Gas cartel breakup very positive for Israel, says expert

Gas cartel breakup very positive for Israel, says expert

The dire prognosis of the Leviathan and Tamar developers is expected but shouldn’t worry Israelis, according to a top antitrust attorney

Workers on the Israeli 'Tamar' gas processing rig, 24 km off the Israeli southern coast of Ashkelon. (Moshe Shai/FLASH90)
Workers on the Israeli 'Tamar' gas processing rig, 24 km off the Israeli southern coast of Ashkelon. (Moshe Shai/FLASH90)

Top officials in the companies responsible for producing gas discovered off Israel’s coast predicted doom and gloom in the wake of the the Antitrust Authority’s decision Tuesday to break up their production consortium, claiming that the move would jeopardize Israel’s credit rating around the world as well as endanger production of the gas altogether.

But not to worry, Israeli antitrust expert Tzurya Meidad Luzon told The Times of Israel. “The complaining is to be expected, given that the companies involved will be forced to give up an important lever with which they would have essentially controlled the Israeli economy. But just the opposite is true – Israel will only benefit from this, and from a legal point of view, there is nothing they can do about the decision, other than complain.”

Tuesday’s decision followed a recent report by a top international energy expert saying the consortium responsible for the Tamar gas field was making “monopolistic contractual demands” on Israel, which would lead to a steep rise in electricity costs for Israelis. According to the report by Sergio Ascari, the consortium – consisting of Noble Energy, Delek Drilling, Isramco, and Dor Explorations – was set to earn double what other similar exploration and drilling groups around the world earn. The Israel Electric Corporation and other energy providers are set to spend some NIS 200 billion ($51 billion) through 2030 on gas that elsewhere would cost only NIS 100 billion. The overcharges will – of course – be absorbed not by the IEC, but by the consumer.

The report was commissioned by the Israel Electric Authority, the government body responsible for energy policy, which has in the past complained about the consortium’s conditions. Ascari’s study confirmed many of these complaints – among them an incessant and ongoing increase in the price of natural gas sold by the consortium, linked to an energy price index and without regard to market conditions. In other words, the contracts lock Israeli buyers into artificially high and increasing prices for Tamar gas, even if the buyers could get cheaper gas elsewhere.

In his decision Tuesday, Antitrust Authority Director David Gilo said that he had told the heads of the consortium companies that the state wanted more competition in the gas market – and that the companies would have to sell some of their holdings to development firms not connected with them. The firms, his office said in a statement, had “created a situation in which they essentially control all of the gas reserves on the State of Israel’s coast.” The companies had thus created a trust, which was illegal and would have to be broken up. Noble Energy owns 39.66% of Leviathan and 36% of Tamar, and Delek owns 45.34% of Leviathan and 31.35% of Tamar.

Top officials of the companies were, of course, upset. “Reneging on contracts with us will cause the state to lose a great deal of money, and ward away investors who will never be sure that a deal made in Israel is a deal,” Yossi Abu, CEO of Delek Drilling, told Israel Radio. Noble’s director of Corporate Affairs in Israel, Bini Zomer, said that the decision would “cast a shadow” over the future of gas and oil development in the country and would affect Noble’s investments in Israel, Channel 2 reported.

Delek chairman Gidon Tadmor told Army Radio that the company “has been negotiating with the government for three years on these arrangements, and Gilo himself has supported the contracts in the past. Needless to say we are shock over the decision. Israel will regret this for years to come.”

Asked when the Leviathan field would begin to produce gas, Tadmor said that prior to their meeting Monday night with Gilo, the consortium had expected the first gas to flow in 2018, but now they weren’t so sure.

“This gas is critical for the state of Israel because we are expecting gas shortages from existing suppliers already in the next few months,” Tadmor said. In addition, the gas could have provided Israel with a great deal of income from foreign sales.

“Why are we placing such an important historic opportunity under a cloud of doubt? Everyone knows that investors don’t like uncertainty,” he said. And now, the legitimacy of deals with the government, contracts with Israeli companies, and the economic justification for the production of the gas have all been thrown into question, Tadmor said, adding that there could be a “snowball effect,” with foreign companies and banks thinking twice about doing business with Israel.

Gilo, he added, was falling for “a populist agenda that claims that we are looking out for our monopolistic interests instead of focusing on what is good for Israel. You cannot change the rules that held for three years at the last minute,” he added.

If Tadmor is implying that the consortium will halt its operations – by going “on strike” to protest the decision, or trying to tie up the issue in the courts while the situation remains extant – he had better think again, said Luzon. “These companies have a contractual obligation to produce gas in a timely manner, and if they don’t, then the state really does have a right to cancel all contracts with them – and then they will really lose their $6 billion.”

Luzon, who is the chief legal adviser of the Movement for Quality Government, a watchdog group that is often highly critical of government policy, had nothing but praise for Gilo’s decision. “He is acting in a decisive manner, doing something the government should have been doing with these companies all along. The decision is a perfectly legal one, and the consortium has no legal legs to stand on that would hold up in court if they were to try and challenge this.”

The reason, she said, was because of the nature of the consortium itself. “Each of the companies received a license to produce gas from part of the find – they were not supposed to be working together. At some point a few years ago, they declared that they would do so, essentially creating the monopoly that Gilo has just broken up. They are the ones who acted in contravention to the law, not the regulator.”

The biggest drawback of the decision is likely to be the increase in headaches among Israelis, who are sure to hear a great deal from the gas companies and their supporters about how problematic the decision is. “The companies’ greatest victory in the past has been their ability to pass themselves – and their monopolistic deal – as ‘critical’ to Israel’s economy,” said Luzon.

“There is no need to panic, because any ‘retaliation’ by the companies is just going to hurt them. They will still make plenty of money – both from profits from selling the gas they produce in the stakes they remain with, and from selling part of their stakes to someone else,” she added. “Israel’s credit rating and business standing will not be harmed in any way – but the state will be a lot more financially secure with the entry of more players into the gas business, bringing in their wake lower costs for the Israeli economy.”

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