Israel has finally settled the long-running saga of the gas regulatory framework agreement with the gas companies.
It has also reached a deal with Egypt to settle the dispute that has arisen after the decision by the International Arbitration Court to award a $1.73-billion compensation to Israeli Electric Corporation against Egypt’s EGAS for discontinuing gas supplies in 2012.
But these do not necessarily mean that Leviathan gas will now be exported to Egypt. Such a deal also needs signed commercial gas sales agreements.
The gas framework deal
The gas regulatory framework deal hit a major obstacle when Israel’s High Court ruled on 27 March that the deal struck between the government and Noble/Delek is illegal, as its central piece, the stability clause, is unconstitutional.
The stability clause was meant to ensure that, over a 10-year period, future governments do not enact regulatory changes in taxation, antitrust limitations and export quotas that undermine this deal.
The stability clause was meant to ensure that, over a 10-year period, future governments do not enact regulatory changes in taxation, antitrust limitations and export quotas that undermine this deal.
It is difficult to invest $6-7 billion in the 620bcm Leviathan project if the rules keep changing.
This saga started in late-2014 when the Israeli antitrust commissioner challenged the Natural Gas Outline Plan, agreed upon by the government and the Noble/Delek consortium, on the basis that the consortium constituted a monopoly.
The monopoly issue struck a raw nerve with the Israeli public. They have been very vociferous and took to the streets on many occasions to attack the perceived monopoly.
Eventually a deal was agreed and officially activated on 17 December 2015 after Prime Minister Netanyahu signed the controversial legal stability clause enabling the framework to move forward.
The High Court in March specifically ruled against the stability clause.
This ruling meant that the entire deal was suspended until the law was amended. Specifically, the government was given one year to fix the stability clause. However, it should be pointed out that the rest of the deal, including use of Article 52, has been left intact.
Article 52 allows the government to invoke national security to bypass the Antitrust Commissioner. Supply of gas to Egypt and Jordan to help stabilise their governments was presented by government as a national security issue.
International oil & gas companies who were uncertain about doing business in Israel due the lack of regulatory and taxation stability were even more concerned after the decision.
A revised deal
But it now looks as if the companies and the government have found a formula that is acceptable to them and to the Court.
On this basis, the government has devised a new deal. This allows future governments to introduce regulatory changes and revise export and taxation regimes should they wish to. In such a case, the government will be obliged to guarantee the gas companies an acceptable return on their investments. This could be in the form of compensation or monetary benefits.
The new deal establishes two test points for investments to be made in Leviathan; with the first being the need by the partnership to invest $1billion dollars by the end of 2017 and the second is that they invest $4 billion by 2019.
In the new deal the government acknowledges the need for having a regulatory environment that encourages investments by international and local companies in the natural gas exploration and production sector.
The government has, however, been vague on detail and it remains to be seen how this works out.
Settlement with Egypt
The other good news is that Israel is also willing to compromise on accepting about 50% of the fine imposed on Egypt for terminating gas supplies to Israel. Payment will be made over 14 years.
Immediately after it became known last December that the fine was imposed by the International Arbitration Court, Egypt ordered a stop to all negotiations with the Israeli companies to import gas.
The compromise would remove this major obstacle to gas deals between Israel and Egypt.
This compromise is important, but it does not immediately clear the way to gas deals and development of Leviathan.
Noble and Delek need signed export contracts to obtain financing for the development of Leviathan. They have an MOU to export gas to Idku for liquefaction and export as LNG to Europe. However global and European gas prices are a major challenge to this. Even US LNG with its much lower gas cost base of $2 per mmBTU is struggling to sell to Europe’s gas trading hubs. Egypt is also well on the way to achieve gas self-sufficiency by 2019-20, and restart LNG exports by 2021-22.
An additional challenge is that the Leviathan partners will have trouble agreeing on a price that is lower than the price they sell to the Israeli domestic market. Under the gas framework deal with Israel, they are required to offer the export agreements’ price formula to customers in Israel. Signing an agreement with Egypt or Jordan at a price that is lower than the domestic price will be a problem.
This leaves Turkey, but the likelihood of an Israel-Turkey gas deal seems difficult in the current environment, especially with Lieberman back in government. He is the new Defence Minister and not a friend of Turkey, but possibly closer to Russia.
With Russia still maintaining a strong military and political presence in Syria and the region, Turkey could be facing a formidable barrier to its aspirations. This includes its quest to access East Med gas in general and Israeli gas in particular. There is also considerable speculation in Israel concerning a possible role for Gazprom in future East Med developments.
And then the very low global gas prices and Noble’s financial problems pose further obstacles.
The new deal opens the way for Israel to open a new bidding round for offshore blocks.
In the current depressed market this would be a challenge. In addition, oil companies may want to wait and see how the new gas regulatory system works out in practice in Israel.
Approval of the gas regulatory framework deal is a positive development for Israel. And so is the compromise with Egypt on the ICC arbitration award.
These are important developments but they do not immediately clear the way to gas deals and development of Leviathan. They need signed gas sales agreements.
In an era of energy-plenty, with long-term low prices, and Egypt on the way to gas self-sufficiency, this will be a challenge.
Would Russia surprise us all and gain an entry into Israeli gas development? Challenging, but if it does, it will be a game changer.
Dr Charles Ellinas is non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council
SOURCE
