Netanyahu, Steinitz present revisions to natural gas compromise outline

The new document will be brought to the cabinet for ministerial approval on Sunday.

August 13, 2015 14:00
Israel gas deal‏

Prime Minister Benjamin Netanyahu announces new gas deal‏.. (photo credit: AMOS BEN-GERSHOM/GPO)

A day after reaching an agreement with the country’s natural gas developers, Prime Minister Benjamin Netanyahu and National Infrastructure, Energy and Water Minister Yuval Steinitz presented the revised terms of the compromise outline on Thursday.

The new document, whose additions focus on pricing schemes, development of the Leviathan reservoir and governmental stability, will be brought to the cabinet for ministerial approval on Sunday.

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“There is every reason to adopt this outline,” Netanyahu said at a press conference in his Jerusalem office on Thursday.

“I will submit this outline to the cabinet on Sunday. I am certain that we will pass it by a large majority, and rightly so, and we will move forward with it for the benefit of the Israeli economy and Israel’s citizens.”

The compromise outline is the result of more than six months of negotiations, which began after 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.”

After initial negotiations concluded, the National Infrastructure, Energy and Water Ministry released a draft version of the outline’s terms to the public on June 30.

For the past few weeks, officials have been working on revising these terms as well as ensuring that the natural gas companies would agree to the new conditions set forth.

As far as gas prices are concerned, Steinitz explained that the government would be offering two options. The companies would be obliged to set their price at level determined by the existing Oil Refineries Ltd. contract, which is currently the lowest in Israel’s gas sector, he said. This would lead to a $5.10 per mmBtu (million British thermal units) price within a few months – linked to the international market price of benchmark Brent crude oil, he added.

Electricity producers – including industrial plants that generate power for themselves – would pay natural an average of the three cheapest 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 cost about $4.70 per mmBtu, with linkage to market changes, Steinitz said.

In the previous version of the outline, that price was slated to be a significantly higher, $5.40 per mmBtu, 20 cents below today’s Israel Electric Corporation contract price.

The gas companies would be required to offer the lower price to all independent power producers with a capacity of more than 20 megawatts, Steinitz explained.

There is also a new agreement with the Economy Ministry, which commits the companies to spend $500 million on local goods and services, the minister said.

Within two years, the gas companies would need to show investment commitments of at least $1.5 billion in the 621-billion cubic meter Leviathan reservoir, Steinitz said. Within five years, they would need to demonstrate an investment commitment of at least $4b., he added.

In addition, the gas companies have now agreed to a clause regarding stability in the sector – and the government’s contribution to maintaining said stability, the minister said.

“The government can commit in the name of the government,” he said. “It cannot commit in the name of the parliament, the Knesset.”

Among the main points of the previous version that would remain intact is the requirement that Delek subsidiaries Delek Drilling and Avner Oil Exploration exit the Tamar reservoir within six years. Noble Energy, meanwhile, could remain the basin’s operator, needing to dilute its ownership from the current 36% share to 25% within the same time frame. The Tamar basin began flowing to Israel’s shores in March 2013.

The Delek subsidiaries and Noble Energy would need to sell their holdings in two much smaller offshore reservoirs that have yet to be developed, Karish and Tanin, within 14 months.

Despite the new stricter revisions that apply to the Leviathan reservoir, the outline maintains that the companies would be able to remain without any change in ownership.

The government would reserve the right, however, to require separate marketing of gas after 10 years of operation, or fewer if necessary.

Netanyahu stressed that the document will lead to an influx of hundreds of billions of shekels in the coming years, money that can boost the health, education and social welfare sectors.

“The gas that will flow to Israel will also lower the cost of living, because gas is an energy that is significantly cheaper than others,” the prime minister said. “This is of unparalleled importance. And, of course, this will also help us in developing industry and the periphery and will thereby help to create new jobs, growth, a lower cost of living, employment, energy security, and a cleaner environment – we do not want to pollute the environment. This is cheaper and cleaner energy.”

Prof. Eytan Sheshinski, who has served as an adviser to Steinitz on energy issues for the past few months, spoke favorably of the latest version of the outline.

“It’s good for the Israeli economy, for the Israeli consumer, for the producers, and for the business sector altogether,” said Sheshinski, professor emeritus in the Hebrew University’s department of economics, who previously headed the Sheshinski Committee on Israeli hydrocarbon taxation.

The new outline was an improvement over the previous one in that it introduced more competition among gas suppliers, and introduced a mechanism to bring down the price, he said.

“It’s a major improvement over the current situation where we have a monopoly and one supplier,” he added, referring to Israel’s sole source of domestic natural gas at the moment, the Tamar reservoir.

The new pricing scheme, which indexes the price of gas based on existing contracts, would bring down the price of gas by roughly $0.80 per mmBtu by 2020, Sheshinski estimated. And it will give the Israel Electric Corporation leverage to negotiate a lower price when its current contract expires, he said.

The roughly nine-month delay caused by reopening the issue, however, had negative consequences as well.

“There are costs to the delay.

The gas market in the world has changed for the worse in terms of new exploration, because the price is going down, the Middle East is in turmoil,” Sheshinski said.

“This inconsistent behavior by Israeli regulators has brought forward a demand for a stability clause that the regulatory rules will not change further. That’s the direct result in my mind for the scrapping of the original plan,” he added.

Opposition lawmakers criticized the new terms.

MK Shelly Yacimovich (Zionist Union), one of the most vocal leaders against the gas deal in all its forms, called Netanyahu and Steinitz’s press conference “a populist show full of meaningless slogans...that will not erase the heavy burden placed on the cost of living by the Netanyahu government.”

The deal perpetuates “a powerful private monopoly that will exploit the citizens of Israel from now on,” Yacimovich said. She accused the government of not really negotiating with the gas companies.

The price of gas will remain exorbitant, the companies can wait five years to begin flow from Leviathan and the government committed to stability, she lamented, and called on ministers to vote against the plan on Sunday.

MK Dov Henin (Joint List), co-chairman of the Knesset Social-Environmental Caucus, also slammed the deal, saying the government surrendered to tycoons.

“The government gave up on all its demands: The price of gas will not be regulated, and the result will be a much higher price than could be reached, which Israeli citizens, local infrastructure and the electricity market will have to pay,” Henin said. “The government agreed to another postponement of the development date for Leviathan, thus harming our energy security in the medium term.”

Assuming the cabinet gives its approval on Sunday, the document will still likely have to come for a vote before the Knesset. Due to Gilo’s refusal to support the outline, its passage requires that the economy minister invoke Article 52 of the 1988 Restrictive Trade Practices Law (the “Antitrust Law”).

Implementing Article 52 enables the minister to circumvent the antitrust commissioner’s authority due to reasons of foreign policy or national security.

At the end of June, however, Economy Minister Arye Deri declined to exercise his authority to invoke the article, and instead agreed to transfer his powers to the government – a move that requires both cabinet and Knesset authorization.

While the transfer quickly received cabinet approval, the Knesset vote was eventually postponed after too many coalition MKs refused to participate, leaving the opposition with a majority.

Both about a month ago and on Thursday, Deri made clear that he would once again consider invoking Article 52 himself if the outline receives the approval of the Knesset.

“Economy Minister Arye Deri remains consistent and will do exactly what he said last month,” a statement from his office said.

“Deri will study the outline agreed upon with the gas companies, will participate in the discussion in the government and in the end will decide how to vote. If and when the outline is approved in the Knesset, Deri will consider whether to sign Article 52.”

Globes contributed to this report.

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