Noble Energy Rejects Key Part of Israeli Government's Plan for Gas Competition

U.S. company opposes plan to have gas from Leviathan field sold by multiple, competing companies.

Off Haifa coast, oil rig at enormous Leviathan natural gas field.
Albatross

Noble Energy, the U.S. company acting as operating partner for Israel’s two biggest gas fields, rejected on Sunday a key part of the Israeli government’s plan to introduce more competition into the industry.

A delegation led by Keith Elliott, the Texas company’s senior vice president for the Eastern Mediterranean, told officials it would not agree to a plan to divide sales from the Leviathan field, which will be Israel’s largest when it goes into production. The government wants as many as five or six independent companies competing to sell the gas in Israel’s domestic market.

The plan comes two months after Antitrust Commissioner David Gilo voided an agreement he had made, that would have left Noble and Israel’s Delek Group in control of Leviathan and the smaller Tamar fields, both off Israel’s Mediterranean coast.

Since Gilo announced his decision, the two sides have been in tense talks about terms to break up the cartel and ensure competition in the domestic market for natural gas.

In an otherwise higher stock market yesterday, energy shares finished lower. Ratio dropped 1.9% to end at 36 agorot (9 cents), while Delek Drilling was down 1.4% by close, at 14.34 shekels.

Government officials reacted angrily on Sunday to Noble’s opposition to the plan to create competition by independent sellers, noting that the government had already retreated on a proposal that would have required Noble to sell its share in either one of the two big fields. Delek, however, would have to sell its Tamar stake.

Officials accused the Texas company of trying to block any and every proposal the government offered to ensure competition. For their part, Noble executives were angered to see that the selling plan remained in the government’s final proposal last Wednesday, even though the company has strongly objected to it.

But government sources noted that if the separate-selling plan is not put into effect, Noble would have effective control over Israel’s natural gas market. The company currently conducts all contractual negotiations with gas customers, who range from Israel Electric Corporation to big industrial users. The government has yet to decide how to structure the sale of gas from Tamar, but if Leviathan sales are not broken up into separate, competitive sales, the U.S. company would effectively control domestic gas sales.

Despite the tough talks from officials, there were already signs yesterday that the government would surrender to most of Noble’s demands on the separate-sellers issue.

Meanwhile, Noble executives expressed reservations about a plan to make Tamar gas sales more competitive, requiring the partners to sell a certain percentage of the gas produced to an independent reseller.

Noble would prefer to become a passive partner, not involved in contract negotiations to sell Tamar gas, although sources said this disagreement was not as critical as the separate sellers for Leviathan gas is.

Another problem for the government’s plan to break up the gas cartel is the requirement that Noble and Delek sell their stakes in the much smaller Karish and Tanin fields.

People in the energy industry yesterday expressed doubt there would be much interest from buyers, because the sales terms allow Noble and Delek to retain the rights to export gas from the two fields. There is also no guarantee that the two companies will make available their infrastructure for delivering the gas from the offshore fields to Israel’s domestic pipeline network.

“Without these preliminary conditions being met, it will be impossible to interest any foreign party in buying Karish and Tanin. And without that, none of this will create competition in the sector,” said one source.

Meanwhile, market sources said on Sunday that Yitzhak Tshuva, who controls 62% of Delek Group, stands to receive 2 billion shekels from selling Delek’s holdings in the Tamar, Karish and Tanin gas fields.

That would be a substantial addition to Tshuva’s fortune. As one of Israel’s wealthiest men, he is believed to have assets of between 12 billion and 15 billion shekels. The single biggest is in Delek Group, which trades on the Tel Aviv Stock Exchange at a 7-billion-shekel market cap, but he also controls the closely held Elad Group, which invests in North American real estate.

Delek holds 31.25% of Tamar, which contains an estimated 290 billion cubic meters of natural gas and 4 million barrels of condensate, as well as 53% of Karish and Tanin.

Sources told TheMarker that the final value of the fields will depend on a host of factors, among them the price gas contracts are set at and escalator clauses built into the contracts and Tamar’s potential for exporting gas.

On the other hand, since the Tamar field is mostly developed and producing, much of the uncertainty over its valuation has been lifted. Analysts said Tamar could be worth between 11 billion and 15 billion shekels – much more than the larger Leviathan field, which may be worth no more than 8 billion shekels because it is still in development.

At 12 billion shekels, the value of the holdings that the two Delek units that have stakes in the field – Delek Drilling and Avner – is a combined 3.7 billion shekels. Karish and Tanin are worth as much as 750 million shekels together but will probably sell for less, so Delek’s share would be worth about 345 million shekels.