Israel Electric Corporation (IEC) (TASE: ELEC.B22) will partially exercise its option to increase the quantity of gas it is to buy from the Tamar gas reservoir partnership, according to talks in recent days between the company and the gas partners. The decision has not been postponed, and the deadline for final notification of the partners that the IEC wishes to exercise the option is in two days. The amount of additional gas under the option is believed to total $6 billion.
IEC and the Tamar partners signed a gas supply contract in 2012, in which the partnership undertook to supply 42.5 BCM, up to a maximum of 77 BCM, over 15 years. The agreement included an option to increase the amount of gas to 99 BCM in two installments. According to the reports of Noble Energy and Delek Drilling Limited Partnership (TASE: DEDR.L), the original agreement amounted to $14 billion, and together with the two added amounts, to $23 billion.
In April 2013, the IEC board of directors approved the first increase of $3 billion, which will be in effect until the end of 2019. As part of the option, the take or pay (the consumers' undertaking to pay for a minimum proportion of the purchased gas, even if they do not need the full amount) rose from 3.5 BCM annually to 5 BCM. It was decided that if IEC wishes to extend the option until 2028 by an additional $6 billion, it must notify the Tamar partners no later than April 15, 2015, in other words, two days from now.
IEC hoped that the notification deadline would be postponed at least until the new gas suppliers enter the sector, enabling it to conduct negotiations with a number of suppliers and obtain a lower price. These hopes soared when the Antitrust Authority director general decided several months ago to intervene in the natural gas sector and split the sole gas supplier in the economy into a number of suppliers. An inter-ministerial committee was established for this purpose, headed by National Economic Council chairman Eugene Kandel, who formulated a draft plan that included a sale and diluting of the partners' holdings in the reservoir, price controls, and separate marketing of the gas.
The draft proposal, however, included no intervention in the IEC's gas contract, nor did it postpone the deadline for IEC's notifying the partners of its wish to exercise the second installment of the option. This fact aroused severe criticism of the inter-ministerial team. Critics pointed out that the contract with IEC was the only contract important to electricity consumers in Israel. Cheaper gas purchased by IEC will be translated into cheaper electricity for consumers.
In any case, the draft proposal was not approved, competition was not achieved, the gas sector in Israel has come to a standstill, and the rest is history. IEC thus has no choice other than to negotiate with the Tamar partners for $6 billion of gas. The Ministry of Finance and the Israel Antitrust Authority therefore asked the Tamar partners to allow IEC to partially exercise its option. In this way, IEC will be able to undertake two days from now to buy a certain amount of gas, and negotiate with additional suppliers entering the market for the rest. The Tamar partners agreed, and their senior executives are currently meeting with senior IEC executives to formulate an agreement facilitating partial exercise of the option.
IEC declined to respond to the report, saying that business information was involved. The Tamar partners also declined to respond.
Published by Globes [online], Israel business news - www.globes-online.com - on April 14, 2015
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