Steinitz: Noble Energy could sue Israel for billions

Yuval Steinitz

Yuval Steinitz: Unless the framework goes ahead, Israel's gas will turn from an asset to a liability.

The natural gas framework devised by Minister of National Infrastructure, Energy, and Water Resources Yuval Steinitz is hanging by a thread. Steinitz believes that if the High Court of Justice (HCJ) strikes down the controversial stability clause, or requires the government to include it in legislation passed by the Knesset, it will spell the end of the plan, and the plans for developing the energy sector will collapse. Noble Energy will sue Israel, and has a good chance of winning compensation in the tens of billions of shekels. Is this a likely scenario, or a prophecy of doom designed to pressure the judges to deny the petitions? The answer will come soon if the HCJ decides as it hinted in its recent hearing.

In an exclusive "Globes" interview, Steinitz offers the judges a way to save face that he says will prevent damage amounting to tens of billions of shekels. "The energy sector is liable to suffer a terrible catastrophe. If the HCJ strikes down the gas plan, Israel will be in a hopeless position. It's ridiculous for anyone to think that that the gas industry can make any progress in a situation like this. We'll be unable to make progress in energy security and unable to switch industrial enterprises, trucks, and buses to natural gas, because we won't have enough gas, and will remain without the prodigious revenues we can expect from Leviathan and Karish-Tanin. Instead, we're liable to be forced to pay billions of dollars in compensation to Noble Energy and Delek Group Ltd. (TASE: DLEKG). This is a concrete risk, just as Israel Electric Corporation (IEC) (TASE: ELEC.B22) sued the Egyptian government for damages and won NIS 7 billion as a result of delays in the flow of Egyptian gas."

"Globes": What opinion did you obtain about Noble Energy's chances of winning international arbitration against us?

Steinitz: "I don't want to disclose the opinion, but I can say in general that they have a good chance, because we ourselves have delayed the development of Leviathan by several years. I know that people are pooh-poohing the possibility of international arbitration, but such things happen. I mentioned IEC, and I can also mention the Iran-Israel arbitration on Eilat Ashkelon Pipeline." (According to foreign reports, Israel was required last May to pay Iran $1.1 billion, A.B.)

"Who can guarantee that the same international arbitration that required the Egyptian government to pay IEC NIS 7 billion for a one-year delay in the flow of Egyptian gas will not rule that the Israeli government must pay Noble Energy NIS 35 billion for a five-year delay?

"This is a risk that must be taken into account. If the gas framework is struck down by the HCJ, it is possible that instead of getting billions of dollars from the Leviathan gas reservoir, we will have to pay billions of dollars in compensation. Instead of the gas being an asset, it will become a heavy burden for the country.

"This is not just another ruling by the HCJ, which struck down the private prison in the Negev, costing the country tens or hundreds of millions of shekels. We're talking about tens of billions here. It's all hanging by a thread now. Sending the gas plan back for further discussion and legislation in the Knesset committees is liable to destroy the plan. It could be a bridge too far," Steinitz argues.

The gas companies themselves told "Globes" that without the stability clause, they will be unwilling to carry on with the gas plan. "No developer will invest $7 billion if he fears that in a year's time, the state can change the rules of the game," a senior gas company official said. "The time for games is over. This is one of the few clauses we were unwilling to forego."

But the HCJ is not invalidating the gas framework itself.

"But without the stability clause, there is no gas framework. I can't say that the framework is in force if such a key clause is struck down, at least until the Knesset approves it. I may be able to get it through the government, but the Knesset is not so sure. I have already heard from a number of coalition MKs who supported the plan in the past that they don't want to award Noble Energy the prize of stability anchored in parliamentary legislation - and I can understand them."

So why did the state give a stability commitment only to Noble Energy?

"There are many similar stability clauses in the government's relations with other companies. For example, when they privatized Israel Chemicals (TASE: ICL: NYSE: ICL), then-Minister of Finance Avraham Shochat gave a written commitment in the name of the Rabin government for 25-30 years of stability, without anchoring it in legislation. Two years ago, when we instituted cement reform, Nesher Israel Cement Enterprises Ltd. was granted a stability clause in a government commitment, not in legislation. There are many cases in which Israeli governments have given similar stability guarantees, and no one demanded legislation."

So why not now on such a sensitive matter? Does not such a critical watershed require legislation?

"If the HCJ requires legislation, it is in essence supporting the demand by Noble Energy, which insisted that stability should also apply to the Knesset. This demand by Noble Energy is what stymied the negotiations last summer. I told Noble Energy that I opposed legislation or any other commitment by the Knesset, and they flew back to Houston. Only after a week did they give in and come back to the negotiating table. What would have happened then? A petition to the HCJ would surely have been filed arguing that a strong US company was forcing the government to grant it stability in a special law. They would have asked why a special law was being enacted for Noble Energy – why Noble Energy was being granted an individual stability law, which was not done for Israeli companies like Nesher or Dead Sea Works. I think it's quite likely that the HCJ would have seriously considered striking down such legislation."

"It's all liable to go down the drain"

Will you ask for another HCJ hearing?

"I don't know if that's possible, but it's clear to me that if the honorable judges think that it's better for stability to be anchored in Knesset legislation, then a rule can be made that will apply from now on that such stability arrangements will require legislation. To demand legislation now, seven months after the Knesset approved the gas framework and the stability clause, is liable to destroy the gas deal. Noble Energy won't leave the Leviathan reservoir. It will hang on to the asset, but developing it won't be worthwhile, and no more drilling to discover new fields will take place. Everything will be ruined; instead of making money out of the gas, we'll have to pay compensation.

"Without new offshore exploration licenses being granted, no company can come to Israel and drill in any case. In 2002, the Ministry of National Infrastructure, Energy, and Water Resources stopped granting licenses, then resumed granting licenses after several years, but stopped again in 2012. In his recent report on the development of the natural gas sector, the State Comptroller criticized the Ministry of National Infrastructure, Energy, and Water Resources for this policy, asserting that among other things, it had led to the creation of a gas monopoly in Israel.

Maybe Noble Energy is bluffing. After all, it is in their interest for the gas framework to pass, with or without stability

"Noble Energy withdrew from the negotiations because of its demand that the stability clause should be strengthened through the Knesset. We imposed price controls on them to lower the price, compared with the current situation, and forced them to sell the Karish and Tanin reservoirs and to dilute their holdings in the Tamar reservoir. We demanded that they develop the Leviathan reservoir according to an accelerated timetable. We demanded many things from them, and the only significant thing they got was the stability clause - a promise that we wouldn't change any of the clauses again."

They received a significant concession on the restrictions on exports from Tamar

"That's true, but we did that mainly because of our interest in quick development of the second stage of Tamar. Actually, the current gas framework is the fifth, and if it collapses, there is no other framework. The first framework was to leave things as they were in 2009, before they discovered the large reservoirs. The second was when I established the Sheshinski Committee, and at the end of the process, I told them, 'Now it's all clear – go develop it.' A year after that, then-Minister of National Infrastructure, Energy, and Water Resources Uzi Landau decided to set up the Tzemach Committee and impose restrictions on exports, which led to the formulating of the another plan. We changed the rules again, but I told them to get on with it. A few months later, along came then-Antitrust Authority director general David Gilo, and said, 'Wait a minute. I didn't notice, and my predecessor also didn't notice, but there's a monopoly here, and I have to reduce excess concentration.' He forced them to sell the Karish and Tanin reservoirs - in other words, the fourth framework. Then he retracted his consent to the fourth framework in late 2014, and everything fell apart again."

"Expansion of the Tamar reservoir depends not only on passage of the gas framework, but also on the willingness of Spanish company Union Fenosa, which owns the gas liquefaction facility in Egypt, to buy gas from Tamar. Union Fenosa signed a letter of intent to import gas, which is enough to justify expansion of the Tamar reservoir. However, Union Fenosa's partner is Italian company ENI, which last August reported a huge gas discovery in Egypt. It is therefore unclear whether the Spanish company will wish to continue the negotiations with Israel.

"The plan I formulated as soon as I became Minister of National Infrastructure, Energy, and Water Resources is the fifth framework," Steinitz points out, "but it is the most comprehensive framework, and the only one that has been approved by the cabinet and the Knesset, and has gone into effect. The train is finally on the tracks, and has begun to move. Noble Energy has even submitted a plan for accelerated development of Leviathan, after years of delays. Companies from all over the world have begun to show interest. I have met with British Gas, ENI, and British Petroleum. Representatives of Royal Dutch Shell came to the round table I conducted in the US. I met with representatives of Hess, Edison, four major Chinese companies, and other European companies.

That did not happen before?

"The European Union Minister of Energy met with me, and told me that he want'ed to bring European companies to Israel, because there was a chance of finding more gas, and we could become an alternative to the North Sea as a source of gas for Europe.

"The only reason that Turkey wants to normalize relations with us is the gas. I know that for a fact. They sent messages last summer, even before the gas framework was approved, that if we succeed in getting the framework through the Knesset, they wanted to renew efforts at normalization with Israel in order to get some of the gas.

"In short, the locomotive of development and discovery of new gas fields is finally back on track, and has begun to move. If the HCJ derails it and sends it back to the shed, we can't get it through the Knesset. This government is incapable of preparing a new framework, and so is the next government. It's all liable to go down the drain."

What if the next Antitrust Authority director general says she is willing to sign the framework?

"That's worthless, because it will take a year and a half. There might as well be no framework. She'll issue a consensual order like the one Gilo made. It will take several months, because a public hearing is required. The gas companies might not agree; they might say, 'We want stability,' and she'll say, 'I can't, because the HCJ won't agree,' and it will all be reopened. It will be very difficult to reach agreements, because the meaning of such a decision, like that of the HCJ, is that they can't get stability without legislation. This process would have taken months, even a year or two, before it was finished."

But they already agreed to Gilo's consensual order without the stability clause.

"I don't know if they'll agree without stability. Let's say they agree. It will take several months to reach agreements. Then the Antitrust Authority director general will have to hold a public hearing, and that's already six months. Then she has to take it to court, which will open it up to objections by other entities, such as the natural gas section of the Movement for Quality Government. The hearing there will take another six months. Petitions will be filed at the HCJ against the decision in the Restrictive Trade Practices Tribunal. In short, under this scenario, it's all over. Everything collapses.

Published by Globes [online], Israel business news - www.globes-online.com - on February 18, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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Yuval Steinitz
Yuval Steinitz
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