The natural gas flowing from the offshore Tamar field since Saturday has excited many Israelis. It's exciting companies even more because the cheaper fuel will help them boost profits.
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These firms suffered two years of exorbitant energy costs when the natural-gas supply dwindled, first because of sabotage of the Sinai pipeline after the Egyptian revolution, then when the Tethys Sea field dried up.
Linking Tamar to Israel Natural Gas Lines' distribution network could move some companies into the black. Oil Refineries Ltd. (Bazan) posted a $46 million operating loss in 2012 but could save as much as $200 million a year by consuming natural gas. Israel Corporation and Israel Petrochemical Enterprises hold 37% and 30.7% stakes in the company.
Bazan, for example, pays $6.30 per million British thermal units, which is equivalent to paying $250 per ton for mazut, a heavy fuel oil. Mazut, however, has recently ranged between $650 and $700 per ton.
The Bazan group, consisting of Bazan and subsidiaries Carmel Olefins and Gadiv Petrochemical Industries, consumes 500,000 tons of mazut annually. After receiving 35% of its energy needs from the dwindling Tethys Sea deposit, the group's savings in 2013 could reach $98 million, which would be $130 million for a full year.
This is a lowball estimate since it doesn’t take into account natural gas as a replacement for the naphtha Carmel Olefins uses to produce polypropylene. Naphtha prices have climbed to $1,000 a ton. The use of natural gas should also reduce oil refineries' maintenance costs.
Paz Oil, controlled by Zadik Bino, operates the oil refinery at Ashdod. According to Paz, the cessation of natural-gas supply from Egypt in 2011 and the greater dependence on Tethys Sea meant Paz didn't get enough gas. Due to the woes at Tethys Sea, Paz was forced to rely on mazut, preventing it from activating its second power plant, which was geared to run on natural gas.
Paz estimated that the partial shutdown of gas supply from Tethys Sea cost it $33 million in 2012 operating profits. It said its second power plant, which was completed at the beginning of this year, should contribute $12 million a year to operating profits. So a full supply of natural gas to Paz would boost operating profits by $45 million a year.
Israel Chemicals, one of the country's five biggest energy consumers, spent $409 million in 2012 on energy, 8% of its operating costs. The company said in its annual report that higher energy and raw-material costs lowered gross profits by $104 million, mostly due to a 50% reduction in the natural-gas supply from Tethys Sea. Since the end of last week, ICL has been receiving all the gas Tethys Sea committed to in the two companies' March 2008 agreement that expires in mid-2015.
ICL will benefit by more than $100 million a year from Tamar; it's building a 250-megawatt power plant for $320 million at its Sodom facilities. The plant will replace ICL's 110-megawatt plant at the site and provide all the electricity and steam it consumes at Sodom for years.
The new plant, which will be powered by natural gas, should improve ICL's profitability due to economies of scale and its combined-cycle technology that generates additional electricity without the need for additional fuel. ICL earned $1.3 billion in 2012, so the switch to natural gas will provide a moderate boost.
Hadera Paper, meanwhile, suffered a NIS 6 million pretax loss in 2012, so the switch to natural gas could prove a godsend. In 2012, it received just 50% of the gas it was entitled to under its supply deal with Tethys Sea. That set the company back NIS 68 million, forcing it to lay off several dozen workers.
A full supply of natural gas will save the company NIS 50 million to NIS 110 million a year. The company is also benefiting by paying $6 per million BTU to the Tamar partnership, down from the $8.50 per million BTU it was previously charged.
Moreover, Hadera Paper is building a combined-cycle plant to supply all its electricity and let it sell the excess on the national power grid. The $150 million plant, with capacity to generate 120 megawatts, should provide tens of millions of shekels in free cash flow after financing expenses are covered.
Makhteshim Agan Industries, 60% owned by ChemChina and 40% by Koor Industries, stands to save $15 million a year by switching to natural gas. This equals 5% of the company's 2012 operating profits.