Energy giant Chevron, which completed its acquisition of Noble Energy this week, on Monday halted the supply of natural gas from Israel’s offshore Tamar gas field to the Israel Electric Corporation. The multinational is conditioning gas sales on the IEC agreeing to pay the high, above-market price agreed upon in a 2012 contract.
In a letter to the IEC, Chevron stated that it will not sell natural gas for less than $4 per thermal unit, contrary to an agreement by the rest of the partners in Tamar, with the exception of Chevron and Delek. Chevron is willing to sell natural gas only for $6.30 per thermal unit. Should IEC not agree to this price, Chevron will cut its supply from Tamar entirely.
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In order to ensure that Israel still has a natural gas supply the IEC was forced to buy gas from the Leviathan offshore reserve at a price of $4.79 per thermal unit, via a spot contract with Leviathan.
“As of midnight yesterday, Israel had no natural gas supply. If we hadn’t made the deal with Leviathan, there would have been no gas,” said an IEC source.
The IEC is committed to buy 1.75 billion cubic meters of natural gas from Tamar this year. So far it has bought 1.5 billion cubic meters, and it intends to order the remaining 0.25 billion cubic meters by the end of the year. The remainder of the natural gas that Israel needs in order to generate electricity – an additional 3 billion cubic meters – it intends to purchase via spot contracts from Leviathan or Tamar.
At the beginning of the week, the partners in Tamar announced that they’d signed an addition to the original gas deal with the IEC. The agreement stated that Tamar would sell gas for up to $4 per thermal unit, the lowest price in Israel. The deal was signed with the Tamar partners Isramco, Dor Gas, Everest Infrastructures and Tamar Petroleum, which collectively hold 53% of the rights to Tamar. Delek Drilling and Chevron, which hold the remainder, did not agree to the terms, and are refusing to honor the new contract.
Israel’s Deputy Attorney General for Economic Law Meir Levin recently determined that Chevron has veto rights on new contracts involving Tamar through the end of 2021. However, the IEC argues that despite Chevron’s veto right, the multinational has no right to shut off Israel’s natural gas supply as the operator of the Tamar reserve.
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The IEC intends to petition the Antitrust Authority and the court in a bid to force Chevron to renew the gas supply.
It’s in Chevron and Delek’s interest that Israel receive natural gas from the Leviathan reserve and not Tamar, as they control 85% of the rights to Leviathan and only 47% of the rights to Tamar. Thus, contracts with Leviathan bring them double the profits. An additional incentive is the price from Leviathan, at $4.78 per thermal unit, is higher than the $4 in the latest Tamar deal.
The Israel Electric Corporation has been working to reduce the price of its gas supply so that it would not be paying the $6.30 per thermal unit in the original 2012 contract.
Chevron stated in response: "Chevron can confirm that it hasn’t discontinued operations from its facilities in Israel. Chevron is pleased to partner with Israel, and we look forward to supporting the country’s strategy to develop its energy resources for the benefit of the country. Chevron firmly believes in the sanctity of contracts and will honor its commercial commitments. We will comply with all applicable laws in the State of Israel, as we do in all of the jurisdictions in which we have a presence."
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“A foreign company, as the operator and supplier, allowing itself to take a public resource as if it were its own, up to the threat of halting the gas flow to a government electricity utility, in order to serve its own private business interests, is unacceptable,” the IEC stated in a harsh letter to Antitrust Commissioner Michal Halperin.
The IEC accused Noble of using its position as operator of the Tamar reserve to undermine competition between Leviathan and Tamar and advance its own interest in Leviathan, and called on the trustbuster to investigate and charge the company for violating antitrust law.
The incident aggravated the already-strained relationship between Noble and Delek vis-a-vis the other partners in Tamar. The controlling partners sent their own complaint to Halperin, accusing Noble and Chevron of abusing their monopoly on Israel’s natural gas resources. They stated in a letter to the Tel Aviv Stock Exchange, “The only reason Noble had to refuse [to supply gas] was its conflict of interest given its major holding in Leviathan.” Noble controls 40% of Leviathan and 25% of Tamar.
The IEC argues that Tamar cannot exercise its veto power by simply cutting the gas flow, but rather has to petition the court and let the court decide.
A gas sector source commented, “This is a scandal. Noble isn’t exercising its veto right but is holding hostage the other partners’ gas. If it has the guts, the Antitrust Authority needs to raid Noble’s offices tomorrow morning,” said the source, who added that he was surprised that the duty attorney general gave Noble veto rights through the end of 2021 in the first place. The source accused the Antitrust Authority of expressing weakness in the affair so far.