Due to Israel’s failure to solve an antitrust dispute, a deal to supply natural gas to a future Palestinian power plant will soon be canceled, the Leviathan reservoir partners reported to the Tel Aviv Stock Exchange on Wednesday.
On January 5, 2014, the stakeholders in the Leviathan reservoir off the coast of Haifa cemented their first export deal – the sale of about 4.75 billion cubic meters of gas over the course of 20 years to the Palestine Power Generation Company, to fuel a 200-megawatt power plant that would be built in Jenin. As of Tuesday, however, PPGC issued a notice to the basin’s partners alerting them to the deal’s contingent termination, due to the failure to fulfill a number of required conditions, the TASE report said.
Despite the relatively small quantity of gas that would be supplied compared to the 621-b.cu.m. volume of the Leviathan reservoir, the partners emphasized the deal’s enormous geopolitical implications at last year’s signing.
At the time, the agreement was estimated to be worth some $1.2 billion.
PPGC announced its intentions on Tuesday “due to the non-fulfillment of the conditions precedent set forth in the agreement, and mainly the non-receipt of the approval by the Antitrust Authority, the delay in approval of the development of the Leviathan project and the non-receipt of other regulatory approvals required by law, as set forth in the supply agreement,” the TASE report says.
“The termination will take effect within 30 days, unless approval of the Antitrust Authority is received by the said date, or within 14 days, unless by such date the other conditions precedent set forth in agreement are fulfilled,” the report continues.
The future of the Leviathan reservoir – and its two main stakeholders, Houston-based Noble Energy and the Delek Group – became uncertain when, on December 23, Antitrust Authority commissioner David Gilo announced that he would reconsider whether their presence in Israel’s Mediterranean gas sector constitutes an illegal “restrictive arrangement,” similar to a cartel.
In addition, the commissioner withdrew his support for a proposed consent decree that would have allowed the companies to resolve the issue by selling two smaller gas reservoirs, in favor of remaining in both Leviathan and Tamar – a neighboring smaller reservoir, in which Noble Energy and Delek are also the principal shareholders.
The 282-b.cu.m. Tamar reservoir, located 80 km. west of Haifa, has been online since March 2013.
Most of its gas is meant to supply the domestic market. The neighboring Leviathan basin, about 130 km. west of Haifa, has yet to be developed but is likely to serve a combination of foreign and local customers.
On February 18, an interministerial team – including Antitrust Authority, Finance Ministry, National Economic Council and National Infrastructure, Energy and Water Ministry officials – presented Noble Energy and the Delek Group with a draft outline aimed at solving a situation that has frozen Leviathan’s development.
In the outline, the united government front demanded that the Delek Group exit the Tamar reservoir entirely and that Noble Energy sell a portion of its shares in the basin – specifically, regarding any gas intended for the domestic market. The document called for the companies to separately market any gas from Leviathan directed to Israeli consumers. In addition, the partners would be required to sell their two smaller reservoirs, Karish and Tanin, as had been originally suggested in the proposed consent decree.
On February 24, however, Gilo announced that he would postpone his decision regarding the status of the companies for another two months, to allow closed-door negotiations between the government and the firms to continue.
Since many components of the dispute require government approval, the decision’s postponement indicates that a settlement will occur only following the formation of the next government, sometime after Tuesday’s election.
The Antitrust Authority and the Leviathan partners declined to provide comment regarding PPGC’s decision to cancel the supply agreement.
Dr. Amit Mor, CEO of the Eco Energy Financial and Strategic Consulting firm and an expert in energy policy and geopolitics at the Interdisciplinary Center Herzliya, stressed that while the 4.75 b.cu.m.
slated to be sold to the Palestinian company constitutes only 0.76 percent of Leviathan’s proved gas reserve, the deal had critical geopolitical implications.
Last January’s contract between PPGC and the Leviathan partners set a precedent that enabled King Abdullah of Jordan to authorize the signing of a nonbinding letter of intent in September regarding the import of 45 b.cu.m. of gas over 15 years from Leviathan, Mor said.
The agreement likewise set a similar precedent for the signing of another regional nonbinding letter of intent – for 105 b.cu.m. of gas over 15 years from Leviathan to the British Gas liquefaction plant in Egypt, he added.
“Once the Palestinians were ready to import gas from the Leviathan field, it made it easier for King Abdullah to authorize such a deal for the Jordanian government company, during a time when there were major protests and demonstrations of Islamic groups against a deal in Jordan, including announcements of many parliament members that even threatened to resign from parliament if the project was approved by the Jordanian government,” Mor said.
Mor acknowledged, however, that the contingent termination of the Palestinian deal will not likely jeopardize the future of the Jordanian and Egyptian letters of intent at this point, though additional delays in Leviathan’s development might do so.
While gas purchased from Leviathan would hail from an Israeli field and cross Israel through an Israeli pipeline before reaching a Palestinian power plant, Mor stressed that such gas could have contributed significantly to the perception of Palestinian energy independence.
“Although the generation costs of electricity in that power station will not necessarily be lower than the relatively low tariff at which the Palestinians purchase electricity from Israel Electric Corporation, such a power plant could serve as a symbol for Palestinian independence in the energy sector and a cause for pride for many Palestinians,” he said.
Initial plans involved commissioning the power plant by 2016, and this has already been postponed to 2017-2018, Mor explained.
Due to the “inconsistency among the Israeli regulators” and the resultant delay in Leviathan’s development, Mor said he feels that PPGC “is acting rationally” in canceling the deal.
“Termination of the contract frees the developers to consider other supply options in the future, once they become available,” he continued.
Such options could include importing gas from Israel’s Tamar field or from the Palestinian Gaza Marine field, Mor explained, “if and when” the 30-b.cu.m. reservoir is developed. While British Gas discovered the basin, located 36 km.
off Gaza’s shores already in 2000, the Israeli government has not yet approved the basin’s development, due to economic, legal and security considerations.
“The new government of Israel after the election should consider authorizing the development of the offshore Palestinian Gaza Marine field, for the benefit of the Palestinians, the Israelis and the Jordanians,” Mor said. “It can serve as an additional supply source to the parties, which is also important from energy, security and economic development considerations.”
Development of Gaza Marine could serve as a component in bilateral negotiations between Israel and the Palestinian Authority, and provide a needed energy diversification and security boost to the region, according to Mor. Because the power needs of the West Bank and the Gaza Strip alone do not justify the approximately $1b. investment required to develop Gaza Marine, export agreements with either Jordan, Israel or Egypt would be necessary, he explained.
Regarding the contingent termination of PPGC’s deal with the Leviathan partners, however, Mor speculated that the decision may also have political motives, due to the “interesting” timing of one week before the Israeli election.
“One cannot rule out the possibility that this was coordinated or directed by the Palestinian Authority and Mr. Abu Mazen [President Mahmoud Abbas] personally, since it coincides with the decision of the PLO Central Council last week to boycott the purchase of goods and services from Israel,” Mor said.
Mor suggested that the PA could be using the termination as a type of retaliation against Israel’s move to withhold Palestinian tax revenues – which occurred in response to the PA’s decision to file war crime charges against Israel at the International Criminal Court.
No matter what the exact reason is behind the deal’s end, postponement of the reservoir’s development could hurt Israelis and Palestinians alike, he stressed.
Each year of delay in the basin’s development costs the Israeli economy about $5b., Mor said, citing calculations made by his consulting firm, Eco Energy. Such a figure takes into account loss of export revenues, possible gas shortages in Israel and potential electricity outages.
The delay constitutes “a major threat to national security because of the high dependency on the Tamar field, which currently supplies all the gas to power generation, industry and other users in Israel,” he continued.
A technical problem or a terrorist threat to the Tamar field could leave “both Israelis and Palestinians sitting in the dark,” he said.