A natural gas drilling rig
A natural gas drilling rig. Photo by Bloomberg
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More and more questions are being asked about the natural gas supply contract that the Israel Electric Corporation signed with the partnership that developed the underwater Tamar drilling site in the Mediterranean. TheMarker has learned that a professional opinion commissioned by the state electricity agency found that the price the IEC has agreed to pay for the gas is excessive.

The state agency, formally known as the Utilities Authority-Electricity, commissioned the report from a European consulting firm that has expertise in the energy sector. The consulting firm made calculations based on a model of revenue relating to the Tamar project as reported by the exploration partnership itself. The consultants came to the conclusion that based on the business conditions presented to them, the price was far higher than the average price that would be demanded under comparable circumstances elsewhere.

For its part, the electricity agency simply confirmed that the matter is under discussion in advance of a hearing on the subject.

If the consultants are correct, the Israel Electric Corporation's deal will mean that the Israeli public will pay billions of shekels more in their electricity bills than is reasonable, over the next 15 years.

The consultants' position paper will be presented to the plenum of the electricity authority today. The meeting is being convened to consider the reopening of the contract with the Tamar exploration partnership. This move follows a decision about a year and a half ago in which it was decided to object to IEC gas supplies at prices that exceeded what is customary.

An examination by the electricity authority's economists in addition to the European consultants has also prompted other questions about the pricing mechanism that the IEC has agreed to in its gas supply agreement, as regards linkage to prevailing prices in the American market.

Concern has also been expressed about the precedent that the Tamar deal might present when it comes to future natural gas supply contracts with the IEC.

The Tamar partnership consists of the U.S. firm Noble Energy, which has a 36% stake; the Delek Group (31% ) Isramco (29% ) and Alon Gas (4% ). The IEC signed a deal with the partnership two months ago to supply 78 billion cubic meters of natural gas at a cost of between $6 billion and $10 billion.

The deal represents a price per cubic meter of $5.30 per million BTUs, which is substantially higher than the $4.70 agreed upon in principle two years ago. At the time, even the lower price tag elicited surprise, because it did not take the quantity of gas that was being purchased into account, or the increased profitability of a large natural gas reserve such as the Tamar site.

The increase in price since the agreement in principle was explained as a result of the linkage provision of the contract. But since the initial agreement the IEC also consented to doubling the amount of gas it would purchase, in the hopes that the gas exploration partnership would cut the IEC a break.

The current price is also substantially higher than that which the Sheshinski committee deemed reasonable.

The committee was convened to reexamine the government's fiscal and taxation policy regarding the country's natural resources, particularly including its underwater natural gas reserves.