Israel, Cartel Reach Accord on Regulating Natural Gas Industry

Energy minister says revised framework paves way for developing energy resources.

Courtesy Albatross

National Infrastructure, Energy and Water Minister Yuval Steinitz promised Thursday that the development of Israel’s natural-gas and oil reserves would finally move forward, after the state reached an agreement with the energy companies on regulatory policy for the industry. 

Steinitz spoke at a press conference hours after the two sides agreed on terms late Wednesday night. The deal followed weeks of intense negotiations and considerable public debate over the so-called framework agreement governing the future of Israeli energy exploitation. 

“The significant discoveries of the Tamar and Leviathan gas fields are not the final word,” Steinitz said, referring to the two offshore fields that account for the lion’s share of Israel’s known natural-gas reserves.

“More gas and oil discoveries await us,” said Steinitz, who urged more foreign firms to invest in Israel. “There is no certainty on this matter, but there is a reasonable chance that further discoveries are waiting to be made.”

The agreement elicited criticism from some lawmakers and government watchdog groups. Critically, Economy Minister Arye Dery refrained from fully endorsing it. But energy shares on the Tel Aviv Stock Exchange rallied on news that uncertainty over the industry’s future was now lifted.

Shares of Ratio Oil Exploration, a partner in Leviathan, jumped 6.1% to close at 38.50 shekels. Avner Oil Exploration and Delek Drilling, both partners in Leviathan and Tamar, rose about 5.7% to 3.05 shekels and 15.89 shekels, respectively. But in New York, shares of Noble Energy, the Texas company that is the operating partner for both fields, were unchanged.

The framework, which will be submitted for the cabinet’s approval on Sunday, contains three important elements that were revised from the original over the six weeks the two sides negotiated.

The first calls for all future contracts signed between the Tamar partners and electricity providers — the biggest customers for the gas — to be initially set at $5 per million British thermal units, less than the ceiling price originally set in the framework. 

The price will likely go down to $4.70 at the end of the year but then climb to $6.40 by 2030 due to clauses linking the price to inflation, the government said.  

The second relates to milestones for the Leviathan field, which is still undeveloped but will become Israel’s biggest by far when it goes into production. Under the revised framework terms, the government set milestones for the development of the larger Leviathan offshore site, while the gas companies committed to spending no less than $1.5 billion over the next two years and to begin production within five years.

Failure to meet these milestones will not incur specific sanctions, but it will free the government from its commitment to regulatory stability, the third major change to the framework. 

Known as the “stability” clause, it commits the government to making no changes in regulations touching on the financial and structural aspects of the gas industry over the next 10 to 15 years. But in a legal compromise hammered out in the revised framework, the clause doesn’t commit the Knesset to “stability,” rather it calls on all future governments to make every effort to block any legislation submitted by Knesset members.

The agreement would also unfreeze a deal to export gas from the Tamar offshore field to facilities operated by the Spanish company Unión Fenosa in Egypt for reexport to Europe.

Prime Minister Benjamin Netanyahu, who spoke at the press conference but left without answering reporters’ question, defended the agreement and asserted that he had held fast against its critics, who were particularly unhappy about the pricing terms and the stability clause. “Like I promised, I did not to give into populism,” he said.

But Dery, who will be responsible for signing off on provisions exempting the gas cartel from antitrust rules, said yesterday he was still undecided.
Dery had derailed the initial framework by refusing to sign off on the agreement before a scheduled Knesset vote that in the end did not take place.

“Minister Dery is consistent and he will do exactly what he said a month ago: He will study the framework agreed with the gas companies, participate in the cabinet discussion and then decide what to do,” his office said in a statement.

Critics of the agreement have expressed concern about what they view as Israel’s dangerous dependence on the single Tamar field, as well as the ability to sell gas to Unión Fenosa and other regional customers. 

They framed the debate primarily in national security terms, but also expressed concern that zigzagging over regulation would delay the fields’ development and deter future investment.  Steinitz said yesterday that years of delays in developing Leviathan, discovered in 2010, has cost Israel tens of billions of shekels.

On the other side, critics — who included Antitrust Commissioner David Gilo and other officials — were concerned the government had given too much control over the energy market to Noble and Delek and didn’t do enough to ensure prices were low. The framework calls on Delek to divest its Tamar stake and for Noble to reduce its holding, but lets them keep Leviathan.
The Movement for Quality Government, a good-governance advocacy organization, took issue yesterday with Netanyahu and Steinitz’s portrayal of the framework as being in the public’s interest.

“The framework is bad for society, and every one of us will feel it hard  in his pocket, in addition to damaging democracy and governmental  norms,” the organization said in a statement.

With reporting from Reuters.