Think­ing ahead

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

Executive Magazine - - Economics & Policy -

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.

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