Who will save us from the gas duopoly's stranglehold?

Amiram Barkat

As Chevron and Delek thwart IEC's attempt to buy gas more cheaply, the regulators have proved impotent.

1. The threat

"For the sake of good order, please confirm that today's order for gas is on the terms of the gas agreement of 2012, otherwise Noble will not be able to supply it." That is what a threat to turn off at the mains looks like, something that has never happened in Israel, not in gas and not in water or electricity. Thus, in a short e-mail message sent by an employee on October 5, Noble Energy (now Chevron) forced the Israel Electric Corporation (IEC) to continue buying gas from the Tamar reservoir from it at the high price set in the controversial 2012 agreement.

The previous day, IEC signed a new agreement with four of the partners in Tamar who together hold 53% of the rights in the reservoir (Isramco, Tamar Petroleum, Dor Gas, and Everest). Under the new agreement, IEC will pay a reduced price for gas from Tamar of $3.7-4.4 per MMBtu (million British thermal units). This is a considerably lower price than the price that IEC currently pays for gas that it buys from Tamar under the 2012 agreement: $6.35 per MMBtu.

This difference could translate into a saving of hundreds of millions of dollars for power consumers in Israel, at the expense of the profit line of the holders of the rights in the reservoir.

The problem? Noble Energy, now part of US energy giant Chevron, claims that it is not a party to the agreement, which it does not recognize and which does not oblige it. Yitzhak Tshuva's Delek Drilling shares this claim. Together, Delek and Chevron hold 47% of Tamar and 85% of the Leviathan reservoir.

For three days, IEC's management wondered what to do. During these three days, IEC switched to buying gas from Leviathan at $4.79 per MMBtu. On Thursday, IEC went back to buying gas in accordance with the following forced and extraordinary solution, revealed here by "Globes" for the first time: for the gas that it buy from Tamar, IEC pays two different prices - $6.35 per MMBtu to Chevron and Delek; about $4 per MMBtu to Isramco, Tamar Petroleum, and the other partnerships with rights in the reservoir.

It does not end there, however. IEC does not intend to remain silent in the face of the threat to cut off supplies, and it is demanding intervention by the regulator, Competition Commissioner Michal Halperin. The dispute could yet develop into a power struggle between the government of Israel and Chevron, one of the biggest energy companies in the world. How will the US giant respond? On the one hand, Chevron released a reassuring announcement last week, but on the other hand, on the same day, its lawyers sent a warning letter to IEC stating that the new agreement contravened its commitments to the owners of Leviathan, in which, as mentioned, Chevron and Delek hold 85%.

2. The dispute: IEC promises to settle scores

At IEC they say they will yet settle scores with Chevron and Delek over the price difference the company is paying them. Meanwhile, if the competition commissioner cannot help, IEC says it will go all the way, and ask the court to intervene.

IEC's basic argument is that it has a signed gas supply agreement with the partners in Tamar, which are prepared to sell it gas cheaply at $3.7, and Chevron/Noble Energy is preventing execution of this agreement in flat contradiction of the opinion recently published by Deputy Attorney General Meir Levin.

This opinion, IEC explains, prevents us from forcing the agreement on Noble Energy as a partner in the reservoir. But in this respect, Noble Energy acts under a different hat, as the operator of the reservoir, and ignores agreements signed by the owners.

Noble/Chevron claims it cannot work under the new agreement, because it has not been presented to it. The solution that is emerging according to all the parties is separate sales, an arrangement that enables each partner in the reservoir to sell gas in a quantity equal to its share in the rights in the reservoir on whatever terms it sees fit. The problem is that a mechanism like this takes time to set up, and Noble/Chevron is in no hurry.

3. Where's the regulator?

The obvious question in a dispute that has such significance for the gas industry and for our electricity bills is, where is the state, which is supposed to ensure competition in the industry? This question becomes all the more sharp in the light of the fact that as early as November 2019, Isramco and its partners in Tamar complained to Halperin and asked for her intervention. Delek and Noble Energy, they argued, are in a conflict of interests when they prevent us from selling gas cheaply from Tamar only because this will be at the expense of the gas they want to sell to IEC from competing reservoir Leviathan (in which Isramco and its partners have no rights at all).

Halperin, who was fearful of deciding such a complex matter alone, when it involved the provisions of the gas outline plan (which, it will be recalled, was designed to circumvent the competition commissioner), passed the matter to Deputy Attorney General for Economic Matters Meir Levin. A month ago, Levin published a long, closely reasoned opinion meant to resolve the dispute between the two groups in Tamar.

The problem: Levin's opinion is like the rabbi who says that everybody's right. Each side uses the parts that are favorable to it, to justify its conduct. On the one hand, Levin found that Noble Energy and Delek could not impose a veto preventing their partners from signing an agreement on gas from Tamar. On the other hand, he found that this bar on exercising a veto still did not apply to Noble Energy. Moreover, he found that until the bar came into force (in December 2021 at the latest) Noble Energy and Delek had to put together a new mechanism that would not let them impose a veto. Then again, he did not clearly state how such an arrangement was to be enforced.

The bottom line: We're back to the starting point, and almost a whole year has been wasted on a process that changed nothing.

4. What next? Who will rescue IEC?

Chevron was surprised by the furor in the Middle East. On Thursday, the company published an announcement that was meant to be reassuring. "We are the beginning of the road in Israel, as we build our relationships with our stakeholders there," the announcement said. "After more than 141 years in business, we recognize the value of partnership. We create mutual relationships that are beneficial for the long term, and we intend to do that in Israel as well."

Only at the same time as this anodyne announcement appeared, lawyers for the Leviathan reservoir (controlled by Chevron and Delek) were activated to thwart IEC's new contract. According to the warning letter that the lawyers sent to IEC, revealed here for the first time, the agreement that promises consumers cheap gas from Tamar is in contravention of the terms of the other agreement that IEC signed with the owners of Leviathan, in which it committed itself to buy gas from them at $4.7 per MMBtu.

The way things look at the moment, IEC cannot stand alone against the double pressure brought to bear by Chevron and Delek from Tamar and Leviathan. The upshot: Only determined intervention by the regulator will enable Israeli gas consumers to benefit from a reduced price. A whole year has gone by, but Levin and Halperin's hair-splitting legal arguments about what is permitted and what is forbidden for each side have not got us a single step further towards competition in the gas industry.

Published by Globes, Israel business news - en.globes.co.il - on October 12, 2020

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

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018