Natural Gas Cartel Defies Israeli Government on Price Ceiling

Commissioner Gilo’s resignation, gov’t friction strengthening companies’ hand.

Courtesy Albatross

Antitrust commissioner David Gilo’s resignation and internal friction in the government have strengthened the natural gas companies’ self-confidence versus the government, as evidenced by the Delek-Noble Energy cartel’s flat rejection of the state’s demand for a price ceiling on gas supplies.

In addition, the four companies that own the Tamar offshore natural gas production site have signed three new gas contracts at a higher price than the one set by the government only two months ago.

The cartel companies Delek and Noble objected to setting a gas price ceiling, although the one proposed by the government derives from the current market price.

TheMarker has learned that the Tamar consortium – Delek, Noble Energy, Isramco and Alon Gas – decided to ignore the temporary gas price ceiling set only two months ago by the Electricity Authority with the Finance Ministry’s backing.

The cartel companies recently signed three new contracts with the entrepreneurs of private power stations planned in Ramat Gavriel, Alon Tavor and Sorek. These contracts were revoked two months ago following the Electricity Authority’s refusal to recognize them, claiming the gas price dictated by Tamar’s owners reflects an alleged monopolistic rent.

The contracts cited a base price of $5.75 per million BTU with a controversial link to the American consumer price index plus/minus 1 percent. In contrast, the base price the Electric Corporation had agreed on was $5.04 per million BTU with the same linkage. This ensured the gas provider from the new stations that the gas price would rise automatically up to $8-7.5 per million BTU.

The Electricity Authority stipulated that it would agree to the lowest price ceiling in the market today, in other words the relatively low gas price it had agreed on with Tamar in its option to increase the gas purchase from the Tamar reserve. This is a base price of $5.35 per million BTU linked to the American CPI at a 30 percent rate only. The authority says this mechanism will prevent the gas price from rising beyond $6.25 per million BTU.

Under the agreement, the authority’s decision will apply to the gas agreements signed by the end of March 2016. This is based on the assumption that by this date the government will have completed its negotiations with the gas companies on the structural changes in the field, or sets another supervised price. However, this temporary instruction did not last.

Ten days ago Delek reported that it signed a new contract with the power station at the Sorek desalination plant, of which it is an indirect partner. The contract reportedly links the price gas to the Electric Corporation’s production rate, following a minor change in the gas’ base price.

At the same time Tamar’s owners agreed with the two northern power stations on a new contract. This contract consists of a linkage closer to the original one (index + 1 percent) than to the linkage dictated by the Electricity Authority.

The gas companies argued in the past that the Electricity Authority was not authorized to supervise the gas price, but only to set the price it would agree to cover with the electricity tariffs guaranteed to the entrepreneurs. In view of this, the cartel set the new gas price according to its own calculations, while the entrepreneurs will be required to cover the cost difference, if any occurs.

However, Tamar’s owners’ conduct caused resentment in the gas market because the Electric Corporation decided a month ago to realize only 25 percent of its option vis-à-vis Tamar. In other words, Tamar’s owners have a sufficient amount of gas that had been priced low from the start and their insistence on charging a higher price did not allegedly stem from financial considerations.