Israel's natural gas.
(photo credit: MINISTRY OF NATIONAL INFRASTRUCTURES)
Although the terms of the country’s natural gas outline may not be ideal, Israelis must accept the document as best possible way to advance the sector, a hydrocarbon industry expert tells The Jerusalem Post.
“In our case in Israel, the best way the government could go is with the current outline,” Yashar Ben Mordechai, a private consultant in the energy industry, who served as the CEO of Oil Refineries Ltd. (ORL Bazan) for 11 years, said on Tuesday. “I’m supporting it not because it’s the best way, but at this point in time, it’s the least worst.”
Ben Mordechai was referring to the compromise outline approved by the cabinet on Sunday, aimed at bringing an end to an eight-month stalemate that has largely frozen new development in the country’s natural gas sector.
The document, which will likely need Knesset approval, is the result of months of negotiations that followed Antitrust Commissioner David Gilo’s December announcement that he would review whether the market dominance of Delek Group and Noble Energy constituted an illegal “restrictive agreement.”
The version of the outline approved by the cabinet includes changes that focus on pricing structures, the development of the still untouched Leviathan reservoir, and stability in government policy. While Prime Minister Benjamin Netanyahu and National Infrastructure, Energy and Water Minister Yuval Steinitz have touted the outline as critical to Israel’s economy and national security, members of the opposition continue to slam it as weak and unable to generate competition.
Ben Mordechai, whose Ashdod ORL refinery was among the first Israeli industrial plants to connect to natural gas in 2005, said the price scheme in the outline could help ensure Israelis are not paying too much for electricity. The former ORL CEO will be teaching energy economics at a new oil and gas engineering program at Kinneret Academic College this fall.
The revised outline involves two new contract options. The companies would be obliged to offer prices according to the existing ORL contract, deemed the country’s lowest cost gas contract for industrial consumers.
This would lead to a $5.10 per mmBtu (million British thermal units) price within a few months – linked to the globally accepted Brent oil price, according to the outline.
Meanwhile, for electricity producers – including industrial plants that produce electricity for themselves – the outline sets the gas price based on an average of the three least expensive contracts of today, those of independent power producers OPC Rotem Ltd., Dorad Energy Ltd. and Dalia Energies Ltd. By the beginning of 2016, the gas price would be about $4.70 per mmBtu, with linkage to market changes. In the previous version of the outline, that price was slated to be a significantly higher, $5.40 per mmBtu, 20¢ below today’s Israel Electric Corporation contract price.
When Ben Mordechai was negotiating natural gas purchasing contracts for ORL in the early 2000s, he described how the company had the option of buying gas from Egypt or buying from the Yam Tethys Israeli partners – a competitive environment that does not exist today.
“We could talk to both of them separately and there was competition and we felt that we were getting a fair price,” he said. “The problem with gas is that since it is heavily dependent on infrastructure, and there is not very much open trade.
“In areas where there are locked-in gas supplies, there is not much competition and not much price discovery,” he added.
Because Israel today is in such a situation, Ben Mordechai stressed that the best way to move forward is with the price scheme presented in the revised outline, which he said takes into account the long-term impact of gas on the country.
Another element of the outline that Ben Mordechai praised discusses the sale of small reservoirs Karish and Tanin. Delek Group’s subsidiary firms and Noble Energy would need to sell their holdings in those two basins within 14 months of the outline’s final approval.
“That will actually promote competition in the market, because one of the things that my colleagues do not quite understand is that the price discovery [which sets spot prices] usually happens by the small players, by the marginal players, not by the large, average players,” Ben Mordechai said.
This is able to occur, he explained, due to low overhead costs and a faster decision-making pace that enables smaller firms to maneuver better.
The former ORL CEO also said he had no doubt that international companies would show interest in purchasing the reservoirs, the sector’s recent uncertainty notwithstanding.
“They can actually grab a nice chunk of the market for a good price,” Ben Mordechai said. “I believe that there will be good companies that will want to come and lock into that opportunity.”
“I do believe that [selling] Karish and Tanin is a good direction to generate competition, and let’s hope that it will materialize at the end of the day,” he added.
Ben Mordechai said the outline should have obliged the Tamar partners to build a second gas pipeline to the Israeli shore.