November 16, 2014 5:14 pm
Regulatory risk fears halt Israel offshore gas drills
Exploration of Israel’s large offshore natural gas reserves, touted as a once-in-a-lifetime opportunity for the country and a geopolitical game-changer for the Middle East, has ground to a halt because of investors’ concerns over regulatory risk.
Drilling ships have stopped the search for new gasfields under the eastern Mediterranean off Israel, where 1,000bn cubic metres of proven reserves lie, and about 1,500bcm more are still to be found. The reason for the hiatus, according to the industry, is the increasingly hostile regulatory environment, including a rule that about half the output should be reserved for the domestic market, although analysts say the recent softening in gas prices has played a contributory role.
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The $6.5bn Leviathan offshore project, on which Israel’s Delek Drilling and Noble Energy of the US want to begin work next year, with gas in production by 2017, continues to inch forward. However, industry investors warn this could be the last significant gas project off Israel’s shores for some time.
“Leviathan . . . will be developed, but with the regulatory challenges they have put in the last three to four years, they have killed the industry,” said a senior energy industry executive, who requested anonymity due to the poor relations between big business and Israeli politicians and regulators.
The halt to new drilling comes as other Israeli companies, including potash producer Israel Chemicals (ICL), complain of overzealous regulation and a mood of economic populism in government and in the Knesset that they say makes their home country an unrewarding place to invest.
Yoram Turbowicz, previously chief of staff to Ehud Olmert when Israeli prime minister and who now advises ICL, says: “There is a pendulum of regulatory pressure . . . and right now we are probably in a period of extreme intervention by the various regulatory authorities in Israel.”
Economic growth has slowed in Israel and political risk is rising because of a worsening communal conflict with the Palestinians.
A dispute over Jerusalem’s al-Aqsa mosque led Jordan to last week withdraw its ambassador to Israel, raising doubts over whether a proposed $15bn deal tied to Leviathan that would see Israel provide gas to its Arab neighbour would go ahead. TheJordanian contract is essential collateral needed by Leviathan’s operators to finance the field, alongside a proposed $30bn deal to supply a liquefied natural gas facility in Egypt operated by BG Group of the UK.
“I absolutely hope we will reach a commercial agreement between BG and the Leviathan partnership by the end of the year,” says Sami Iskander, BG’s chief operating officer. “The issues are not insurmountable,” he adds, while declining to say what stood in the way of the deal.
Israel’s government last year approved the creation of a fund to manage increasing revenues from its gas industry. The Tamar offshore field, which began producing last year, contributed half a percentage point to Israel’s gross domestic product.
Dan Shapiro, US ambassador to Israel, spoke last week of the need to “move quickly” on developing nearby Leviathan, adding that energy companies needed a “stable, predictable investment environment”.
“Companies have many places where they can invest their money,” Mr Shapiro told an energy conference in Tel Aviv.
Australia’s Woodside Petroleum pulled out of its $2.7bn investment in Leviathan in May, saying negotiations had “failed to reach a commercially acceptable outcome” and complaining about uncertainty over tax and export issues.
The remaining Leviathan investors await a final decision on whether Israel will impose price controls on domestically sold gas – a potential deal-breaker they believe is unlikely but on which they still need confirmation.
In addition, the Israeli Antitrust Authority has ordered Leviathan’s owners to sell oil and gas rights to two smaller fields to allow greater market competition.
Avishay Braverman, head of the Knesset’s economic affairs committee, took to Facebook recently to argue that breaking the “gas monopoly” would reduce the price of electricity in Israel by 15 per cent.
Leviathan . . . will be developed, but with the regulatory challenges they have put in the last three to four years, they have killed the industry
- Senior energy industry executive
Public anger over high prices and the cosy – sometimes corrupt – links between politics and business in Israel came to the fore with a wave of social protests that swept the country in 2011. This is now finding expression in an uncompromising stance taken by politicians such as Mr Braverman and Yair Lapid, the populist finance minister who last year vetoed a proposed merger between ICL and Canada’s PotashCorp.
Analysts say such regulatory zeal and economic nationalism is having a marked effect on the investment climate. In a report on the gas sector prepared for Norway earlier this year, consultancy IHS ranked Israel lower than Angola or Mozambique in terms of officials’ respect for contracts.
Earlier this week, a government committee in charge of setting tax policy on non-gas natural resources – in effect ICL – approved a recommendation to impose a surtax worth between 25-42 per cent on the minerals the company extracts from the Dead Sea.
ICL said the new tax makes further investments in its home base in Israel’s southern Negev region unprofitable, and that it will now put more money into its overseas operations in Spain, the UK and Ethiopia.
In a symbolic snub to its home country, ICL’s board this week announced their quarterly results from Barcelona. The company also revealed plans to invest a further $435m in its Iberian operation, even as it cuts $80m of costs at home.
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