Israel Electric Corporation (IEC) hedges its bets with ‘practical’ Tamar decision

 

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The decision by Israel’s dominant electricity company to exercise only part of its purchase option for gas from the Tamar field should benefit other projects in the region, industry experts say.

Israel Electric Corp. (IEC) told Tamar owners Noble Energy and Delek Group last week it would buy just $1.5 billion of additional Tamar volumes from 2020, much less than the $6 billion it had optioned.

The decision was said to have been triggered by doubts about the Israeli Antitrust Authority’s proposal to break up the ownership duopoly over Israel’s gas fields, as well as the need for an anchor customer to fund development of the estimated 538 billion cubic metre Leviathan field. Price was also said to have been an issue. The IEC could not be reached for comment.

Amit Mor, chief executive of Eco Energy Financial & Strategic Consulting, called the IEC’s decision “practical” because the company needs more suppliers to ensure energy security, and given the potential for delay if the Antitrust Authority’s demand to break up the ownership of the fields is not dealt with in the next few months.

“The reality now [is] there are two additional major fields that need to be developed [requiring a large customer],” Mor told Interfax. “It [the reduced option] is a necessity… so additional suppliers would have a market.”

As well as the IEC’s need for more suppliers, the owners of the Leviathan field need a large – if not an anchor – customer to get development underway.

Nati Birenboim, chief executive of consultancy Tamuz Group, said the Israeli company wanted to keep its options open to be able to buy from new sources – such as Leviathan or the two smaller Karish and Tanin fields – at potentially cheaper prices in future.

Leviathan looming

As the country’s main power provider as well as the dominant Tamar customer (taking up to 40% of all sales from that field), Birenboim said the IEC would also need to be a key buyer of Leviathan gas to make development of that field viable.

“It was easy to finance Tamar because the whole market was waiting for it,” he told Interfax. “That’s not the situation with Leviathan. The market today is crowded so it’s good for Leviathan to have these customers too.”

Independent energy consultant Gina Cohen said that, although price was a large factor in the IEC cashing in at least part of its option, “the main turning point” was lower-than-expected electricity demand in Israel.

She told Interfax that, although the IEC felt it had a good deal with the option – linked to the United States consumer price index (CPI), which has been consistently falling since 2012 – it was not overly happy with the price relative to the sums paid by rivals.

“They are not that pleased with the price, because there are other [independent power producers: IPPs] in the market who bought gas linked to the electricity generation price,” she said. “Since the electricity price fell these IPPs now pay a lower price than the IEC [as well as] others, such as the oil refineries, who bought gas linked at the oil price.”

Price too low

However, the IEC price, which was set at $5.04/MMBtu for this latest tranche and 30% linked to the US CPI, is still relatively low compared with the $5.70/MMBtu the company is paying for the bulk of its supplies. “Their belief was that, ‘yes, we need some more gas and so let’s buy this cheap tranche that is available to us’,” said Cohen.”

 

The agreement between the IEC and the Tamar partners means that, from 2020, the IEC’s take-or-pay quantity will rise to 3 billion cubic metres per year and the maximum total quantity to be supplied up until 2028 will be around 87 bcm – compared with 99 bcm if the option had been exercised fully and 83.5 bcm if it had not been exercised at all.

 

When the Antitrust Authority’s draft proposal did not address any of the IEC’s competition concerns and finally fell through, the Ministry of Finance and the authority asked the Tamar partners to allow the IEC to exercise only part of the option.

soure: Interfax