Energy Minister Steinitz announces terms of gas compromise deal

After six months of disagreements among government officials , Steinitz released the final terms of ongoing negotiations for public commentary.

June 30, 2015 15:28
Yuval Steinitz

National Infrastructure, Energy and Water Minister Yuval Steinitz.. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

Stressing the urgency of moving forward on natural gas, National Infrastructure, Energy and Water Minister Yuval Steinitz presented the terms of a highly disputed compromise development outline on Tuesday.

“The outline that we reached is not just good; it is the best. It is the best possible in reality,” Steinitz said during a press conference at his Jerusalem office.

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“The outline is good for the State of Israel and its citizens,” he continued. “It is reasonable but stringent from the perspective of the energy companies. They are forced to take upon themselves harsh conditions, the harshest conditions among energy companies in all Western countries, in all OECD countries.”

After six months of disagreements among government officials and natural gas companies that have largely frozen the sector’s development, Steinitz released the final terms of negotiations for public commentary, prior to cabinet discussions on the subject. On Monday, the government postponed a Knesset vote on a measure that would have enabled the cabinet to move forward with such discussions, due to the coalition’s inability to rally a majority.

The disputes in the natural gas sector are the result of Antitrust Commissioner David Gilo’s December announcement that he would review whether the market dominance of the Delek Group and Noble Energy constituted an illegal “restrictive agreement.” Since then, members of an interministerial team – including representatives from the Energy Ministry, the Finance Ministry and the National Economic Council of the Prime Minister’s Office – have formulated several drafts of a compromise outline to settle the issue, the final version of which was released on Tuesday.

At the press conference, Steinitz emphasized that while the 621-billion cubic meter Leviathan gas reservoir had been discovered in 2010, development of the basin had not even begun.

“If we continue to be delayed, the damages will be huge,” he said. “I decided immediately upon my entrance to this position [as minister], despite the fact that there are other important issues, first and foremost to invest my efforts during my first weeks in office to reach a breakthrough and an outline that would bring an end to years of delays that have hurt the State of Israel and its citizens gravely.”

Among the goals of the outline, Steinitz explained, was the swift development of Leviathan, requiring the companies to do so by the end of July 2019.

In addition, the outline aims to foster an environment of competition with the entrance of a new operator into the Israeli offshore market, the reduction of cross-ownership among reservoirs and encouragement of new investment. Lastly, the outline emphasizes the need to ensure reasonable prices during the intermediate period, until competition is established.

Under the outline, Delek subsidiaries Delek Drilling and Avner Oil Exploration will have to exit the Tamar reservoir, whose gas began flowing to Israel in March 2013, selling their assets there within six years. Houston-based Noble Energy could remain the basin’s operator, needing to dilute its ownership from the current 36 percent share to 25%.

The Delek subsidiaries and Noble Energy would need to sell their holdings in two much smaller offshore reservoirs, Karish and Tanin, within 14 months. Because the buyer would be required to sell gas only to Israel, export allocations intended for these reservoirs would be transferred to Leviathan, according to the outline.

In 2013, the cabinet decided to cap exports at 40% of production.

The outline says the Karish and Tanin buyer would be required to provide “skin in the game,” a phrase meaning that buyers must demonstrate that they have undertaken serious monetary risk through their investment. As an incentive for a quick transaction, the government would allow for Delek and Noble to receive up to 9% of royalties from Karish and Tanin gas sales if they sold the reservoirs within eight months, and up to 7% if they sold within 14.

The negotiations involving Karish and Tanin almost broke down, Steinitz said, emphasizing how Delek and Noble had discovered those reservoirs and the government had authorized them to invest their resources there.

“Here we are taking a draconian step,” the minister added.

With regard to the Leviathan reservoir, the companies will be able to remain without any change in ownership, the outline explains. The government reserves the right, however, to require separate marketing of gas after 10 years of operation, or fewer if necessary.

“Of course we would be happier if there was competition, but if there isn’t competition, then we reserve for ourselves the right to take this drastic step,” Steinitz said.

As far as gas prices are concerned, the minister pledged that the terms of the outline would enable profits to benefit the citizens of Israel.

“We are ensuring that the prices in Israel will be reasonable in comparison to the rest of the world,” Steinitz said.

When negotiating prices with Israeli firms, gas companies will have two options, according to the terms of the outline. The first will involve a formula that takes into account revenues from gas sales made during the previous quarter, divided by the cumulative amount of natural gas in million British Thermal Units (mmBtu). At the beginning of each quarter, the base price will be updated.

The second option is to calculate sales prices based on the best existing consumer contracts in the market, taking into account current prices for benchmark Brent crude oil. If a company exports gas at a price that is lower than the price on the domestic market, it will need to sell its gas in Israel at the lower price, Steinitz stressed.

Until a competitive market is achieved, a price ceiling with linkage to market changes – at this point, $5.40 per mmBtu – would be enforced, Prof. Eugene Kandel, head of the National Economic Council in the Prime Minister’s Office, explained.

“If prices of export go up, the prices here cannot go up because they have a ceiling,” Kandel told The Jerusalem Post following the press conference. “If the prices of export go down, the prices here go down.”

The idea of transforming today’s average price into the maximum hard-price ceiling is important, Kandel explained. While today there is a range of prices, the outline takes the average of these prices and makes this average – the $5.40 per mmBtu – the maximum, he said.

With regard to infrastructure, pipelines designated for export will not be entitled to tax benefits guaranteed to local pipelines, as mandated by the Sheshinski Committee, whose recommendations on hydrocarbon taxation became law in 2013. In addition, the government will publish a memorandum to the Petroleum Profit Taxation Law – the law passed as a result of the Sheshinski Committee proposals – to regulate aspects of transactions among interested parties and to correct loopholes discovered in the law, according to the outline.

“There will be competition between the fields, as well as competition between the export and the local market,” Kandel said. “If the companies find that the prices around us for gas dropped and they can only sell at lower prices, then we will have lower prices in Israel as well.”

Now that the terms of the compromise outline have been unveiled, government officials said there would be a period for public commentary, followed by an eventual discussion of the document by the full cabinet.

Conveying the outline to the cabinet still faces the hurdle that the government had expected to overcome on Monday. On that evening, the coalition chose to postpone a Knesset vote on a legal matter that would have allowed the government to bypass Antitrust Commissioner Gilo’s objections to the compromise deal. Gilo has made clear that he would not support the outline and went so far as to announce on May 26 his resignation, effective in August.

To sidestep the antitrust commissioner’s authority, Prime Minister Benjamin Netanyahu and other proponents of the compromise deal promoted invoking Article 52 of the 1988 Restrictive Trade Practices Law (the Antitrust Law), through which an antitrust commissioner can be prevented from interfering in a “restrictive agreement” due to reasons of foreign policy or national security.

Although Article 52 enables an economy minister to directly exercise his authority to invoke the clause, Economy Minister Arye Deri transferred his powers on the issue to the government in Thursday’s security cabinet meeting. The day before, he had warned Netanyahu that he would not act as a “rubber stamp” on the approval of what has become a divisive issue among politicians and industry stakeholders.

With one vote against and three abstentions, the government on Sunday approved the transfer of authority from Deri to the full cabinet. However, because the economy minister waived his authority on the issue, Article 31a. and b. of Basic Law: The Government mandates that the issue receive Knesset approval as well.

The Knesset vote to transfer Deri’s authority to the general cabinet was supposed to take place Monday evening, but was pushed to the end of day’s agenda – meaning after midnight – when too many coalition MKs refused to participate, leaving the opposition with a majority.

It remains unclear when a new vote on the transfer via Article 52 will take place.

On Tuesday afternoon, State Comptroller Joseph Shapira wrote a letter to Steinitz, notifying him that the State Comptroller’s Office would soon issue an updated report about development of the country’s gas sector. Shapira asked that the government hold off approving the compromise outline until ministers receive the report.

The Knesset Economics Committee, meanwhile, plans to hold a meeting to discuss the gas plan next Monday. Committee chairman Eitan Cabel (Zionist Union) invited the prime minister, Steinitz and Delek Group owner Yitzhak Tshuva to present their stands.

Nonetheless, Steinitz remained confident on Tuesday that the compromise deal was strong and would advance.

“I have no doubt that in the real world, not in the fantasy world, this outline is good for the State of Israel, it is good for its citizens,” he said.

Lahav Harkov contributed to this report.

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