Israel Might be Required to Provide Guarantees for Political Risks Insurance for Gas Projects

Tamar Field

Israel’s gas projects may need political risk insurance policies to secure financing for their development when the buyers are in neighbouring states, according to a senior Israeli banker.

Boaz Schwartz, the Chairman of the Association of Foreign Banks in Israel, says banks and lenders to the projects would demand such insurance policies. “It would be right to consider political risk insurance particularly with neighbouring countries and when contracts have also political significance. The insurance will be part of the requirements for the project financing,” Schwartz said last year when he testified in front of the Kandel Committee, the body that set the natural gas regulatory framework.

He said: “It is important to note that Egypt and Jordan are sub-investment grade countries and Turkey is borderline investment grade. It is therefore very important to back export contracts with strong political insurance and/or the support of one or more international export credit agencies like US EXIM or global agencies like MIGA or IFC. The government should, in our opinion, take an active role in lobbying for such support and potentially even underwrite some of the political risk on its own.”

The low investment grade rating of Egypt and Jordan is due not only to weak economies but also because their regimes are unstable.

He estimated that developing the country’s gas assets could cost between $8 billion and $10 billion, with more than 70% of that coming from debt.

In its calculations the A.F.B.I. found that if gas from Leviathan were sold at $5.45/million British thermal units to Israeli, Jordanian and Egyptian customers the investors’ share of the cash flow would be 40%, their share of the NPV would be 35% and the return on investment would be 15%. He said that would be less than the industry norm.

But if those insurers were unable to issue political risk policies it might be that “the government [of Israel] would consider providing guarantees. The state shouldn’t take business risks. However, it should take [the risk] in case there is a change of regime in Egypt or Jordan and the gas contract is cancelled.”

He mentioned the US government as a potential interested party in the project’s implementation. The U.S mediated between Israel and Jordan during the gas talks and even encouraged the creation of an American intermediary to take title to the gas in order to reduce the friction between the Jordanian administration and its population.