Leviathan agreement opponents won't admit mistake

Amiram Barkat

Noble Energy's final investment decision (FID) disproves theories that the company has no intention of developing the field.

"The interest of the Leviathan owners is not to develop the reservoir, because they want to get as much money as possible out of Tamar. There won't be anything, because there is nothing. It's nothing but PR. The state should nationalize Leviathan and bring it back to state management, and put an end to this farce, in which Noble Energy and (Delek Group Ltd. (TASE: DLEKG) controlling shareholder) Yitzhak Tshuva do whatever they want with our gas" (television commentator Alon Nisser, January 19, 2017).

Last week, "Globes" analyzed the many risks overshadowing developing of the huge Leviathan natural gas reservoir. There are many question marks concerning possible exports of Israeli gas from Leviathan to Jordan, Egypt, Turkey, Greece, and Italy. The actual situation has not changed since then. The deal with Jordan still lacks formal approval, but one thing has happened: Noble Energy, Delek Group, and the Ratio Oil Exploration (1992) LP (TASE:RATI.L) partnership - the development partners in the rights to Leviathan - have made a final investment decision (FID) to spend a total of $3.75 billion on developing the reservoir by the end of 2019, thereby confounding many assessments, including mine.

The significance of the FID is two-fold. The Leviathan developers now bear the full risk, and have used up their last chip for bargaining with the state. Minister of National Infrastructure, Energy, and Water Resources Yuval Steinitz can stop holding his breath now. The meter is now running in Houston, where Noble Energy has its headquarters, and in Netanya, where Delek Group is located. If there are street demonstrations in Amman or a fiscal crisis in Jordan, Noble Energy will have to deal with it. If the economy's demand for gas does not grow at the planned pace, that is Tshuva's problem.

The FID is having another, much less obvious, effect: it is dissipating all the hot air put out by the opponents of the gas plan.

The discredited theory that the developers are deliberately refraining from development of the reservoir - because they want to extort more benefits from the state, because they are waiting for global gas prices to rise, or because they want to keep the market for Tamar - was fostered and fed until the very last minute by commentators representing no one but themselves. Since these people will never admit they were mistaken (and will go on persuading us that we are the ones who do not understand), I am taking this opportunity to point this out.

And what about all the rest of the hot air? It has almost all vanished in less than a year.

First they said that the development of the gas reservoirs had no political significance - that it was all spin and lies by the Prime Minister's Office and the National Security Council. This was refuted by none other than Turkish President Recep Tayyip Erdogan, who decided to rejuvenate his relations with Israel around the negotiations for a gas agreement. They also said that the gas plan generated an anti-competitive solution that will perpetuate the gas monopoly of Tshuva and Noble Energy forever.

One year after Erdogan, along comes Greek company Energean and buys the rights to the Tanin and Karish reservoirs. Many people, myself among them, took Energean lightly, and regarded Tanin and Karish as nothing more than a midget, compared with the Tamar and Leviathan giants. In order to generate competition for Tshuva and Noble Energy, however, it is not necessary to bring Exxon Mobil here. One more real contender able to supply the marginal demand for gas is enough.

It is a fact that concern about losing customers in Israel pushed the Leviathan developers into hurrying to develop Leviathan before the Greek midget steals the remaining customers.

What is left to the fanatic opponents of the gas agreement? They will repeat the old familiar arguments: the gas is too expensive, the developers will make too much money, and the punch line: the state has surrendered to the gas monopoly. These are half-truths, at best. Yes, the price of gas can be halved, as proposed by former Minister of Environmental Protection Avi Gabai, but half of the price of gas is collected by the state in taxes, royalties, corporate tax, and in the future, in excess profits tax, courtesy of the Sheshinski Committee, as Gabai is again forgetting to mention.

Yes, it is true that the state "surrendered" to the monopoly, but it chose to do so, believing that Israel should not invest a single shekel of its own money in gas exploration, developing gas reservoirs, building marine gas infrastructure, or any other parts of the operation, other than the costs of security. This is a debatable idea. In my opinion, it is better for the state to build gas production infrastructure and develop a services industry for gas reservoirs, as Norway did so successfully. This argument, however, does not alter the fact that the model of a partnership between the state and the developers, as outlined by the Sheshinski Committee and continued in the gas agreement, is working.

Yes, it is true that the state will spend €430 million on ships from Germany to protect the gas platforms. All the rest of the money, however - $5 billion ($3.75 billion on development and another $1.2 billion on exploration) is being invested by the developers themselves out of their own pockets.

There is no other national resource in which the state invests so little in developing on the one hand, and taxes so heavily on the other. In every deal, there is a tradeoff. In this case, the tradeoff is the double-digit percentage of the developer's return.

Do they want the developer to get less? The tradeoff will be in the reliability of the supply. Do they want the state to nationalize the gas and develop it by itself? The tradeoff will be in the timetable, costs, and efficiency. There is no free lunch.

Published by Globes [online], Israel Business News - www.globes-online.com - on March 1, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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