New gas deal expected to slash electricity prices, but some say it’s not enough

Israelis can expect their electricity costs to go down, thanks to a deal reached with the consortium that owns the Tamar natural gas fields that will save the state hundreds of millions of shekels, the Israel Electric Corporation says.

The deal will take effect retroactively on July 1, subject to approval by the antitrust commissioner and the regulatory Israel Electric Authority. But while the deal locks in cheaper rates for years to come, some have asked whether the state-owned IEC could have gotten an even better deal by going to the open market.

The price of gas has a direct impact on the pockets of Israelis because it is used for 75 to 80 percent of all electricity. A spokesperson for the IEC, Dalia Bodinger, said that the new agreement would lower electricity bills paid by consumers.

“The company believes that this is an excellent and responsible deal which will save the public hundreds of millions and lead to a cheaper [consumer] rate,” she said.

The original contract, signed in 2012, allowed the parties to reopen the contract in 2021 and renegotiate the price by up to 25%. A further window will open in 2024, at which time an increase or decrease of up to 10% will be permitted.

An aerial view of the Tamar gas-processing rig off the southern coastal city of Ashkelon, June 23, 2014. (Moshe Shai/Flash90)

The new deal is considerably cheaper than the original one, and the overall terms have improved.

While under the old deal, the IEC paid up to $6.36 per unit of heat for the entire quantity ordered each year, the new agreement specifies that the 21 billion cubic meters (3 bcm per year) it is already committed to buying through 2028 will cost $4.50 per unit of heat. That price will drop to $3.95 per unit of heat (without indexation, see below) on any additional amount of up to 16 bcm, and will go to tender on anything above that.

An IEC source speculated that another roughly 13 bcm could be needed on the tender basis.

Director of the Israel Electric Corporation and former IDF general Yiftach Ron-Tal speaks at a conference in Jerusalem on October 23, 2013. (Miriam Alster/ Flash 90)

The revised agreement also obliges the Tamar partnership to reserve 13 bcm for the period 2028 to 2030, in case the state needs it, at the flat, unindexed price of $3.95 per unit of heat.

IEC chairman Yiftach Ron-Tal said, “In addition to the success of the electricity corporation in fixing a lower and better price for the benefit of the Israeli public, this is an economic step on a national level that will contribute directly to a lowering of the cost of living and to growth in the State of Israel.”

The Tamar consortium said that the new deal added $2.2 billion to the $3.4 billion already received from the IEC.

The terms for the IEC’s payments to the Tamar partnership were originally set in 2012, when the country badly needed the Tamar reservoir to become operational. Israel’s only working reservoir at the time, Mari-B Yam Tethys, had just dried up and gas imports from Egypt had been halted by sabotage of the pipes by Islamist militants. The country was forced to import expensive fossil fuels from elsewhere.

That contract committed the IEC to pay for 3.5 bcm per year until 2028 (it was lowered to 3 bcm in 2019), whether the gas was needed or not, at a price determined by a highly controversial mechanism, which will continue to apply, although under the new deal, annual price rises will be capped at 1.25%.

Expressed in US currency, the price was tied to the US Consumer Price Index plus 1% per year until 2019, and minus 1% per year until 2028.

This has meant that the IEC’s bills from the Tamar consortium have steadily risen, while global prices have plunged rising from $5.30 in 2013 to $6.36 per unit of heat by the end of last year. (The partnership agreed to lower it slightly for the first six months of this year).

Illustrative. An Israel Electricity Corporation worker raised by crane to a utility pole to perform maintenance works on June 10, 2013. (Flash 90)

In 2017, the State Comptroller published a highly critical report estimating that these terms would cost the public an excess of $820 million to $1.5 billion.

An IEC source explained that renewed negotiations began with each of the Tamar partners separately and that once the best price had been achieved, continued with the partners as a bloc to improve the terms further.

The Tamar partnership comprises Chevron, with a 25% stake (purchased from Noble Energy last year), Delek Drilling (22%), Isramco (28.75%), Tamar Petroleum (16.75%), Dor Gas (4%), and Everest (3.5%). Delek Drilling has to sell its stake by the end of the year, in line with antitrust rules.

A similar partnership, made up of Chevron (39.66%), Delek Drilling (45.33%), and the Ratio Partnership (15%), controls the Leviathan natural gas lease, which started commercial production at the end of 2019.

The IEC’s agreement with the partners who own rights to the Leviathan ended on June 30 at a price of around $4.40 per unit of heat. Leviathan’s gas will be mainly exported, and for now, anything that the IEC needs from it will be according to spot prices on the day.

Earlier this year, the Globes business daily reported that the IEC was also buying liquid natural gas (LNG) on the spot market at an average price of $3.50 per BTU. (LNG is natural gas cooled to minus 160 degrees).

With gas from the larger Leviathan field geared to export and the smaller Karish and Tanin fields not yet in commercial production, the source said that the IEC deal with the Tamar consortium reflected its commitment to ensure energy security and help the government to implement its policy of completely phasing out coal by 2025.

View of the Leviathan gas field’s processing rig from the Dor Habonim Beach Nature Reserve, on January 1, 2020. (Flash90)

But some have questioned whether the IEC could have gotten a better deal by looking elsewhere.

“The IEC requirement has been around 5 bcm per year and things will stay this way. If they’re going to get 3 bcm annually at $4.5 and another 2.5 bcm a year also at a fixed price, the chance they’ll need much above all of this is low,” said Ariel Sawicki, who follows the gas industry for consumer advocacy group Lobby99. “Why didn’t they do a tender on the 16 bcm? Maybe Leviathan would sell it for less or somebody international would sell liquid national gas (LNG), of which there’s a surplus? Why did they close off everything from now until the end of the decade?”

Bodinger, the IEC spokesperson, said that the $3.95 price for the additional 16 bcm was so good that it was decided not to risk a tender that could result in a higher price.

On Thursday, the International Gas Union published its gas price survey for 2021 (see graph on page 36), showing that among gas producing countries, Israel still pays high rates.

Lobby 99, a crowd-directed political action group, has asked the finance, energy, and economy ministries to intervene in the deal and help to lower the prices further.

“In the case of most natural gas exporters, the price for local consumers is lower than $4, so if the Tamar partnership sells most of the gas to the IEC at $4.5, we’ll still be paying more,” said Sawicki.

But an IEC source pointed to a Central District Court decision in June to throw out a request for a class action suit based on a claim that the Tamar partnership was charging the IEC an excessively high price.

Source Link: https://www.timesofisrael.com/new-gas-deal-expected-to-slash-electricity-prices-but-some-say-its-not-enough/

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