Israel cabinet yields to gas cartel

Bureaucratic regulatory shenanigans in Israel all but killed development of the country’s vast offshore gas fields this year. Chief editor and energy expert Gary Lakes reports on a controversial blueprint that has now emerged from a shambles that caused Huston’s Noble Energy to down tools, Australia’s Woodside Petroleum to stomp away from a deal, and Israel’s own anti-trust boss to quit his job in disgust.

LAST December Israel looked very much like fulfilling the high expectations raised by the discovery of large natural gas fields off its Mediterranean. Noble Energy of Houston and its Israeli partner, Delek Group, were finalizing a plan to develop the huge Leviathan gas field and to expand the Tamar field, which came on stream in 2013. Letters of intent were signed to sell gas to the foreign companies operating two idle LNG plants on Egypt’s Nile Delta coast and to a private Egyptian firm seeking to import Israeli gas for domestic industries. Selling gas to Jordan and the Palestinian Authority looked like a certainty.

Noble Energy had been on a regional roll. It operated several licenses and over a few years it had made six gas discoveries offshore of Israel. Tamar, with an estimated 283 billion cubic meters (bcm) was found in 2009 and Leviathan, with 623 bcm at the end of 2010. There were also smaller fields like Tanin and Karish. In all, Noble, Delek and their junior partners had found nearly one trillion cubic meters of natural gas and Tamar now supplies 60 percent of Israel’s power generation.

Not so independent: Prof. David Gilo quit as Antitrust Authority head..
Not so independent: Prof. David Gilo quit as Antitrust Authority head. [Globes]
But then Israel’s Anti-Monopoly Authority pulled back from an earlier deal with Noble and Delek that had allowed the two companies to keep their Tamar and Leviathan holdings in return for selling Tanin and Karish. Authority head David Gilo, now declared the companies a monopoly and said they must divest themselves not only of Tanin and Karish, but Tamar and Leviathan too. Noble and Delek objected and downed tools.

The cabinet eventually overruled Gilo, who promptly resigned in protest at the government’s alternative framework proposals. These had a rough ride through numerous state bodies and the vocal Israeli media before winning cabinet (but not yet Knesset) approval on August 16.

“What the cabinet eventually passed tries to set prices in the market for new contracts, without touching the old contracts,” Gina Cohen, an independent Israeli energy consultant told Global Sources Magazine.

Gina Cohen, Mediterranean energy consultant.
Gina Cohen, Mediterranean energy consultant.

“It permits the immediate export of gas from Tamar, starts to set the parameters for export taxes, obliges Delek to sell all its holdings in Tamar, Tanin and Karish, and Noble to sell 11 percent of its holdings in Tamar, and all its holdings in Tanin and Karish,” she said.
“In addition,” said Cohen, “the framework agreement tries to provide certain – but probably not yet sufficient – incentives to develop the smaller Tanin and Karish fields whilst imposing, in my view, certain constraints on the development of Leviathan in terms of the type of GSPAs [gas sales and purchase agreements] the license holders can enter into. It has also included for the first time the need for the companies to carry out some local content purchases – for a total of $500 million accumulated between the Tamar and Leviathan partners,” she said.

“What all this will achieve in terms of greater competition and the speedy development of new fields, only time will tell,” Cohen said. She added that in her opinion the government should have left well-enough alone. Instead, it wasted many precious months that could have been used to expand Tamar and develop Leviathan, as well as making sales and purchase agreements with regional partners.

Indeed, it’s unknown how far Israel might have progressed in developing its energy resources if the myriad of government ministries, regulators, and agencies had not become involved in declaring the country’s sole gas supplier a monopoly.

Since making their substantial gas discoveries off Israel, Noble, Delek and partners have had to weather the Sheshenski Committee, which raised taxes and royalties, the Zemach Committee, which put a limit of 40 percent on the volume of gas reserves that could be exported, and the fiasco of Australia’s Woodside Petroleum walking out of an almost done deal to develop an LNG project for the Leviathan field when it failed to get clarity from Israeli regulators.

As Cohen says, it is still unclear if the framework agreement closes the monopoly question and can jump-start development of the two big fields. The cabinet must still win Knesset approval for the government to legally overrule the supposedly independent Anti-Trust Authority. New companies must then come in to develop Tanin and Karish and buy Delek’s Tamar shares. Foreign investors capable of deep water drilling will be required for new exploration work – and they will need to be unfazed by close encounters of a bureaucratic kind with the Israelis.

Dr. Amit Mor (right) welcoming Prime Minister Benjamin Netanyahu to an energy convention.
Dr. Amit Mor (right) welcoming Prime Minister Benjamin Netanyahu to an energy convention. [Eco-Energy]
“The objective now is to come up with a scheme that will enable the quickest development of additional gas fields to ensure the security of Israel’s energy supply,” consultant Dr. Amit Mor, CEO of Israel’s Eco-Energy, told Global Sources Magazine. He said another crucial element of the cabinet’s actions must be to introduce competition, since the domestic market will not tolerate the prices that a monopoly controlling the huge resources of Leviathan and Tamar could command. In addition, said Mor, developing a gas export industry is another priority – Israel stands to earn tens of billions of dollars from exports in the next 25 years. Bringing Leviathan, Karish and Tanin on stream is expected to take five years.

But with only 61 seats in the 120-seat parliament assembly, Netanyahu faces a struggle getting the agreement through the Knesset in the face of widespread opposition. Many deputies are critical of the arrangement, claiming that the companies retain to much control over a resource vital for Israel’s economic well-being and energy security. Some critics even demand that all gas resources should be nationalized.

“It’s all become highly political and is one of the most discussed issues in Israel,” Mor said. “It’s uncertain if Netanyahu will get a majority vote. It’s likely that some votes will be needed from the opposition for it to pass. Personally, I think parliament will approve the scheme, which is the best possibility available right now,” he said. “Once the Knesset approves it, there will be regulatory certainty that would enable Israeli companies to develop the existing fields [Karish and Tanin], and for other companies to continue to drill in the future.”

Noble and Delek have accepted the changes in the shareholding structure of their offshore licenses, but have successfully insisted on certainty in government regulations and a guarantee of no further changes for at least 10 years.

To develop the fields without government investment, the Leviathan partners must sign long-term contracts with export markets, especially with the companies operating LNG facilities in Egypt, and with NEPCO, the national electricity company of Jordan, Mor said. “Hopefully those contracts will be signed by the end of this year and provide the $6 billion required to develop the Leviathan field.”.

Economy Minister Aryeh Dery (left), depicted here as one of the many headaches for Benjamin Netanyahu in trying to pass the controversial gas deal. [Cartoon: Amos Biderman, Haaretz]
Economy Minister Aryeh Dery (left), depicted here as one of the many headaches for Benjamin Netanyahu in trying to pass the controversial gas deal. [Cartoon: Amos Biderman, Haaretz]
This regulatory ordeal has tried the patience of all concerned and despite the quest for “certainty”, it remains definitely uncertain how the framework agreement will plays out. Israel has squandered time in developing resources that had attracted the global energy market’s attention. It will take a long and steady Israeli commitment for East Mediterranean gas to catch the market’s imagination again.

 

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