Taking the mask off Leviathan gas negotiations

By
January 29, 2015 10:54

Antitrust Authority, gas companies meet behind closed doors; S&P: Regulatory uncertainty could ultimately hurt country’s credit rating.




Hadera

A man points as he stands on a tanker carrying liquified natural gas, ten miles off the coast from Hadera. (photo credit: REUTERS)

The fate of the Leviathan natural gas reservoir remains up in the air, as the relevant corporate and government parties continue to deliberate behind closed doors.

After Israel Antitrust Authority Commissioner David Gilo announced his intention last month to reevaluate the status of the reservoir’s two biggest stakeholders – the Delek Group and Noble Energy – as shareholders of the basin, negotiations among the parties are ongoing this week. A compromise among the parties has yet to be reached, despite several erroneous reports circulating in the Israeli media that outline plans to dismantle the monopoly.

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An Israel Antitrust Authority spokesman told The Jerusalem Post on Wednesday that “the IAA is part of a group of government officials that is trying to discuss solutions to the problems in the natural gas market.”

“We at the IAA are also meeting with the representatives of Delek to discuss a possible solution outside of court,” the spokesman said. “The above-mentioned group of government officials is discussing all regulatory issues with Delek and Noble and the other natural gas companies. In parallel, we are conducting hearings yesterday [to Noble] and today [to Delek and Ratio], the parties to the alleged restraint of trade, regarding the alleged restraint of trade.”

On December 23, Gilo announced that a proposed consent decree regarding the entry of the Delek Group and Noble Energy into the Leviathan reservoir would not be submitted to the Antitrust Tribunal for approval as had previously been agreed upon. In addition to nixing his support for this arrangement, which would have allowed the companies to sell two smaller reservoirs in order to remain in Leviathan, Gilo said he would consider whether their stake in Leviathan constitutes an illegal “restraint of trade,” or restrictive agreement, similar to a cartel. The Antitrust Authority defines a restrictive agreement as any deal that may harm competition.

Houston-based Noble Energy owns a 39.66% stake of the 621-billion-cubic-meter Leviathan reservoir, while Delek Group subsidiaries Delek Drilling and Avner Oil Exploration each hold 22.67%, and Ratio Oil Exploration has a 15% share.

Noble Energy also holds 36% of the 282 billion cu.m. Tamar gas reservoir –which began flowing to Israel’s domestic market in March 2013.The Delek Group’s Delek Drilling and Avner Oil Exploration each own 15.625%, Isramco controls 28.75% and Dor Gas has 4%.

Industry sources told the Post on Wednesday that from a legal standpoint, the Delek-Noble partnership in Tamar and Leviathan in no way constitutes a restrictive agreement.

Because neither Tamar nor Leviathan existed when the companies entered the reservoir, and no gas in the basins had been discovered, there was no way to make a move for competition, the industry sources argued.

Should the Antitrust Authority proceed with the move to declare the partnership a restraint of trade, the sources expressed confidence it would lose a legal battle in court. It is unlikely the commissioner will bring the issue to court, however, as work on a compromise among the parties is continuing, the sources added.

At this point, Finance Ministry officials would ideally like to see a compromise that would bring the Delek Group out of the Tamar reservoir, leaving Isramco and Dor Gas to sell the resource from the reservoir domestically, and Noble Energy to sell only abroad, according to sources. It is unlikely, however, that Noble Energy would accept any changes regarding its status in Tamar, the sources added.

Manufacturers Association of Israel President Shraga Brosh warned Wednesday that failure to resolve the gas crisis would scare away investors and could put Israel on a US “black list” if Noble decides to pursue international arbitration.

“The gas crisis is causing irreversible damage to Israel’s reputation as a place worth doing business,” Brosh told Prof. Eugene Kandel, head of the National Economic Council at the Prime Minister’s Office. The regulatory back and forth already constituted a serious blow to the confidence of investors, who feel they cannot rely on agreements with the Israeli government and are exposed to frequent regulatory changes, Brosh said. Gilo’s reversals, he added, are “intolerable and unforgivable behavior in the business world.”

According to the MAI, Israel’s natural gas flow has the potential to lower energy costs for businesses by NIS 1.4 billion a year at its peak, making business more competitive, lowering prices, creating 12,000 jobs and increasing annual GDP by NIS 4.2b.

“This saving is achievable in a few years in the event that the existing regulatory barriers will be lowered, so that all the relevant factories will be connected to the natural gas supply,” he said, a prospect which is unlikely if Noble goes to international arbitration instead of investing another NIS 7.5b., as planned, in Leviathan.

A report by credit ratings agency S&P on Tuesday noted that regulatory uncertainty could ultimately hurt Israel’s credit rating, which would make government borrowing more expensive.

“We think the now increased difficulties in Israel’s development of natural gas fields offshore could pose credit risks for the sovereign and the domestic economy,” the company wrote in a report. It listed a slew of regulatory uncertainties that could scare away other investors, including, “Israel’s untested new tax regime for natural gas, the commissioner’s changing opinions, and the long and unclear approval process for connecting the gas reserves to shore – all of which in our view don’t reflect well on Israel’s governance framework, one of our five key factors in our sovereign credit analysis.”

Australian company Woodside’s decision last year not to move forward with investments in Leviathan underscored S&P’s point.

“Additional future benefits from gas exports from Leviathan, such as sizable royalty revenues for the state and increased geopolitical leverage, now seem increasingly doubtful given the possible decree,” the report added. “What’s more, we think the unexpected decision regarding the Leviathan licensing agreement does not reflect well on Israel’s institutional and governance effectiveness.”

Despite similar such warnings from foreign investors, Knesset members and social activists have thus far hailed the Antitrust Authority’s decision as an opportunity to tackle corporate interests and bring natural gas to Israeli citizens at a competitive price.

But Prof. Brenda Shaffer, an expert on energy policy in the University of Haifa’s School of Political Science and a visiting researcher at Georgetown University, stressed that Israel’s small gas sector cannot be compared with the large, competitive markets.

“All the around the world, places with small amounts of players and buyers don’t have competitive gas markets,” she told the Post Wednesday. She named the US, the Netherlands and the UK as examples of countries with competitive gas markets, with a wide range of suppliers and buyers.

“Even those markets, especially in the case of the UK, have not succeeded in getting better prices,” Shaffer said.

The Tanin and Karish fields – the two smaller reservoirs that Delek and Noble were originally intending to sell, in order to remain in Leviathan – will not likely be developed in the foreseeable future, according to Shaffer.

These small fields provide little commercial interest and no way to foster competition, she explained. In all likelihood, Shaffer said, the development of Leviathan will only conclude when the stockpile in Tamar is dwindling.

Thus, competition between the two may not even be logistically possible.

“Even if all these fields are developed, most likely they’re not going to be operational the same time,” she added. “Their lifespans are most likely not going to overlap for many years.” In an article Shaffer published earlier this week for the Atlantic Council think tank, titled “Anti-Trust in the Eastern Mediterranean,” she described the ongoing Antitrust Authority challenge as “ill-founded.”

“If the current investing companies are forced to divest, the prospect of developing Leviathan within the next five years will become unattainable,” she wrote.

Shaffer encourages the government, the investing companies and the US to promote a policy solution that would be more suitable for a market of Israel’s size but also satisfy antitrust concerns. She suggests that rather than breaking up the partnership structure, the government could “address pricing and contracts to ensure that there is no unfair price consequence of the gas being supplied by a single supplier.” Such a price structure would incentivize development of the field and be pegged to prices of alternative sources of power generation such as coal or renewables, she writes.

In November, MK Avishay Braverman (Labor) proposed a bill regarding the supervision of natural gas prices, which he described as a fair solution capable of lowering the cost of living and saving Israelis billions. Despite receiving the support of 34 MKs, his bill was rejected by the Ministerial Committee for Legislation.

Recently, Prof. Manuel Trajtenberg, who is running for Knesset on the Zionist Union (Labor-Hatnua) list, likewise expressed his support for regulating gas prices.

Regardless of the solution chosen, Shaffer stressed that in terms of national security, Israel must realize that “under current market conditions no one is looking to buy into expensive gas projects.” The only companies that would be interested in entering the existing ownership structure of Tamar or Leviathan as an operator would be those with a political agenda, she explained.

“That would have a lot of risks and negative geopolitical implications,” she told the Post. “It’s much better to have a familiar and friendly company.”


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