Treasury urges Tamar partners to cancel deals

The Finance Ministry wants deals with OPC and Dorad, even if contracts with Dalia and Edeltech have to be cancelled.

The Tamar natural gas field partners are waiting for the Antitrust Authority and the Public Utilities Authority (Electricity) to approve their gas supply contracts with Israel Electric Corporation (IEC) (TASE: ELEC.B22) and private power producers. However, behind the scenes, the Ministry of Finance is asking the two regulators not to approve the contracts, unless the Tamar partners sign contracts with other independent power producers (IPPs), even if this costs the Tamar partners their current contracts.

The media is giving the impression that the fight is over the government's demand to lower the price of gas to be paid by IEC, which would in turn lower electricity rates. But the real battle is not over the IEC contract, but over something else entirely - between the IPPs, the Ministry Finance and the Tamar partners. This is a bitter battle that is almost life and death for the multibillion dollar IPP ventures. These ventures must have natural gas to generate electricity, and without gas supply contracts, they are in jeopardy. But Tamar cannot supply gas to all the IPPs, at least not before 2015.

In this battle, the IPPs contend that the Ministry of Finance has picked a side and is using all its power in that side's favor: the ministry is demanding that the Tamar partners sign gas agreements with two IPPs: Israel Corporation (TASE: ILCO) subsidiary OPC Rotem Ltd., and Dorad Energy Ltd. They are two big power producers, which previously signed gas supply contracts with Egypt's East Mediterranean Gas Company (EMG). By demanding that the Tamar partners sign contracts with them, the ministry is forcing the partners to cancel their contracts with two other private power producers - Dalia Power Energies Ltd. and Edeltech Ltd.

The Tamar partners - Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG), Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), and Alon Natural Gas Exploration Ltd. (TASE: ALGS) - oppose the demand, but admit that may have no choice. Sources inform ''Globes'' that the Ministry of Finance has rejected a compromise that they proposed.

The Ministry of Finance said in response that it was acting under its commitment to ensure that all private power producers receive gas from the Tamar field. The ministry points out that OPC and Dorad power stations were due to come online in 2013, two years before Edeltech and Dalia Energies' power stations. "If Dorad and Israel Corp. do not have gas and their power stations use diesel, the public will have to finance the difference of hundreds of millions of shekels a year," the ministry told "Globes".

The Ministry of Finance is threatening to intervene and divide up the gas distribution itself, unless the Tamar partners reach a deal with the private power producers. "This is a product in short supply, which is being supplied by a monopoly," said the ministry.

For the lack of a few inches

Pictorially, it could be said that a lack of a few inches is the source of the problem. The pipeline that will carry gas from the Tamar platform to Israel was planned before the gas crisis with Egypt, which at the time supplied 40% of Israel's natural gas needs. Tamar was not intended to be Israel's sole source of gas, but that is now the case.

The pipeline network from Tamar has two sections: the first is two parallel 16-inch pipelines, which will carry the gas from the production well 135 kilometers south to a platform offshore from Ashdod; the second section is a single 30-inch pipeline carries the gas onshore. The capacity of second section is 7-8 billion cubic meters (BCM) a year.

The Tamar partners have contracts to supply 8 BCM altogether beginning in 2013. This problem is likely to last until 2015, when work on expanding the pipeline's capacity by 20%, by adding compressors is due to be completed. This work will move the bottleneck to the pipelines from the Tamar platform, which means that the platform's gas storage facilities will have to be expanded. But such facilities face technical and legal obstacles.

On this basis, the Tamar partners proposed the following compromise to the Ministry of Finance: a commitment to supply all Dorad and OPC's gas needs until Dalia Energies and Edeltech's power plants come online in 2015. Full gas deliveries to Dorad and OPC will resume when the pipeline capacity is increased, which means that Dorad and OPC would only need an interim solution until the work is completed. The Tamar partners believe that this interim period should last only a few months, but they would not commit to an exact number.

The Ministry of Finance rejected the proposal, and demands that the Tamar partners sign gas supply contracts with Dorad and OPC at the same terms as the contracts with Dalia Energies and Edeltech. The ministry said, "If there problem was three months and a few permits, we'd agree, but this is an attempt to get other things, which we cannot disclose."

A source familiar with the issue believes that the Ministry of Finance prefers for the Tamar partners to cancel the contracts with Dalia Energies and Edeltech, because of the ministry intervenes it will be exposed to a petition to the High Court of Justice. The Tamar partners are well covered if the gas supply contracts are cancelled, since they stipulate that if Dalia Energies and Edeltech do not provide the necessary permits by a certain deadline, the partners can cancel the contracts. This deadline passed last week.

An energy market source told "Globes", "How can the government want to attract foreign companies if it intervenes so grossly in signed contracts, or if it takes gas promised to one customer and gives the gas to its competitors? With all due respect to the government's problem, that is going over the line. The government can and should solve the pipeline capacity problem or the gas shortage itself, as they are liable to result in electricity shortfalls at peak demand."

The Ministry of Finance said in response today that it does not want the Tamar partners to cancel their existing gas supply contracts with the two IPPs, but only to sign contracts with the two other IPPs.

Published by Globes [online], Israel business news - www.globes-online.com - on June 6, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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