A fateful debate involving complicated legal issues and huge business interests is taking place in the government. Many of Israel’s biggest companies are involved, as are many of the country’s top lawyers.
It’s all dedicated to a decision to be made in the next several weeks on whether to take steps against the natural gas cartel. At stake is not only the cost of living for ordinary Israelis but the ability of regulators to exercise control over the country’s natural gas industry. There’s also a business angle to the debate because energy contracts worth billions of dollars over the next 15-30 years hang in the balance.
The origin of the dispute is a complaint with Israel’s antitrust commission filed on November 20 by the four minority partners in the Tamar natural gas field against the senior partners – Israel’s Delek Group and Noble Energy of Texas.
The four – Isramco, Dor Energy, Everest (Harel Insurance) and Tamar Petroleum – accuse Delek and Noble of abusing their cross-holdings in both Tamar and the much bigger Leviathan field to undermine competition between the two.
The two companies are alleged to have created a price cartel at the expense of the minority partners in Tamar, when the two fields were bidding for an important contract with state-owned Israel Electric Corporation last year.
In their complaint, they say they wanted to offer terms to IEC that would have saved the company $70 million over two years. But, the four allege, Delek and Noble vetoed the proposal.
The four claim that Delek and Noble, which together control 47% of Tamar versus 85% of Leviathan, have a greater interest in selling Leviathan gas over Tamar gas because they will earn a greater share of the profits. A newer gas reservoir that only began production in the last three weeks, Leviathan has fewer customers.
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In the end, the Tamar and Leviathan partnerships made almost identically priced bids for the two-year contract worth about $850 million, and Leviathan won.
Losing the contract has hit Tamar Petroleum hard. Since it was spun out of Delek in 2017 with a 16.75% share of Tamar, its share price has plummeted. Competition from Leviathan and Karish, owned by the British-Greek company Energean, has caused it to lose contracts with big customers like Israel Chemicals and private electric-power producers; the IEC contract was the biggest loss of all.
At the end of last week, Tamar Petroleum was forced to pull a 140 million shekel ($40.4 million) secondary offering on the Tel Aviv Stock Exchange for lack of demand from institutional investors, even though the securities were being offered at a sharply discounted price.
On its face, it was a classic example of a monopoly exploiting its market power. However, in the Israeli context the situation is more complicated,
It stems from the 2016 gas framework agreement, aimed at Delek and Noble’s lock on the Israeli energy market by virtue of their control of the two giant fields. The government agreed that both companies could retain stakes in both reservoirs until 2022, by which time Delek will have to divest from Tamar and Noble reduce its holding to 25%.
The absurd situation that resulted from this requires all potential natural gas customers to meet twice with Ori Loewenstein, director of gas marketing at Noble Energy – once to get an offer from Tamar and a second time from its “competitor” Leviathan.
Thus, when IEC sought bids to supply it with additional natural gas, Tamar and Leviathan both offered to sell it for $4.78 per thousand cubic feet.
“How could it be the same price?” Shuki Horesh, the attorney representing IEC, asked the court. “I ask that question, TheMarker asked the question and your honor asked the question three times: Did they sit down together? Did the Mr. Loewenstein who represents Tamar, and the same Mr. Loewenstein that represents Leviathan, decide between themselves what price they would offer?”
To which Zvi Agmon, the attorney representing the Leviathan partners admitted: “There can’t be real competition when I own both places. Who expects me to compete with myself?”
Over the last decade, scores of experts, not to mention TheMarker, urged that the cross-holding either be banned or, if not, to subject natural gas prices to supervision.
The partial solution that was finally implemented has boomeranged because Delek and Noble say the framework does not prohibit them from acting as they have. They contend that any government interference in the veto they have over Tamar would violate another condition of the framework.
Who’s paying for Leviathan?
The financing for development of Leviathan was only made possible because the government had agreed to those conditions. In the end, however, the financing effectively came at the expense of the 2.5 million consumers of electricity – the ones who pay $5 per million BTUs of gas from Leviathan when the smaller Karish field, for example, is charging only $4.
The debate is now on whether the government can step in to the situation it has created.
Still, this outcome was inevitable based on the framework terms. It was evident to anyone who cared to look. As TheMarker wrote in February 2016 during the framework debate, “Is ensuring Leviathan gas at the end of 2019 ... worth the high price and the loss of Israel’s democratic character? Wouldn’t it be better to devise a better framework agreement, which would as a fait accompli break the monopoly, both for the present and for the future, and try for a competitive market, even if it comes at the cost of a legal battle?”
Meanwhile, earlier this month, activists from the right launched a campaign against TheMarker over Leviathan. The reasoning goes that, five years ago, TheMarker expressed doubt about whether any gas would ever be produced at Leviathan, and therefore any other criticism it makes about the gas framework should be dismissed out of hand.
Yes, even those critiques are now being brought up by the Tamar minority partners.
Who is behind the campaign? It is hard to say, but it looks strikingly familiar to a 2010 campaign funded by the gas companies against TheMarker and Prof. Eytan Sheshinski for supporting giving the government a greater share of gas profits. Similar attacks were mounted over other issues.
Since all Israelis bear the cost of overpriced gas, the issue of how to regulate and tax the industry isn’t one for the left, the right, Jews or Arabs. It’s not hard to imagine who is behind the campaign.
There will always be someone who gladly acts as a tool for business interests, so dealing with them is futile. What is important is not to succumb to the background noise they create, and not allow ourselves to get distracted from the debate currently underway on cross ownership of gas reservoirs.
Eran Azran contributed to this report.