Lebanon can learn from Israel’s bumbling regulatory changes for offshore gas
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 imposing 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.