Antitrust Authority Head David Gilo Faces Tough Decision on Leviathan Natural Gas Field

Caught between a rock and a hard place: a monopoly on the one hand, and on the other a court case that could drag on for years, delaying the development of the natural gas fields

The Israel Antitrust Authority, the independent government enforcement agency tasked with regulating mergers and preventing cartels from dominating Israel's economy, is faced with a crucial decision in the next few weeks in the natural gas sector. Professor David Gilo, the director of the authority, will have to weigh the agency's fight against monopolies – bearing in mind that lack of competition often translates into higher costs for consumers – against the possibility of legal action that could slow the development of an emerging natural resource.

In September 2011, the Israel Antitrust Authority ruled, after a hearing, that the partners in drilling for natural gas in the Leviathan reserve – Delek Drilling, Noble Energy and Ratio Oil Exploration – were operating as a cartel that limited competition in the natural gas market. The backdrop for the ruling is the strategic partnership in formation between Delek and Noble, which resulted in their owning nearly all of Israel’s natural gas reserves and could lead to a monopoly and control prices for decades to come.

Antitrust advocates also feared that the large investment by Delek and Noble in the Tamar field, for example – a natural gas field located about 80 kilometers off the coast of Haifa – would be harmful to competition from other companies. Delek and Noble hold 67 percent of the rights to Tamar, stifling competition in the industry since there will be no interest in competition using the Leviathan field, in which they hold 85 percent of the rights – thus leading to the formation of a cartel.

Over the next few weeks, Gilo is expected to make what could be a landmark decision on this sensitive issue. His decision could present a challenge not only to antitrust law, but also a shock Israel’s energy industry as a whole and even affect international transactions that are taking place around it. The official announcement of the restrictive arrangement could force the partners to sell the gas in the field separately or sell their holdings in the field.

On the other hand, the decision that this partnership is a cartel will almost definitely cause Delek and Noble to go to court, dragging the state into a protracted legal procedure. This move could endanger not only the development of the Leviathan field, but also the construction of the northern gas pipeline that is slated to bring gas from the offshore fields, whose cost is estimated at $2 billion – a cost the state plans to impose upon the Leviathan partners.

The partners in the Leviathan field were summoned to a hearing, during which they tried to persuade Gilo not to declare them a cartel. The hearing ended in May 2012, but no decision has been made since then. As far as anyone knows, the reason for the delay is the legal pressure that the partners are putting on the authority, although the interim situation is causing much more damage than any decision could.

Here are some options available to Gilo when he announces his decision sometime over the next few days.

1. Announcement of a cartel, followed by talks

So far, the partners in the Leviathan field have not asked for an exemption from being considered a cartel. Such an exemption would enable them to cooperate in the development of the field and the sale of the natural gas it contains. Statute 14 of the Antitrust Law allows the head of the antitrust authority to exempt members of a cartel from the obligation to obtain the court’s permission for an arrangement as long as the arrangement causes no substantial harm to competition in the market. But such an exemption cannot be permitted after the fact, and it is likely that it will not be granted under the current market circumstances. Therefore, Gilo will most probably announce that the Leviathan partnership is a cartel, and announce another hearing on their business activities.

Such a ruling, together with the statement that Delek and Noble are a monopoly in the natural gas market, will serve as a bargaining chip that Gilo can use later on in the negotiations for an agreed-upon solution to this market failure.

“While this measure is legally acceptable, it is problematic for the public,” an expert in the antitrust field told TheMarker. “The Antitrust Authority has known about this issue for at least two years, so to come now with just a ruling is sort of ‘too little, too late.’ He shouldn’t have waited so long to do it. It’s even the kind of measure that won’t smell too good.”

2. Separate sales

Without a permit to sell jointly, the current situation requires each of the partners to sell its relative share in the field separately. Therefore, this is virtual competition: the natural gas will reach the customers from the same field and via the same infrastructure. The intention is to bring about a situation in which the partners compete among themselves for every potential customer.

The Tzemach committee, which examined the policy of natural gas use, noted the problematic market situation and recommended looking into obligating the partners to sell separately even though this would result in only limited competition. The reservations about doing so stem from the fact that separate sales do not ensure a truly competitive environment. This is because there must still be technical coordination between the natural gas contracts of the various partners in order to ensure the supply, so there is also fear that the quantities, and even the prices, could be fixed. The partners also determine the pace of development, thus affecting the future supply of natural gas. A study conducted for the Tzemach Comittee found that while separate selling is accepted in the world and even obligatory in Europe and Australia, in 87 percent of the cases that were examined, the customers signed identical linkage mechanisms with the separate partners in the natural gas field. Also, in 57 percent of the cases, the prices for the natural gas were identical.

Recently, it was revealed that the Australian energy company Woodside Petroleum, which was in talks with the Leviathan partners to purchase a 30-percent share in the natural gas field, is looking into the possibility of selling separately to the Israeli market after starting talks with the regulators about solving the cartel issue. In such a case, Noble and Delek still hold 60 percent of the rights in the field, and it is not clear how strong competition will be between Woodside, which came in to promote an export project, and its partners, who are already selling natural gas to the local market.

3. Delek and Noble will have to sell Leviathan

The simplest solution, which will enable true competition in the local natural gas market, would be to split the ownership structure of both of the large natural gas fields, Tamar and Leviathan, by making Delek and Noble sell their holdings in the Leviathan field to an independent third party.

But that is not as simple as it seems. To do so, Gilo will have to convince the antitrust court that there is no other way to ensure competition in the industry. Delek and Noble will claim otherwise, and the hearings could go to the High Court of Justice and drag on for years. This route would entail a tough battle with the natural gas companies and the use of political force to assist them. All of this would happen at a time when it is not at all clear whether a serious buyer for the natural gas field would be found, since the purchase would require a huge investment of money and complex development – and the withdrawal of most of the large global oil and natural gas companies from the region.

“People always come to me and say ‘Who’s going to buy it?’ But experience shows that they do,” an antitrust expert says. “That’s what they said in the Brodet committee [which recommended the sale of the banks’ real holdings in 1995] and the Bachar committee [which recommended the sale of the banks’ provident funds and mutual funds in 2005].

"When the refineries were privatized in 2006, people said the refinery in Ashdod was a pile of junk, and the Paz Oil Company bought it for billions. They said Pi Glilot was nothing but a few rusty containers, and Delek bought it for an enormous sum. It’s amazing to see how quickly people change their minds. It’s nothing complicated, and where there’s a will, there’s a way,” the expert says.

Regarding the court case that could result from the measure, the expert adds, “Hearings that go on for years and years? There’s time to manage that. After all, the Tamar field will soon be starting to provide natural gas. Leviathan is the right place for court hearings that will go on for years.”

4. Compromise

The last option is the announcement of a consent order – in other words, a compromise plan reached with the agreement of both parties. The order would be brought for confirmation to antitrust court, which could accept or reject it. A compromise could include a binding set of conditions that Delek and Noble would have to fulfill in order to receive an exemption from being declared a cartel. For example, they might have to agree to price regulation in the event of an absolute monopoly, commit to laying the northern pipeline by a certain date, or leave room in the pipeline for additional suppliers.

One example of a compromise might involve obligating Delek and Noble to sell off a certain portion of their rights, leaving them with a share below a certain threshold. Another proposal, which was reported in TheMarker in the past, is that Delek and Noble would give up their holdings in the relatively small natural gas fields such as Tanin (30 billion cubic meters), Dalit (7.7 billion cubic meters), Dolphin (2.3 billion cubic meters) and Karish (estimated at 57 billion cubic meters before drilling) in exchange for the right to stay in Leviathan and pump natural gas from it.

Only some of these natural gas fields are seen as economically viable for development, and the amount of natural gas in the Dolphin and Dalit fields do not justify the construction of collection treatment plants. In addition, the small natural gas fields will have difficulty competing with the large advantage of Tamar and Leviathan, and it’s doubtful whether they will attract potential buyers. The measure could also be seen as an unjust reward for Delek and Noble, which will be asked to give up their licenses in any case if they do not meet the timeline set for the fields’ development.
 

Courtesy Albatross