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Israel Approves Leviathan Off Shore Gas Deal

Reuters reported that Israel has reached a deal to develop the important Leviathan offshore gas field after difficult negotiations with development partners, Houston-based Noble Energy, Inc.and Israeli Partenr, Delek Group:

Aug 13 Israel’s government said on Thursday it reached a deal that will pave the way for the development of Leviathan and two other offshore natural gas wells.

“The outline will bring Israel hundreds of billions of shekels in the coming years,” Prime Minister Benjamin Netanyahu told a news conference, saying he will present the agreement to the cabinet on Sunday for a vote.

The controversial deal initially revealed in June will allow Texas-based Noble Energy and Israel’s Delek Group to keep ownership of the largest offshore field, Leviathan. They are required to sell off other assets, including stakes in another large deposit called Tamar.

Critics say the agreement still leaves Noble and Delek with too much power since they would control most of Israel’s gas reserves.

Netanyahu, who has struggled to muster enough support for an agreement, earlier this week won crucial backing from the central bank.

What a difference a day makes. Noble Energy had threatened to walk after the narishkeit of Dr. Gilo and his Socialist minions reneged on a compromise deal last December. Now, as we have written, Israel and trilateral alliance of Cyprus and Greece can develop a major source of energy in their respective Exclusive Economic Zones in the Eastern Mediterranean and Levant Basins. good to see the spikes in trading for both Houston-based Noble Energy in early trading on the NYSE and Delek Group on the Tel Aviv Stock Exchanges.

Sometimes, as the expression goes, Ha Shem works in mysterious, yet positive ways. Kudos to patient Israeli Prime Minister Netanyahu, Energy Minister Steinitz and Bank of Israel Governor, Dr. Karnit Flug.

EDITORS NOTE: This column originally appeared in the New English Review.

Israeli Populist Protest Against Offshore Gas Development Deal Misguided

Last week, Israeli PM Netanyahu effectively declared offshore gas deal with Delek Partners and US Noble Energy, Inc. a national security issue. This was the conclusion reached after discussions with the development partners and economic analysis of other major gas developments resulting in a proposed framework to replace a series of bust deals with the Israel Antitrust Authority. He and his Energy Minister Yuval Steinitz may have a daunting task ahead next week contending with coalition partner, Economics Minister Aryeh Deri of Shas and Populist/Green opponents of the new deal. They support the position of the outgoing General Director of the Israel Antitrust Authority, Dr. David Gilo who resigned on May 26th objecting to the new deal saying he would not leave until August 2015. We have written about the offshore gas developments in several New English Review (NER) articles andIconoclast posts.  See: “Could Israel Lose the Energy Prize in the Eastern Mediterranean” NER (Jan. 2015). We specifically pointed out the radical populist actions by Dr.  David Gilo, who didn’t appear to have the requisite understanding of   energy market dynamics, let alone geo-political realities, or the risk capital requirements to develop and distribute gas.

Last December Gilo reneged on a March 2014 comprise deal with the Delek-Noble development partners instead accusing them of being a duopoly operating  in restraint of trade. Instead he sent the development partners a consent decree forcing sale of interests in the offshore gas deals for which they provided the risk capital to bring to develop them. Thus began the unraveling of a potentially important development of significant natural gas reservoirs in Israel’s offshore Exclusive Economic Zone in the Eastern Mediterranean Levant Basin.  Delek and  Houston based Noble Energy  had spent  over $6 billion before bringing  in the  9  trillion cubic feet tcf Tamir field in 2009 and  the 21 tcf  Leviathan field in 2011. Delivery of gas from the Tamar field began in 2013, while the significant larger Leviathan field might be brought on stream in 2018.  When the Knesset adopted revised   royalty and tax scheme proposed by the Sheshinski Committee in 2013, Israel looked like it might be on the path to a bright economic future.  That included the possibility of earning upwards of $70 billion in future revenues funding an authorized Sovereign Wealth Fund. The tax revenues from the gas sold for domestic use and export would substantively alleviate social program and national security budgetary burdens. That was also evident to former Reagan National Security aide, Prof. Norman Bailey of Haifa U and, Caroline Glick, deputy managing editor of the Jerusalem Post in an op-ed published on Thursday, July 2, 2015, Israel’s  Populist Energy Crisis.  

Saturday night, July Fourth, the Jerusalem Post reported, thousands from the student Green Course movement protesting the new gas deal from Netanyahu in Tel Aviv’s Rabin Square, Jerusalem, Beersheba and at the PM’s home in Caesarea.  According to the Post, “The activists demanded lower gas prices and increased use of gas in domestic factories, accusing the government of bending to foreign interests.”

The new proposal that Netanyahu is poised to secure cabinet approval on Monday, July 6th had the following terms according to the Post:

Under the government’s gas outline, Delek subsidiaries Delek Drilling and Avner Oil Exploration would have to exit the 282-b.cu.m, Tamar reservoir, whose gas began flowing to Israel in March 2013, selling their assets there within six years.

Houston-based Noble Energy could remain the basin’s operator, needing to dilute its ownership from the current 36 percent share to 25 percent within the same time frame.

The Delek subsidiaries and Noble Energy would be required to sell their holdings in two much smaller offshore reservoirs, Karish and Tanin, within 14 months. Because the buyer would be required to sell gas only to Israel, export allocations intended for these reservoirs would be transferred to Leviathan, according to the outline.

In 2013, the cabinet decided to cap exports at 40% of production, and pipelines designated for export will not be entitled to tax benefits guaranteed to local pipelines, as mandated by the Sheshinski Committee, whose recommendations on hydrocarbon taxation became law in 2013.

Glick in her Post op Ed  suggested that the hit that Israel had taken in foreign direct investment had a lot to do with misguided populist economic doctrine that pervades the Zionist Union, Yesh Atid, some coalition partners and Knesset opposition.  From my own investment banking exposure in Israel these populist economic views are a reflection of the founding Labor Socialist parties and the Histadrut. The latter owns enterprises that have never been effectively privatized.  It is also a poor reflection on a country that prides itself on the law, that doesn’t extend to honoring contractual obligations. She argues that is reflected in downward trends in Foreign Direct Investment cited in the most recent UN Council on Trade and Development report:

In 2014 Foreign Direct Investment in Israel was 46 percent below levels in 2013, dropping from $11.8 billion to $6.4bn. During the same period worldwide direct foreign investment dropped a mere 16%, meaning the drop in investment in Israel was nearly three times the global average.

Israel also had demonstrated that it was okay for foreign partners like Noble Energy to invest billions in offshore energy development, just as long if it came through, that the terms could change denying appropriate returns to risk investors.  Moreover, the hue and cry in Israel that the duopoly of the Delek –Noble gas partnership could result in price gouging was false.   When in fact since the Tamir field came on stream average gas prices dropped in Israel resulting in both lower energy and manufacturing costs.

The Israel Noble Energy manager Binyamin Zomer reinforced Glick’s observations with these comments cited in Globes Israel Business:

Let’s make it clear. We didn’t break the law, and we didn’t prevent competition. What we did do was to succeed beyond the expectations of the government that invited us to invest in Israel. Israel was happy, it seems, for Noble Energy to risk its money in Israel, as long as it was unsuccessful. There is a monopoly – that’s not a crime. Let’s understand why this happened. The company agreed to invest its money where other companies refused (and we won’t apologize for that); the supply of gas from Egypt ended in 2011 (and that was not our fault); other companies with no experience found no gas (again, not our fault); and the incessant interference by regulators with no background in oil and gas drove every gas company away, except for Noble Energy.

Glick offered the following proposals to rectify the impasse:

If we are to correct the damage – to our energy market specifically and to the Israeli economy overall – there is only one path to take. The Knesset must abrogate the 2011 windfall profits law and end all attempts to define the Delek-Noble partnership as a monopoly while seeking new, creative ways to seize their profits.

Then, the Knesset must pass a law that will protect investors from attempts to retroactively change the terms of operating licenses they receive from the State of Israel.

Israel has enough problems with the anti-Semitic boycott movement that is growing by leaps and bounds. We need to curb our populist tendencies and stop making those who want to invest in Israel feel that they are fools to do so.

As the late Hollywood and radio personality of my youth Bill Bendix might opine, “this is a rotten development.” Israel’s obsessive democracy  makes  the country  prone  to  divisive squabbles and in this case  possibly resulting in losing  a glittering economic future.  This latest Knesset speed bump doesn’t bode well  for Israel  achieving first world economic preeminence.  As we have written innumerable times these Israeli populists are economically uniformed  genetic socialists who have no understanding of both geo-political resource realities and commodity market dynamics or the risk reward relationships undergirding energy development. We blame Dr. Gilo whose dictatorial arrogance reneging the original compromise deal with both Delek Group and Noble Energy was nothing but political grandstanding . He was awaiting the victory of Zionist Union and populist parties like Yesh Atid that didn’t occur on March 17, 2015.  He should never have been permitted to remain as the radical leftist Antitrust Authority General Director until his departure in August after he rejected the Netanyahu government’s replacement deal on May 26th. No self respecting energy development group will invest a shekel in Israel’s energy resources because it is no better than a third world country that doesn’t honor agreements. Israel may have just screwed itself out of the future source of wealth that would alleviate social disparities and the budgetary burdens of national defense. Prime Minister Netanyahu is now caught in a nearly impossible task to  push through this new agreement on July 6th given the makeup of his ruling coalition. The fictional book and film character Forest Gump has the last word on those populist protesters in Israel, “stupid is as stupid does”.

EDITORS NOTE: This column originally appeared in the New English Review. The featured image is of Tel Aviv offshore gas deal protesters, July 4, 2015. Source: Jerusalem Post.

Israel’s Gas Pains Relieved

Great business news from Israel this week. Israel has become a veritable cyber ware super power.  According to Ha’aretz, sales of computer and network security technology reached more than $6 billion in 2014, accounting for 10% of the global $60 billion market place. The other great news was the resignation on Monday, May 25th of Dr. David Gilo, head of the independent Israel Antitrust Authority.  In his statement Gilo said:

My decision is a result of a number of considerations, most importantly the report that the cabinet, particularly the Prime Minister’s Office, the Ministry of Finance, and the Ministry of National Infrastructure, Energy, and Water Resources, will do everything they can to push forward the currently emerging structure in the natural gas sector. I am convinced that such a structure will not lead to competition in this important market, and could possibly detract from the independence of the Antitrust Authority, a matter of public importance, and harm its ability to carry out unilateral measures

 He had single handedly  brought to a halt the development of Israel’s important off shore gas fields by the Israel-US partnership, Delek Group Ltd. (TASE: DLEKG) and Houston based Noble Energy , Inc. (NBL-NYSE) . The partnership had put up $6 billion in risk capital to develop the country’s offshore gas fields, achieving energy security, creating a potential wealth producing export market.   Gilo stopped development of the giant Leviathan field in December 2014 when he reneged on a compromise deal reached earlier last year involving selling two existing smaller fields developed by the partners offshore in the country’s Exclusive Economic Zone (EEZ).      While he resigned on Monday, May 25th, he won’t be departing until the end of August, 2015.  Allegedly that would give him time to clean up his other consumerist initiatives.  However, many believe based on his statement his real agenda was to take pot shots at the compromise plan being floated by the Ministries of Finance, Energy and Infrastructure, backed by Prime Minister Netanyahu for good and sound national security reasons.   A legal opinion from the State’s attorney General provided authority for the government to develop and conclude the proposed agreement with the development partners.    According to Globes, Israel Business, the compromise plan:

Requires Delek Group, Ltd. to sell all of its holdings in the Tamar natural gas reservoir within six years. Noble Energy, Delek Group’s partner will be required to reduce its holdings in Tamar from 36% to 25%, and will be barred from marketing gas from the Leviathan reservoir to Israel. At the same time, the agreement leaves Noble Energy with control of both reservoirs as the company operating them.

As we have written in both NER articles and Iconoclast posts Gilo was seeking to do the impossible. To create competition by forcing the sale of one of the two major fields, the Tamar, hoping to induce foreign competitors to make investments for the completion of the giant Leviathan gas field and thereby lowering energy prices through competition. Problem with that misguided view was there were few if any takers. Further, it put into jeopardy signed agreements for delivery of gas from the existing Tamar field with the Palestinian Authority, Egypt and Jordan. Moreover the government killed a potential minority investment by Australian energy development firm, Woodside, PTY for development of LNG from the Leviathan field and delivery to the Asian market. As a result, Nobel is presently working with the Republic of Cyprus to develop an LNG processing and distribution complex to link up with the Republic’s Aphrodite offshore gas field adjacent to that of Israel’s Leviathan.

In the run up to the March 17th, Knesset elections, it was apparent that Gilo was grandstanding perhaps hoping that the Zionist Union opposition might win. If that occurred he could pursue his consent decree proposal accusing the partners of being a monopoly in violation of Israeli basic law. Instead, Gilo and entourage took off for a junket to Holland to see how the Netherlands handled their off shore gas fields development.

It quickly became apparent that the Netanyahu government was not going to abide by this high handed patently political move by Gilo.  At stake is more than $76 billion in potential tax revenues that might be used to offset burdensome national and other social program expenditures .

Prior to Gilo’s resignation, the Netanyahu government  reached out to Professor Eitan Sheshinski at Hebrew University who had developed the original tax plan in 2010 to produce revenues from oil and gas developments both onshore and offshore. Sheshinski was appointed as adviser to Energy Minister Yuval Steinitz, who he had worked with in the development of the original tax plan. He suggested in a Globes Israel Business interview that liquidation of the Tamar field ownership would not lower prices.  Additionally he said that Gilo’s original intent of controlling prices was unproductive.  Sheshinski was cited by Globes saying:

All in all, today’s price is reasonable by the standards of Europe, and certainly at the level of the Far East.  The price of gas in Europe is $8-10 per energy unit, and is about $15 in the Far East. Delek Drilling Limited Partnership (TASE: DEDR.L) and Avner Oil and Gas LP (TASE: AVNR.L) today reported that the average gas price in Israel in the first quarter of 2015 was $5.45 per energy unit.

Sheshinski also asserted that controls over natural gas prices might do more harm than good. “Controls give a lot of authority to a bureaucratic system, and experience does not justify optimism,” he said, adding, “I don’t see how the regulator in Israel can adapt himself to the many changes occurring worldwide in gas prices. You have to keep this as far as possible from the bureaucratic and political system.”

Globes noted the Finance Ministry’s compromise proposal for ‘soft pricing’:

The state proposed that the price of gas in future contracts be a weighted average of gas prices in the contracts that have already been signed in Israel.

Sheshinski’s assessment of the Gilo’s objective , liquidating the monopoly, that a duopoly would enhance price competition was wrongheaded:

Both global experience and economic theory explicitly state that anyone who thinks that a duopoly will cause perfect competition is wrong. In this matter, you also can rely on our experience in Israel. In a duopoly, the controlling shareholders have a common interest… some claim that a duopoly’s prices are even worse than those of a monopoly.

He went on to address the current international markets impacted by a spike in US oil and gas fracking production:

In my opinion, the goal is to ensure that gas prices in Israel are not different from those prevailing in similar countries around the world. A revolution is now taking place in global energy prices. The US is becoming the world’s biggest oil producer, and both oil and gas prices are on a downtrend. In my opinion, this trend will continue, and our goal should be not to pay more than the reasonable prices of countries in a similar situation with respect to gas reservoirs.

Another expert who happened to be in Eilat,  Israel  at an international conference  this week was a law partner from the Washington, DC firm of Greenberg Traurig, Global Energy & Infrastructure Practice co-chairman, Kenneth Minesinger,  “legal advisor of the Alaska state government in its negotiations with the oil and gas companies.”   Minesinger had these comments in a Globes interview:

I’ve been advising the Alaskan government how to negotiate with the gas companies for decades. Like in Israel, two major reservoirs were discovered in Alaska: Prudhoe Bay and Point Thomson. The population there is small, and the gas industry is controlled by three companies.

Both Alaska and Israel are now trying to find out how to negotiate with the gas companies in a way that will safeguard the interests of the state and its residents, together with the gas companies’ interests.

I think that it’s necessary to act quickly in order to ensure development of the Leviathan reservoir, but hasty action motivated by panic isn’t the right way. What’s involved is an agreement that will ensure Israel hundreds of billions of shekels in revenue over the years, and serious consideration and the necessary time must therefore be devoted to this matter. In contrast to Alaska, the development project for the Leviathan reservoir is simple, but it is still difficult for an inexperienced country like Israel.

Minesinger pointed out that long term contracts must include development of a network   of adequately sized pipelines connecting fields that are developed.  Further, he suggested that pricing in such agreements should be formulaic and not based on a fixed single point basis. To overcome suspicions that developing companies might earn excessive profits Minesinger suggested distribution of profit sharing checks to Israel’s citizens akin to what Alaska presently does. He has also proposed to Alaska possible consideration of a state owned gas company.

The final comment on this week’s developments in the wake of the resignation of IAA head, Gilo, came in a Globes op ed from Norman Bailey, former Reagan national security aide and Haifa University policy expert, citing lessons learned:

The resignation of Prof. Gilo as head of the Antitrust Authority is undoubtedly good news. His reneging last December on the agreement he had made with the natural gas companies Noble, Delek and Ratio the preceding March had thrown the whole development of Israel’s offshore natural gas resources into confusion. The matter had already been badly handled by the government, which had driven out the Australian company Woodside, and Gilo’s retraction had put at risk the economic, financial and geo-political benefits of the gas discoveries. The government, after an unacceptable earlier draft, finally crafted a new, acceptable proposal over Gilo’s objections, which prompted his resignation. The lessons to be learned here are twofold: regulation is necessary but should not dominate at the expense of other relevant considerations; and agreements made should be honored, unless circumstances change fundamentally, which was not the case. Israel as a magnet for investment has been preserved.

We await announcement of an acceptable compromise plan to the parties involved to end this episode once again illustrating that  rule of law must reflect economic market realities.

EDITORS NOTE: This column originally appeared in the New English Review.