New Controls Could Reduce Gas Price by 30%, Interministerial Panel Finds

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The platform at the Tamar offshore gas field.Credit: Albatross

An interministerial committee has found that imposing governmental controls on the natural gas produced in the Tamar offshore field would set the market price at $3.70 per unit, 30 percent less than the current average. The panel’s recommendations have yet to be presented due to political opposition by Prime Minister Benjamin Netanyahu, former Finance Minister Yair Lapid and former Energy Minister Silvan Shalom.

Haaretz has learned that, according to several possible scenarios from the panel that studied natural gas prices, a price of $3.70 would be sufficient to cover past and future exploration and drilling at Tamar, as well as current operating and capital expenses. The owners would get an 18% return on their investment, based on the Sheshinski Committee’s recommendations for the distribution of profits.

The government wants to set as the current average price of $5.40 an upper limit for new contracts, as part of its proposed compromise arrangement with the gas companies – Israel-based Delek Group and Texan firm Noble Energy. The $3.70 price would lower consumer expenses on electricity by 5.5 percent, saving them 1.3 billion shekels ($341 million) a year.

The lower price will be possible, the panel says, due to the low cost of production at Tamar and the tax benefits the two firms received as part of the softening of tax laws regulating the profits made from natural gas, making the development of that field extremely profitable.

According to several scenarios the committee examined, even the doubly expensive development of the gigantic Leviathan field could be fully financed at $3.70 per unit, based on providing its owners with guaranteed contracts for exporting gas and supplying it to local markets. Despite this, no official recommendation regarding the setting of prices has been submitted as yet.

This stems from fears that the development of Leviathan will be much more expensive, possibly halting its progress, and concerns that setting a low bar would limit returns made on developing gas fields in the future – this could inhibit new players from joining, increasing the dependence of the local market on the Delek-Noble Energy monopoly.

A further stumbling block was a dilemma over the right level of taxation, since the Sheshinski Committee ruled that the state is entitled to 50 percent of all royalties. The interministerial committee didn’t want to subsidize natural gas, but recognized that taxation – which would ensure sufficient government revenues – would place a burden on the consumer.

A second dilemma was finding a balance between the price imposed on the consumer for the sake of future development of new gas fields and the benefits accrued from future development, after enabling the entry of new developers into the gas-production area.

Some panel members believed that $4.50 per unit struck a good balance between helping the consumer and ensuring future development at Leviathan. Using this figure as a ceiling, which was also proposed by an Italian expert who studied the issue, would reduce the price of natural gas by 17 percent and electricity by 3 percent, which would save consumers 1 billion shekels. A further 6-8 percent could be saved in the future by canceling the draconian linkage clause in the contract regulating the Tamar field. The Energy Ministry opposes any regulation and says that if any is imposed, the price should be set at $6 per unit.

The Tamar gas field was discovered in 2009 and Leviathan a year later. Combined, they hold an estimated 29 trillion cubic feet of natural gas. Tamar came online in 2013, but Leviathan will not start production before 2019 at the earliest.

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