Gas company reports high prices, huge debt; public still waiting for wealth fund
In first quarter report, Delek Drilling discloses $444.4 million in assets, $84.3 million in profits, a $2 billion deficit, $3.4 billion of loans to repay over next 18 months
Sue Surkes is The Times of Israel's environment reporter
Ministers and officials who promised that some of the fruits of Israel’s natural gas bonanza would finance projects for the nation’s good monumentally failed to predict that by 2020, not a dime would have been paid into a special fund for that purpose.
Nor did they foresee the worldwide drop in oil and gas prices when, in 2015, they locked the Israel Electric Corporation into paying Delek Drilling, owned by Israeli Yitzhak Tshuva, and its partner, the Texas-based operator Noble Energy, rates for gas from the Tamar reservoir that rise every year.
And they certainly did not expect that Delek Drilling, 55 percent of which is owned by Tshuva’s Delek Group, would bleed losses so great, and amass debts so large, that its future cannot be guaranteed.
In its first quarter financial report for 2020, released Sunday, Delek Drilling — whose shares have nosedived by 70% this year — reported net profits for the quarter of $84.3 million, royalties to the state of $38.5 million and assets totaling just $444.4 million.
It also disclosed a $2 billion deficit and said it will have to raise at least $2.5 billion this year, via either the banks or the institutional bondholders, just to meet its 2020 financial obligations, which include repaying bondholders and banks $620 million. Next year, it will need to repay an additional $2.8 billion.
Providing a window into its pricing, it reported charging more than $5 per thousand cubic feet of natural gas, while the cost of producing it ranged from just 34 to 66 cents.
For the Tamar rig, which started commercial production in 2013, the price per thousand cubic feet of gas produced was $5.28 and the company’s net income was $3.84, after production costs of 34 cents, royalties to the state of 61 cents and payments to other parties totaling 49 cents.
For the Leviathan rig, which came online commercially in January, the price per thousand cubic feet was $5.43 and the net income $3.96 after production costs of 66 cents, royalties to the state of 60 cents and payments to other parties totaling 21 cents.
Strategic projects for the good of the country
In 2014, the Knesset passed a law mandating the creation of a sovereign wealth fund to collect payments from the gas companies, which would be spent on strategic projects for the State of Israel.
That law specified that the funds could also be used to help the country in an emergency, although obviously it could not have foreseen the coronavirus pandemic and its effects on the economy.
Six years later, that fund has not even been set up.
Just NIS 450 million ($130 million) in levies has been collected to date and that was from the Mari-B Yam Tethys gas field, which closed in 2012. The sum was paid in 2013, and not a cent more has gone into the fund since then. The money is being managed temporarily in a wealth fund by the Finance Ministry’s Office of the Accountant General.
In 2012, an inter-ministerial committee headed by the then chairman of the National Economic Council, Prof. Eugene Kandel, predicted that by 2018, the fund would amass more than NIS 1.5 billion (according to 2012 dollar-to-shekel exchange rates), exceeding the NIS 1 billion required for the fund to start operating.
But at a meeting Tuesday of the Special Knesset Committee for Supervising the sovereign wealth fund, Energy Minister Yuval Steinitz was unable to explain why the NIS 1 billion benchmark had not been reached in 2018, only saying that he was not responsible for the forecast.
The answer lies in the terms that the government agreed on with the gas companies.
The law exempts Tamar’s owners from paying anything in levies until they have recouped twice the cash they invested, from day one of exploration (the high-risk part) to the start of commercial production — giving them a maximum of four years to do so.
It then gives them a further grace period via a formula. Payment only begins once the companies’ total proceeds, minus total expenses, divided by total investments, reaches the figure of 2.
When that happens, the companies have to start transferring 20% of their profits to the sovereign wealth fund (or a fraction thereof, depending on the month of the financial year in which the payments start). As the share of expenses decreases in relation to the income that comes in, that percentage rises, reaching a maximum of 50% of profits when the formula gets to 2.8. It is capped at 50% thereafter.
In the case of the Leviathan gas field, nothing has to be paid in levies until 1.5 of the investment has been recouped, within a maximum of two years. After that, the first 20% in levies will only be paid when the formula yields the figure of 1.5. The maximum levy of 50% kicks in when the formula figure reaches 2.3, remaining at 50% thereafter.
Steinitz told the committee that he expected the Leviathan field to start paying into the fund by 2024, while the gas companies — before coronavirus ate into their profits — were not predicting any payments until 2025.
In January, before coronavirus struck Israel and battered profits, the Times of Israel was told that the formula for the Tamar field was expected to reach the requisite figure of 2 later on this year, although creative accounting by the companies’ firms might push it into 2021.
The gas companies have predicted that by the end of the decade, they will have deposited some $7 billion into the wealth fund. By contrast, Lobby99, a crowd-funded organization that lobbies government on behalf of the public, calculates that this sum will be no higher than $2.4 billion.
The Energy Ministry points out that apart from the Sovereign Wealth Fund, the gas companies have paid the state NIS 5.5 billion ($1.6 billion) in royalties since 2013 and NIS 6.5 billion ($1.9 billion) in corporate tax.
Repeating his mantra “The big advantage of natural gas is environmental,” because it pollutes the air less than coal, Steinitz estimated Tuesday that some 3,000 billion cubic meters of natural gas were still waiting to be discovered, and that all this should be exploited and sold.
Earlier this month, however, a report by the environmental advocacy organization Adam Teva V’Din asserted that methane from the country’s natural gas infrastructure is increasing the country’s overall global-warming greenhouse gas emissions by some 8% and is probably preventing it from meeting its international obligations on climate change.
