price per tank, IEC paid $20 per mmbtuunit in 2014 and $7in 2015. For its most recent tanks, it paid the aforementioned $4.9 per unit.

Why does the price keep dropping? There are severalreasons, first and foremost the drop in oil prices over the past year. While the price of gas IEC pays Tamar is tied to the USConsumer Price Index, the LNG tanks are purchased in spot deals. These transactions reflect global oil prices, leading most deals to move around the $4-5 per unit range.

Another reason is thatglobal energy giants likeBP have surpluses of LNG, mostly due to a relatively warm winter. Once the gas is liquefied, it cannot be stored for long as it loses 2% to evaporation each week forcing companies to offload it atlower prices.

To sum up, IEC made a smart investment decision in exploitingcurrently low energy prices to purchase discounted LNG tanks, but the prices in these transactions cannot be compared to the rates of long term deals like the one signed with the Tamar partners.

Beyond that, there are more options available to the government if it wants to assure Israels energy security. If we look at the $700 million the IEC pays over the years for the LNG tanks and offshore facility, and we take into account that it will not get more than 1-2 BCM of gas from its investment, then it may be better for the state to build another pipeline to Tamar or develop the Karish and Tanin fields, which are sitting on 80 BCM, itself.

Published by Globes [online], Israel business news - www.globes-online.com - on April 10, 2016

Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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