According to yesterday's announcement, private electricity producer Dorad Energy has signed a contract to buy natural gas from the Karish and Tanin reservoirs at $4 per heat unit - the lowest price in gas deals in a decade. This price is 20% less than the price of gas from the Leviathan reservoir and almost $2 cheaper than the price that Israel Electric Corporation (IEC) (TASE: ELEC.B22) is paying the developers of the Tamar reservoir – the price on which the electricity rates for the general public are based.
Nevertheless, the celebrations at the Ministry of Finance and among supporters of the gas deal are premature. Even if Karish and Tanin are demonstrating their ability to take market share away from Leviathan, the big question is what will happen to gas prices after Idan Ofer buys most of the remaining gas in the two small reservoirs.
The report of the emerging deal between Greek gas supplier Energean and Dorad has aroused expressions of joy in the Ministry of Finance budget department. Ministry of Finance head of budgets department Amir Levi and Udi Adiri, his deputy for infrastructure matters, have been greatly criticized in the past two years for their support for the gas plan. Levi's main argument in favor of the gas plan was a description of the third player – Delek Group Ltd. (TASE: DLEKG) and Noble Energy, the controlling shareholders in all of the reservoirs discovered to date had agreed in the gas plan to sell the Karish and Tanin reservoirs to a third party.
Most market experts, headed by Antitrust Authority director general David Gilo, who resigned, argued that the two reservoirs were too small, and could not possibly compete with Leviathan. They explained that economies of scale would enable Leviathan to break its competitors. Levi insisted that one additional player, however small, would be enough to generate real competition for the gas monopoly.
In December 2016, Energean, a medium-sized company with deep water drilling in Greece entered the picture, paying Delek $150 million for the rights to the two reservoirs. The Greek company has since been working hard and showing daring beyond the Ministry of Finance's most optimistic expectations. While the Leviathan developers have closed agreements with Paz Oil Company Ltd. (TASE:PZOL) and others at $4.70-4.80 per heating unit, Dorad chairman Erez Halfon closed a deal with Energean at only $4 per heating unit. "Competition is working," they said at the Ministry of Finance yesterday. "Leviathan will also lower prices, simply because it will have no choice."
But it does have a choice. The obvious reason is that almost all the remaining gas in the two reservoirs is about to be sold to Israel Corporation (TASE: ILCO), controlled by Idan Ofer. This group is negotiating to buy gas for Israel Chemicals (TASE: ICL: NYSE: ICL), Oil Refineries Ltd. (TASE:ORL), and electricity producer OPC, and the price will almost certainly be less than $4 per heating unit. The big question is what will happen afterwards. As of now, it looks like Ofer and the Leviathan developers will have the last laugh.
Published by Globes [online], Israel Business News - www.globes-online.com - on August 3, 2017
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