Natural gas to cost Israelis double world average, report says

Natural gas to cost Israelis double world average, report says

The discovery off Israel's shores will do nothing to lower the price of electricity -- but rather increase it, according to an energy expert

Gas rigs in the Tamar field, off the coast of Israel, in June 2014. (Moshe Shai/Flash90)
Gas rigs in the Tamar field, off the coast of Israel, in June 2014. (Moshe Shai/Flash90)

Israelis who have been looking forward to lower electricity prices — as the Israel Electric Corporation begins using natural gas from the country’s offshore fields — are in for a rude shock, according to a report by an Italian energy expert.

The price of electricity is likely to go up, not down — the result of what Sergio Ascari said were “monopolistic contractual demands” placed before Israel by the consortium responsible for the Tamar gas field.

According to Ascari’s report, the consortium — consisting of Noble Energy, Delek Drilling, Isramco, and Dor Explorations — is earning double what other similar exploration and drilling groups around the world earn on average. The IEC 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’s findings were reported Thursday by business daily The Marker.

Ascari was hired to examine the corporation’s contracts with the Tamar consortium, signed in 2012 after many months of negotiations. Ascari — currently a consultant on energy matters, and formerly head of natural-gas issues at the Italian Regulatory Authority for Electricity — has been studying the contracts for the past several months, and submitted his report last week.

The study was organized at the behest of the Public Utilities Authority (Electricity), which has in the past complained about the consortium’s conditions. Ascari’s study confirmed the validity of many of those complaints — among them an 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 perennially rising prices for Tamar gas, even though buyers could get cheaper gas elsewhere.

In addition, Ascari said, the contracts set a minimum price for gas, also independent of market conditions. However, there is no maximum price, as is customary in contracts of this kind. Thus, instead of making energy cheaper for the Israeli consumer, the Tamar contracts will have the opposite effect — making electricity one of the biggest expenses in the Israeli economy, Ascari added.

Other conditions include a mechanism whereby electricity producers will be required to buy a minimum amount of gas, and a guarantee that the current consortium will remain the sole supplier of gas with its customers.

With that, Ascari does not recommend implementing direct price controls on gas prices, instead recommending that the government intervene to negotiate a new pricing mechanism between the sides that would link the prices that the Tamar consortium charges to market conditions in Europe and the Far East, thus ensuring that prices remain realistic for the supplier, and competitive for the electricity producers.

In a letter to Prime Minister Benjamin Netanyahu and Minister of National Infrastructure, Energy, and Water Silvan Shalom, Orit Farkash-Cohen, chairwoman of the Public Utilities Authority (Electricity), said that “a monopolistic situation has emerged, with the gas contracts presented to the Authority including conditions that are unacceptable in a competitive gas market — in particular the unbalanced distribution of risk that favors the gas supplier, putting the consumer at risk amount and price risk.”

According to the report, both Netanyahu and Shalom have seen Ascari’s report, but have yet to comment.

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