Israel Hopeless to reach Settlements of Disputes for its Natural Gas Sector

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With the gas sector development and the imminent end of sanctions against gas-rich Iran looming in the background, Israel’s Minister of National Infrastructures, Energy, & Water Resources, is trying to reach a final settlement of several unsolved disputes for the hudrocarbons sector in Israel, with Delek Group & Noble Energy.

Commenting on the geopolitical situation, Minister of National Infrastructures, Energy, & Water Resources Y. Steinitz warned, “Iran has gas reserves with 40 times as much gas as Israel. They couldn’t invest there for 5 years because of the sanctions, but the minute the sanctions are removed and Iran returns to the market, there’s a risk we could be left high and dry. Israel should look at the whole geopolitical map, and not think merely about narrow considerations. As soon as Iran is free of the sanctions, the international companies and banks will hurry to go there, and we’ll be stuck.”

So what is happening with gas exports? Egypt and Jordan are not waiting for Israel to solve its internal disputes; they are looking for other ways to buy cheap gas. This fact is arousing panic in the the Israeli Government.

The panic is having an effect. In order to help gas exports to Egypt move ahead, the Govt will probably approve the export of gas from the Tamar reservoir to Spanish company Union Fenosa, even though it barred any significant exports of gas from Tamar before the Leviathan reservoir is connected to the shore. The gas companies are also asking the state to recognized construction costs for the pipeline they are due to build for exports to Egypt, meaning a delay in the payment of tax under the Sheshinski law. At the moment, it appears that the Ministry of Finance is opposing this demand.

Another unsolved question relating to gas exports concerns the gas export quotas. The gas companies are seeking to increase the quotas designated for export, so that the Israeli economy keeps 450 BCM for itself, not 540 BCM, as determined previously. The Government is refusing this demand, but is willing to consider to leave 45 BCM of gas for Jordan out of this export quota.

Another important unsolved issue is the model for determining taxes on gas exports. Last November, a team headed by former Minister of Finance director general Yael Andorn recommended legally establishing the Netback model for determining taxation on exports. Under this method, the state will determine the developers’ expected taxable profit according to the price in the deal, minus an acceptable rate of making back the investment for deals of this type, plus the acceptable rate of return.

In May 2014, the Tamar partners signed a letter of intent with Union Fenosa, which has a gas liquefaction facility in Damietta, Egypt, to supply the company with 70 BCM over 15 years.

Since Antitrust Authority director general Prof. Gilo ruled last December that the gas sector should be restructured, negotiations with the Spanish company have stalled. It now turns out that Union Fenosa is unwilling to pay for a gas pipeline connecting the Tamar reservoir to the facility in Egypt.

Meanwhile, a report recently published by international consultancy company Ernst & Young indicates that Egypt’s desire to supply gas to its local economy, combined with the shaky state of the country’s gas reserves, will lead Royal Dutch Shell to sell BG liquefaction facility in Idku.

“If Shell does sell BG’s business in Egypt, the deal between Leviathan and BG is in danger,” Van Leer Institute Chazan Center for Social Justice & Democracy research fellow asserts. “The Leviathan partners and BG have already been negotiating for over a year. The minute Shell sells BG’s business to a 3rd party, the entire matter will be in trouble… Obviously, the company that buys the facility can also decide to buy Israeli gas, but no one can be sure of that, and exports to Israeli gas to Egypt will be delayed by several years in any case.”

The Leviathan partners signed a letter of intent with BG last June to supply 105 BCM of gas to the BG liquefaction facility at Idku, Egypt for 15 years. The value of the deal is estimated at $30 Bn. One sixth of the gas reserves at Leviathan will be exported in this huge deal, which is designed to make development of Leviathan worthwhile.
However, no final agreement has been signed by BG and the Leviathan partners due to regulatory problems.

Now that Shell has entered the picture, the question arises of whether such a deal can exist at all in the future.