We wrote about the significant prospects of Israel’s development of offshore natural gas in the Levant Basin in the Eastern Mediterranean in a December 2011 NER article, Will Israel Win the Energy Prize in the Levant Basin?, We cautioned about the regulatory risks given recommendations of the Sheshinski Commission.
Yesterday, these Sheshinski recommendations may have been upended by a ruling regarding Israel’s Cartel Law by the head of the independent Israel Anti-trust Authority (IAA). Dr. David Gilo of the IAA effectively ruled that the Noble Energy – Delek consortium constituted a monopoly and would be forced to sell the Leviathan or Tamar fields in Israel’s offshore Exclusive Economic Zone. Globes, Israel Business reported in an article, Regulator decides Tamar and Leviathan form monopoly:
[Gilo] is going back on his decision, subject to a hearing, to let the companies continue holding both the Tamar and Leviathan gas fields. The State will now require the companies to sell their holdings in one of the fields.
Sources in the energy market believe that such a step will delay development of the Leviathan field by several years and could see Israel dragged into the international court of arbitration by US company Noble Energy, which has been developing both fields.
The reaction from Noble Energy was swift:
Noble Energy Israel Country Manager Binyamin (Bini) Zomer said, "For 16 years, Noble Energy has invested in the exploration and development of Israel's gas and oil resources. To date we have invested with our partners close to $6 billion in developing the country's oil and gas sector. These investments contribute to the Israeli economy and environment, and at the same time grant Israel energy independence while providing an opportunity for regional cooperation and contributing to regional stability."
He warned, "The antitrust regulator's decision to go back on the agreement.. casts a shadow over the future of Israel's gas and oil sector and influences Noble Energy's continued investment in the country."
Zoma’s comments were mirrored in official statements from Houston-based Noble Energy’s Chairman in a news release:
Earlier today, Noble Energy, Inc. (NYSE: NBL) and its partners in the Leviathan field were advised by the Israel Anti-trust Authority of its decision to not submit the Consent Decree to the Anti-trust Tribunal for final approval. In response, Noble Energy and partners have requested a hearing on the topic with the Anti-trust Authority, which Noble Energy expects to occur in the next few weeks.
In March 2014, Noble Energy, its partners, and the Anti-trust Authority reached agreement for the Consent Decree that included the divestiture of the Tanin and Karish gas fields. This agreement is a key component for the final investment decision on the Leviathan development.
Charles D. Davidson, Noble Energy's Chairman, commented, "The actions of the Anti-trust Authority are another disturbing example of the uncertain regulatory environment in Israel. Specifically, this is a matter that we believed was resolved some time ago and follows on recent assurances from the Anti-trust Authority that approval was forthcoming. We believe this is a harmful precedent for Israel to set and we will vigorously defend our rights relating to our assets."
Ominously, the ruling may delay if not stop development of the significant Leviathan gas field with more than 16 tcf. Further, the IAA would significantly delay indefinitely the implementation of the Eastern Mediterranean Pipeline connecting Leviathan with the adjacent Cypriot Aphrodite gas field with 7 tcf via Greece and Italy to securely supply gas to the EU thereby stymieing geo resource hegemony by Russia and Turkey. The Noble Delek consortium had signed agreements with the Republic of Cyprus in 2011 for the joint development of Cyprus’ offshore gas fields, despite threats from Turkey and its satrap, the Northern Turkish Cypriot Republic.
Billions of Israeli tax revenue, billions of returns to the Noble Energy –Delek consortium and billions in sales to Egypt, Jordan and other regional markets in signed agreements are now at risk. The effects on the trading values of the Noble-Energy-Delek consortium stocks on the NYSE and Tel Aviv Stock Exchanges were immediate. Noble Energy stock (NBL-NYSE) plummeted by over 6.4 % from $50.97 at the market close on December 22nd to $ 47.73, currently. Globes reported the fall off in trading for the Delek and Tamar partners caused by the IAA announcement:
In the stock market, Delek Group Ltd. (TASE: DLEKG) fell 16.5% for the largest fall on the Tel Aviv 25 Index following the antitrust order to sell either its Leviathan or Tamar holdings. Delek's energy exploration units Avner Oil and Gas LP (TASE: AVNR.L) and Delek Drilling Limited Partnership (TASE: DEDR.L) fell 11.75% and 12.73% respectively. Tamar partner Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) fell 7.44% on the day's largest turnover, and Leviathan partner Ratio Oil Exploration (1992) LP (TASE:RATI.L) fell 16.9%.
This ruling comes amidst the snap election campaign triggered by a no-confidence vote confounding the ability of the Netanyahu care taker government to seek possible redress via the Knesset. There are suspicions in Israel that the IAA ruling may have been politically motivated by Labor Party and Histadrut leaders, given the latter’s control over the Israel Electric Company, the national power authority.
These rapid fire developments brought troubling assessments from Gal Luft in an article in The Journal of Energy Security, “Israel’s Energy Dream- the End is Nigh”:
After years of delays and billions of dollars spent, a new and increasingly likely scenario should be considered – the premature – and tragic – death of the Israeli gas dream. I alluded to this option in an August 2013 article titled "Israel's Zero Gas Game" in which I warned that Israel has become so busy dividing the pie that its leaders forgot it must first be baked and that due to the failure of the government to present a clear vision for the country's energy sector, articulate the rights and responsibilities of foreign investors and most importantly set rules and stick to them.
There are very few oil and gas companies who have both the experience of drilling in deep waters and the willingness to associate themselves with Israel, especially in light of Noble's experience. With falling energy prices worldwide, the chance of a Noble-like operator popping out of nowhere is slim. This means that in its desire to avoid the creation of a monopoly, Israel is taking the risk that Leviathan, the world's largest offshore gas discovery of the past decade, will not be developed for many years to come - if ever.
The views of some Israelis regarding the IAA ruling were reflected in comments to Luft’s article posted at Israpundit. Note this approving comment:
We, Israel, are not a sub part of the “Chiquita Banana” plantation. …
The foreign investors, while welcome, shall not rip off the land and or resources. Period….. I reject the notion of any foreign company or country gaining undue control over our economic exclusion zone.
And this rebuttal:
Noble went out on a limb to do this exploration. No, it did not have any Arab/Muslim clients, but they kissed off any chance of ever having any by drilling these fields.
First, Israel screws them over on the Woodside deal, and now this. Do you think that “other potential partners in the Far East” — you know, like Woodside of Australia, which walked away from a potential deal because of the tax shenanigans of leftists in the Israeli bureaucracy — will want to deal with Israel, when Israel decides to interfere with contracts and tax laws after the fact? This is the type of shenanigans I expect from third world authoritarian dictators, not from a Western country that wants to encourage entrepreneurial capitalism.
Stay tuned for developments. Israel’s future is at stake with the outcome.
The Israel regulators are both insane and suicidal, but not that different than some U.S. regulators, save that America has a greater margin of error to protect it from comparable damage. Instead of being glad that an American firm has taken the huge risk in this investment, they prefer ideological rigidity to a quantum leap in Israel's economic and political situation. Petty little men who probably never managed anything approaching the magnitude of this project have the power to ruin it.