Tamar partners set to sign $3b gas deal with Dorad

Dorad Energy had signed a contract with Egypt's EMG, but has to reach an agreement with the Tamar partners after the deal was cancelled.

Independent power producer (IPP) Dorad Energy Ltd. is due to sign a $3 billion natural gas purchasing contract with the Tamar partners within days. Dorad signed a contract with Egypt's East Mediterranean Gas Company (EMG) in 2007, but was forced to reach a deal with the Tamar partners after EMG's Egyptian suppliers cancelled their contracts with it.

The road to a contract with Dorad was opened when the Public Utilities Authority (Electricity) and the Antitrust Authority approved the Tamar partners' gas supply contract with Israel Electric Corporation (IEC) (TASE: ELEC.B22) on Thursday, subject to certain conditions. Over the past few weeks, Dorad has been competing for a gas contract with another IPP, Israel Corporation (TASE: ILCO) unit OPC Rotem Ltd., which is building a power station at Mishor Rotem and its sister company Oil Refineries Ltd. (TASE:ORL). OPC and Oil Refineries also had a contract with EMG, and are now the only IPPs without a gas supply contract. The Tamar partners already have contracts with IPPs Edeltech Ltd. and Dalia Power Energies Ltd.

As a result of the pending contract between the Tamar partners and Dorad, OPC and Oil Refineries are liable to have insufficient natural gas, because the pipeline from Tamar lacks the capacity to supply gas for IEC and all the IPPs simultaneously. The pipeline is due to be expanded by mid-2015, but that is subject to feasibility studies and the obtaining of permits to operate Yam Tethys's Mari B reservoir as an operating reservoir.

Noble Energy Inc. (NYSE: NBL) owns 36% of Tamar, Delek Group Ltd. (TASE: DLEKG) subsidiaries Avner Oil and Gas LP (TASE: AVNR.L) and DD) each own 15.625%, Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) owns 28.7%, and Dor Alon Energy in Israel (1988) Ltd. (TASE:DRAL) unit Alon Natural Gas Exploration Ltd. (TASE: ALGS) owns 4%. Noble Energy and Delek also own Yam Tethys.

Antitrust Authority director general David Gilo has required the Tamar partners to allocate the pipeline's available capacity for Dalia Energies in favor of IEC until Dalia Energies' power station comes online. But if the Tamar pipeline expansion is delayed, OPC and Oil Refineries are liable to end up with insufficient gas from Tamar during the interim period.

Antitrust Authority sources said that the Tamar partners have promised to make every effort to ensure that OPC and Oil Refineries will have the gas they need.

In the coming days, the Tamar partners will discuss amending their gas supply contract with IEC on the basis of the terms set by the regulators. Sources believe that there will be no need for IEC's board of directors to again approve the contract. The IEC deal is essentially two contracts: the basic contract, totaling $10-16 billion, which has been unchanged, because touching it was liable to affect the bank financing needed by Delek, Isramco, and Alon Gas for Tamar's development; and numerous changes to the options agreement, to allow IEC to increase its gas purchases up to 98 billion cubic meters (BCM), which will increase the total contract to $22 billion.

There are two key changes in the options agreement: reduction in the portion of the price for the natural gas that is linked to the Consumer Price Index (CPI) from 100% to 30%, leaving the balance of the price unlinked; and cancellation of the fixed-interest mechanism that was in addition to the CPI-linkage. Sources estimate that these changes, demanded by the Public Utilities Authority, will cost the Tamar partners $1 billion from the IEC contract.

The Public Utilities Authority has also required the Tamar partners to insert two early exit dates into the IEC contract, at which it will notify the partners if it intends to exercise the option.

More problematic changes, as far as the Tamar partners are concerned, were made to their contracts with the IPPs. The partners' reservations are mainly over the option allowing the IPPs to halve their minimum gas purchases. The partners argued that because the options were given without an exercise price, such as raising the price of gas to be paid by the IPPs, forces the partners to choose this option, rendering the alternative of shortening the contract period to seven years irrelevant.

The Antitrust Authority dismissed the argument, saying that any change that did not solely benefit the IPPs was liable to cause the reopening of their bank financing agreements.

Published by Globes [online], Israel business news - www.globes-online.com - on June 17, 2012

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

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