Israel Electric Corp. to Pay $4 Billion for Natural Gas It Doesn't Need

State-owned company in discussions with operators of Tamar natural gas production site, aiming to revise agreement which requires it to buy more gas than it can use.

Avi Bar-Eli
Avi Bar-Eli
A growing share of Israel's electricity is produced from natural gas from the Tamar gas field off the Mediterranean coast. Credit: Albatross Aerial Perspective
Avi Bar-Eli
Avi Bar-Eli

The state-owned Israel Electric Corporation is in discussions with the operators of the offshore Tamar natural gas production site, the goal being to resolve the potential problem of the utility having contracted to buy more gas than it can use.

This was confirmed Wednesday by the utility’s chairman Yiftach Ron-Tal at a session of the Knesset Economic Affairs Committee, following disclosure that morning in the Hebrew edition of TheMarker.

The IEC’s contractual commitment to purchase gas from the Tamar field, in which Houston-based Noble Energy currently has a 36% stake and the Delek Group a 31.3% share, could require the electricity utility to buy 3 to 5 billion shekels ($790 million to $1.3 billion) worth of gas in excess of its actual needs between next year and 2019, unless it works out a revised agreement with the Tamar operators. Although in the past, electricity in Israel was produced largely by coal and oil-burning generators, the new availability of natural gas from Israeli offshore exploration sites has motivated the IEC to shift fuel consumption to natural gas.

The issue of possible oversupply of gas at the IEC surfaces as the government has been attempting to get final approval for a regulatory settlement that will address concerns over the monopoly status of Noble and Delek’s holdings in Israel’s two major offshore gas fields, the Tamar field and the much larger Leviathan field, which has not yet come online.

On the issue of the oversupply, in response to a question by Knesset Economic Affairs Committee chairman Eitan Cabel (Zionist Union), Ron-Tal said “the Electric Corporation does not intend, to the extent that it can [avoid payment], to pay for gas that it is not consuming, and if it has overstocks of gas, it will sell them.” The electric company had been given two contractual options to increase the amount of gas that it had originally agreed in 2012 to buy, he said. It is the first option, which was in fact exercised, that creates the concern about oversupply, he explained.

At the conclusion of the meeting, Cabel announced that he would immediately call on State Comptroller Joseph Shapira to investigate the contract that that the IEC signed as well as the decision making at the state utility that led to the agreement.

And in other developments related to the gas industry, questions have been raised about the failure of the Israel Manufacturers Association to pursue negotiating a better price for its members for gas supplies from the Tamar gas field. There have also been suggestions that the inaction is a result of a possible conflict of interest of association president Shraga Brosh.

He and the group’s director general, Amir Hayek, publicly called for expediting the bureaucracy of the process, but they arguably ignored calls from figures in the Israeli manufacturing sector to fight to lower the price of gas at which the gas will be sold in Israel. They also ignored possible concern that the provision in the government’s plan allowing gas produced by the monopoly to be exported might endanger local supply.

Their public stance particularly raised eyebrows because five months ago the sector was provided new leverage in pressing for Israeli industry’s interests in the gas sector but passed up on using it. In February outgoing Antitrust Commissioner David Gilo gave Israeli industrial plants the permission to negotiate purchasing supplies of gas from the Tamar plant in bulk, as a group, without concern that they would be running afoul of antitrust regulations, in what is known as a single buyer arrangement.

Gilo was responding to a request by Brosh’s predecessor, Zvi Oren. “Industrial plants are suffering from a lack of bargaining power in buying gas due to the fact that the Tamar reserve is the exclusive supplier in Israel at the current time,” the Antitrust Commission stated in approving the single buyer negotiations. The Manufacturers Association has so far not exercised the opportunity to negotiate as a single buyer. Complicating matters further, however, Brosh has an interest in a private company that also sells gas to industrial customers and offers them the option of having Brosh’s firm negotiate a price and the terms on which gas will be supplied by the Tamar field, for a commission fee.

Brosh and his brother Yariv together have a 45% interest in the company, Oshrad Natural Gas. Another 45% stake is owned by former Histadrut labor federation Ofer Eini, and the remaining 10% by David Wolf, who worked in Brosh’s office at the manufacturer’s association. In many respect, therefore what Oshrad offers for a fee, the Manufacturers Association would be offering to its constituency for free.

In the past, Shraga Brosh has said that Oshrad would not be involved in such contacts with the Tamar partnership or with anything that gives rise to an appearance of a conflict. In response to an inquiry from TheMarker on Wednesday, manufacturer’s association sources said Brosh had transferred his authority on the matter in February to Hayek to avoid any conflict. The association said it did in fact broach the issue of negotiating a price with one Tamar partner, the Delek Group, but was turned down, with Delek saying that it could not enter into such negotiations due to regulatory uncertainties.

Sources at the manufacturers association added Wednesday that matter was also complicated by other factors including uncertainty as to the demand for gas on the part of industry. The association issued a statement saying that once the regulatory issue over the supply of gas from Tamar and Leviathan is resolved, the prospect of bulk purchases will again be brought before the presidium of the organization.

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