Why Le­banon should keep an eye on oil & gas hur­dles in Is­rael

Financial Mirror (Cyprus) - - FRONT PAGE -

Since 2010, pol­i­cy­mak­ers in Is­rael have had to re­peat­edly in­ter­vene in the en­ergy sec­tor to deal with chal­lenges — not just op­por­tu­ni­ties — pre­sented by the dis­cov­ery of large gas fields.

In De­cem­ber 2014, Is­rael’s an­titrust com­mis­sioner David Gilo re­voked a pre­vi­ous agree­ment that al­lowed US based Noble En­ergy and Is­raeli com­pany Delek to re­tain own­er­ship of Is­rael’s big­gest off­shore field, Leviathan, in re­turn for giv­ing up two small fields, Tanin and Kar­ish. The de­ci­sion threat­ens the devel­op­ment of Leviathan, ex­pected by 2018, and risks de­lay­ing it for an un­de­ter­mined pe­riod of time.

The de­ci­sion comes af­ter the re­sults of a re­port, com­mis­sioned by the Public Util­i­ties Author­ity, were made public on De­cem­ber 18, con­firm­ing pre­vi­ous wor­ries, in­clud­ing an on­go­ing in­crease in the price of nat­u­ral gas sold by the Ta­mar con­sor­tium (the Noble and Delek led part­ners in Ta­mar, an­other large field) and an­tic­i­pat­ing an in­crease in elec­tric­ity prices, as a re­sult of “mo­nop­o­lis­tic con­trac­tual de­mands,” lock­ing Is­raeli con­sumers into ar­ti­fi­cially high and peren­ni­ally ris­ing prices. The Is­rael Elec­tric Cor­po­ra­tion (IEC) is cur­rently pay­ing around $5.70 per mil­lion Bri­tish Ther­mal Units (mmBtu), per­ceived as a rea­son­able price, but the con­cern is about fu­ture de­vel­op­ments and trends. The start­ing price for IEC’s long term sup­ply agree­ments was $5/mmBtu but would even­tu­ally reach $7.70/mmBtu.

The de­ci­sion, which trig­gered a clash with the Min­istry of En­ergy, also comes amid a mood of eco­nomic pop­ulism in Is­rael, re­layed at the high­est lev­els of state in­sti­tu­tions (in­clud­ing by cer­tain mem­bers of the cabi­net and the Knes­set), and fu­eled fur­ther by the March 17 na­tional elec­tion.

Noble has threat­ened to freeze “ad­di­tional ex­plo­ration or devel­op­ment in­vest­ments” in Is­rael un­til the res­o­lu­tion of this and other reg­u­la­tory mat­ters. Reg­u­la­tory un­cer­tainty is per­ceived as a de­ter­rent for for­eign in­vest­ments in Is­rael, par­tic­u­larly in the oil and gas sec­tor. Gilo’s de­ci­sion to re­nege on a pre­vi­ous agree­ment is not an iso­lated event. Since 2010, (i.e. af­ter the dis­cov­ery of Ta­mar and Leviathan), Is­raeli au­thor­i­ties have re­peat­edly in­ter­vened to reg­u­late the sec­tor. First, through the Sheshin­ski com­mit­tee — a spe­cial com­mis­sion whose rec­om­men­da­tions, in­clud­ing a ma­jor tax in­crease, were ap­proved by the Knes­set in March 2011 — and sec­ond, through the Tzemach com­mit­tee and the de­ci­sion in 2013 to put a cap on gas ex­ports, up­set­ting com­pa­nies who ar­gue that the Is­raeli mar­ket is too small and ex­ports are needed to jus­tify huge devel­op­ment costs. With such reg­u­la­tory un­cer­tainty find­ing a po­ten­tial buyer for Leviathan might prove to be chal­leng­ing, although the field re­tains enough ap­peal for in­vestors.

Un­less a com­pro­mise is found — which seems to be a pos­si­bil­ity — the Noble–Delek part­ners will be re­quired to re­nounce one of their two ma­jor fields, Leviathan or Ta­mar, prompt­ing, by the same to­ken, a lengthy legal battle with the state. A po­ten­tial com­pro­mise could in­clude re­tain­ing Ta­mar and Leviathan, in ex­change for sell­ing Tanin and Kar­ish, in ad­di­tion to a re­quire­ment to sell the gas separately, thus cre­at­ing com­pe­ti­tion. An­other com­pro­mise might in­volve es­tab­lish­ing a public com­pany to buy the gas and sell it do­mes­ti­cally at ‘rea­son­able’ prices, or even i mpos­ing con­tro­ver­sial price con­trols. The lat­est plan pro­posed by Gilo in­volves break­ing up the mo­nop­oly into sev­eral en­ti­ties, each of which would sell the gas separately. The plan bars Noble from sell­ing Ta­mar gas in the do­mes­tic mar­ket. In Leviathan, each part­ner would sell its share of the gas separately. In ad­di­tion, the plan calls for Delek to sell its stakes in Ta­mar and re­quires Noble and Delek to sell their stakes in Kar­ish and Tanin. The plan was re­port­edly re­jected by the con­cerned par­ties. The An­titrust Author­ity — which ini­tially said the plan was fi­nal and fail­ure to abide by it would lead it to de­clare that the cur­rent own­er­ship struc­ture con­sti­tutes a re­straint of trade, prompt­ing uni­lat­eral ac­tion — has de­layed its de­ci­sion un­til the end of April to al­low enough time to reach an agreed so­lu­tion.

The de­bate sur­round­ing the way the sec­tor is be­ing man­aged is so in­tense and widely backed by the public that a pos­si­ble change in the in­sti­tu­tional frame­work and the estab­lish­ment of a reg­u­la­tory author­ity can­not be ruled out.

The un­cer­tainty over Leviathan’s own­er­ship and pos­si­ble devel­op­ment de­lays might jeop­ar­dize gas sup­ply deals cur­rently in dis­cus­sion, in­clud­ing:

- A let­ter of in­tent with Bri­tain’s BG, op­er­a­tor of an LNG plant in Idku, Egypt, to sup­ply 7 bcm of nat­u­ral gas per year over a pe­riod of 15 years. The deal is es­ti­mated to be worth around $30 bln.

-A pre­lim­i­nary deal with Jor­dan’s Na­tional Elec­tric Com­pany to sup­ply 45 bcm of nat­u­ral gas over a pe­riod of 15 years, for ap­prox­i­mately $15 bln.

- A $1.2 bln deal with the Pales­tine Power Gen­er­a­tion Com­pany to sup­ply 4.75 bcm of nat­u­ral gas over a pe­riod of 20 years. The PPGC al­ready de­clared in early March that the deal will be can­celed within 30 days un­less reg­u­la­tory is­sues are solved.

The US

is

a

firm

sup­porter

of

th­ese

deals, which

it per­ceives as help­ing se­cure re­gional sta­bil­ity by fos­ter­ing mu­tual in­ter­ests, and has been in­stru­men­tal in fa­cil­i­tat­ing the ne­go­ti­a­tions. The Is­raeli move is there­fore per­ceived by the Amer­i­cans as an ob­sta­cle to the poli­cies they are pur­su­ing in the re­gion. Spe­cial En­voy for In­ter­na­tional En­ergy Af­fairs at the Depart­ment of State Amos Hochstein, who vis­ited Is­rael fol­low­ing Gilo’s an­nounce­ment that he is re­vok­ing the deal with Noble and Delek, had two main mes­sages to con­vey: first, the dis­pute will have con­se­quences on the in­vest­ment en­vi­ron­ment in Is­rael, and sec­ond, gas agree­ments with po­ten­tial re­gional clients are an op­por­tu­nity that must not be dis­carded.

Sta­bil­ity and the abil­ity to an­tic­i­pate the reg­u­la­tory frame­work are par­tic­u­larly vi­tal for the en­ergy sec­tor, one that re­quires ma­jor in­vest­ments at the ini­tial phase with the ex­pec­ta­tion of a re­turn on in­vest­ments. Reg­u­la­tory un­cer­tainty is al­ready af­fect­ing the at­trac­tive­ness of the sec­tor and more dif­fi­cul­ties are to be ex­pected if the process drags on. Italy’s Edi­son, which prequalified for Le­banon’s first li­cens­ing round, is now re­con­sid­er­ing its de­ci­sion to ac­quire the two small Is­raeli gas fields close to the Le­banese bor­der, Tanin and Kar­ish. But en­ergy is also a strate­gic sec­tor. If un­chal­lenged, a mo­nop­oly would emerge sup­ply­ing en­ergy to broad sec­tors, and any change in fu­ture prices would af­fect the en­tire econ­omy.

The de­sire to pre­vent that is un­der­stand­able. But adapted mea­sures should have been taken long ago if Is­rael wanted smooth sail­ing through the ex­trac­tive process. The prob­lem is the fail­ure to an­tic­i­pate any of the de­vel­op­ments and al­ways be­ing a step be­hind: fail­ure to an­tic­i­pate the pos­si­bil­ity of large dis­cov­er­ies and de­velop an ad­e­quate fis­cal frame­work; the lengthy pe­riod to make a (first) de­ci­sion on Noble and Delek form­ing a pos­si­ble mo­nop­oly; mak­ing a de­ci­sion that failed to ad­dress mo­nop­oly con­cerns (forc­ing them to sell Tanin and Kar­ish, which to­gether hold up to 3 tcf of nat­u­ral gas, com­pared to Ta­mar and Leviathan’s ap­prox­i­mately 32 tcf); and fi­nally de­cid­ing, a year later, to re­tract that de­ci­sion.

Re­cent de­vel­op­ments in Is­rael are a case in point, demon­strat­ing how im­por­tant it is to set a pol­icy as early on in the process as pos­si­ble to avoid reg­u­la­tory un­cer­tainty. This is worth pon­der­ing in a coun­try like Le­banon where de facto mo­nop­o­lies are tol­er­ated.

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