Bank of Israel governor expresses support for natural gas outline

"By the nature of negotiations, the outline does not achieve the ideal result, but it does contain many advantages for the economy," BoI chief says.

Karnit Flug
Emphasizing the long-term impact the country’s natural gas reservoirs will have on the economy, Bank of Israel Governor Karnit Flug expressed her institution’s support for the sector’s disputed com - promise outline at the High Court of Justice on Monday.
“The Bank of Israel’s position is that under the circumstances created, the new outline provides a reasonable response to the needs of the economy, particularly for the purpose of speeding up the connection of an additional natural gas pipeline and the promotion of development of the Leviathan and Karish and Tanin reservoirs,” Flug said, according to a summary of her remarks published by the Bank of Israel.
Flug was referring to an outline formulated after more than half a year of negotiations among government officials and the natural gas companies operating off Israel’s Mediterranean coast.
The discussions began at the end of December, when Antitrust Commissioner David Gilo announced that he would review whether the market dominance of the Delek Group and Noble Energy constituted an illegal “restrictive agreement.” After negotiations concluded, the National Infrastructure, Energy and Water Ministry released the resultant outline’s terms to the public on June 30.
“By the nature of negotiations, the outline does not achieve the ideal result, but it does contain many advantages for the economy,” Flug said. “As such, the Bank of Israel supports the main points of the outline and progress toward its implementation.”
If no changes are made to the current version of the outline, one of the main points involves Delek subsidiaries Delek Drilling and Avner Oil Exploration exiting the Tamar reservoir within six years. Houston-based Noble Energy could remain the basin’s operator, but would need 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 the two much smaller offshore reservoirs that have yet to be developed, Karish and Tanin, within 14 months.
With regard to the much larger, Leviathan reservoir, which also has not yet been developed, 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.
As far as prices are concerned, the current version of the outline presents two options through which gas companies would be able to negotiate with Israeli consumers, but stresses that the firms would not be able to export gas at prices lower than domestic sales prices. Mean - while, until a competitive market is achieved, a price ceiling with linkage to market changes – at this point, $5.40 per mmBtu (million British thermal units) – would be enforced.
A cabinet and Knesset vote on the natural gas outline was slated to take place on July 29, prior to the Knesset recess. However, the night before, National Infrastructure, Energy and Water Minister Yuval Steinitz, in consultation with Prime Minister Benjamin Netanyahu, decided to postpone the vote.
Discussing the outline at the High Court, Flug explained that the document would pave the way for “more stable regulation of the natural gas economy” by organizing a variety of issues that previous - ly were “subject to uncertainty.” In doing so, advancing both the financing and the development of the reservoirs would be easier, creating supply redundancy and a more competitive market structure, she said.
Flug likewise expressed her support for the outline’s statements regarding the realization of export contracts with Egypt and Jordan, and the potential economic benefits of such agreements.
Despite her arguments in favor of the outline’s terms, the Bank of Israel governor cautioned that before the document’s final approval occurs, certain milestones must be set. She specifically discussed the urgency of developing the Leviathan reservoir and connecting it to Israel’s local supply, stressing that decisions must be made regarding actions to be taken should this development not happen according to the agreed upon pace.
“In particular, it is import - ant that if a delay in development prevents the creation of a more competitive structure than is currently the case in the natural gas market, alternative steps be defined that will advance the connection of the gas reservoirs to the Israeli economy in the most rapidly possible manner, alongside a mechanism that will protect Israeli consumers from monopolistic pricing,” Flug said