Uprooting trees
Uprooting trees to lay a subterranean gas pipeline for the IEC. Photo by Itzik Ben-Malki
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Israel Electric Corporation's board of directors will convene Tuesday and Wednesday to vote on a deal to buy natural gas from the Tamar partnership. The deal will then be brought to the Utilities Board and the Antitrust Authority for vetting.

Details that TheMarker has elucidated regarding the deal raise questions about the price that IEC has agreed to pay: it's 10% to 15% above the price cited in the agreement signed between the utility and the Tamar partners in December 2009.

It seems the public will be paying at least $2.5 billion more for 15 years. The biggest deal in Israeli history won't be some glittering high-tech exit or a massive purchase of trains by Israel Railways. It will be the Israel Electric Corporation's 15-year contract to buy gas from the Tamar partners, for as much as $19 billion.

The negotiations were held in secrecy: All numbers cited herein are estimates. Yet the public will be the one footing this bill, which follows a procurement process exempted from tender.

The Tamar partners are Houston, Texas-based Noble Energy, Delek Group and Isramco.

The formula for calculating gas prices is hideously complex, involving a great many parameters and linkages. In 2009, the IEC agreed to pay the Tamar partners as much as $9.5 billion for 2.7 billion cubic meters over 15 years, well above the price the Egyptians were getting, even after the Egyptians hiked the price to $4 per million BTU. (It was less, however, than the IEC has been paying the Tethys Sea group for emergency gas supplies after saboteurs began blowing up the Egyptian pipeline serially this year. ) So the Tamar partners were raising the bar from the start, ignoring the advantage of having a secure customer buying a vast bulk of its product.

Talks screech to a halt

Though the IEC was prepared to sign a final agreement, the Tamar partners balked, suspending negotiations until the Sheshinski committee, headed by economist Eitan Sheshinski, had finished its deliberations and handed down recommendations for tax policy on the exploitation of natural resources. If the government meant to take a bigger bite, said the Tamar partners, they'd have to raise prices. (The Sheshinski committee members rebutted that the partners' margins were so wide there was no justification to charge more. )

To keep the price low, the IEC thought to increase its procurement volume, or to extend the contract to 20 years. But at the end of the day the Tamar partners were in a position of strength. The Egyptian supply has become unreliable and there are no other sources of gas.

The Utilities Authority has stated that it won't let the IEC raise prices on consumers in order to cover a cost of gas beyond that which was agreed to in 2009. Yet the IEC and Tamar partners have agreed on a relatively high price of $5.20 per million BTU, compared with the $4.60 agreed to in 2009. They claim the difference is due to linkage, though what linkage they're referring to isn't clear - the mechanism agreed on in 2009, or the new, opaque formula agreed on now.

Linkage by the price of agreements from 2009 would have added just 6% to the price (to $4.98 per million BTU ).