It’s doubtful whether Chevron was expecting that within days after completing its acquisition of Noble Energy, and with it the Leviathan and Tamar gas fields, that it would become embroiled in a controversy.
Last week, Noble, now a unit of the U.S. energy giant, refused to implement an agreement some of its partners in Tamar had reached with Israel Electric Corp. to sell the utility natural gas at a relatively cheap $4 per million British thermal units.
Noble said it would only sell the gas at $6.30, the price set in IEC’s original 2012 contract on the ground that the new agreement wasn’t valid. As Tamar’s operating partner, the U.S. company had the power to impose its decision on the other partners.
Noble’s position created a stir. IEC and some of the Tamar partners urged the Competition Authority to intervene, arguing that Noble had abused its monopoly power. They called on the authority to open a criminal investigation against the company and its executives. The Knesset is expected to take up the issue later this week.
However, Deputy Attorney General Meir Levin recently concluded that, based on his strict reading of the natural gas framework agreement, Noble indeed has veto power over Tamar until the end of next year. If so, the Competition Authority will not intervene, even if executives at IEC and among the Tamar partners disagree.
It’s likely that the decision to veto was taken by Noble executives, without consulting Chevron senior management. The latter has yet to learn the ways of Israeli business culture and norms. Be that as it may, the decision is a blow to Chevron’s image just as it enters the Israeli business scene.
Not surprisingly, Chevron sought to calm matters, noting in a press statement that it had just arrived in Israel and is working to build trust with various stakeholders. It vowed to do just that in the coming weeks.
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In fact, just two days after the veto crisis, Tamar gas started to be delivered to IEC power plants. The two sides reached new understandings, ending the public clash. The solution isn’t particularly creative and could have been put into effect before the crisis exploded: They agreed to put off a decision on pricing till later, in line with what regulators say.
However, if Chevron wants to enter the Israeli market on the right foot, it will have to do more than engage in messaging. It will have to take concrete steps which demonstrate that the predatory conduct of the Noble era is over. The first step should be to voluntarily surrender the veto power it has over Tamar, even if legally it retains it for more than another year.
Noble’s veto power is the main issue regulators and Tamar’s other partners are grappling with right now. It enables Noble to effectively control the natural gas market and steer gas deals to the Leviathan field.
Why would it do that? There are several reasons. One is that it controls 40% of Leviathan, compared with just 25% of Tamar, so it earns a bigger share of profits from the former. Leviathan prices are higher and, because it is a newer field, it is exempt from the so-called Sheshinski tax on windfall profits.
The Competition Authority is starting to act to open the gas market to competition. It has announced plans to subject Noble’s decisions regarding Tamar to a majority vote of partners starting at the end of 2021. Since the minority partners have a combined 53% stake, they will gain effective control that will enable them to sign contracts on behalf of the partnership, and compete with Leviathan.
A voluntary surrender of its veto rights would send a powerful message to the market and draw a line between it and Noble as a company that hasn’t come to Israel to collect monopoly rents. In any case, the start of the Sheshinski taxes on Tamar will drastically reduce profits starting this year. Tamar’s operations are marginal for a company the size of Chevron. It will generate much bigger profits as it fully develops Leviathan.
It will also enable competition to emerge in the Israeli domestic market at a relatively critical time. Energean, the Greek energy company that owns the much smaller Karish field, has recently signed contracts that come close to ensuring customers for all its output. It will no longer be a competitor for new business, leaving the market to Tamar and Leviathan alone.
For Chevron, pulling back from the veto will have almost no financial implications. The surplus profits it will earn from Leviathan through the end of 2021 will be in just the tens of millions of dollars, crumbs for a company of Chevron’s size.
If Chevron wants to really send a message of change, the way to do it is to give up the veto. It’s a small financial loss to pay for a big boost in its image in a country that is just getting to know it.