The gas from the Tamar off-shore field will continue to flow to the Israeli market even if its price is artificially lowered by the state, according to government sources familiar with the matter. However, those same sources believe that the negative aspects of price supervision could make the entire enterprise moot, especially if the government does not properly promote it.
The issue of price supervision has been debated for more than two years by a joint price committee of the ministries of finance and national infrastructure. The committee, which was made privy to the full commercial data of the Tamar venture, reached several conclusions. The first - and most important to the public - determined that it was possible to significantly lower the price of gas from Tamar without critically hurting the profitability of the venture.
According to the committee, the gas field will yield double-digit returns to its operators even if the gas is sold for $4 per thermal unit, as opposed to the $5.4-5.6 of today. The main reason: when the field was connected to shore in 2013, it had no competitors and won over the natural gas market by default. As such, the venture has sold much larger quantities than its operators expected - and the early, unexpected revenue meant a great deal for the project’s profitability.
But fixing the price at $4 will have three negative consequences for the market and the treasury.
First, it will lower the taxes collected by the state. The treasury will lose $0.50 of every dollar the price is lowered, which will easily surpass NIS 1 billion per year.
Second, it will hurt the competition between the Tamar field and other off-shore reserves. At a price of $4, the development costs on Tanin and Karish become untenable, and the Leviathan project’s development marginal (the latter, for its part, depends on finding an anchor investor from abroad). Creative solutions will be needed to promote competition which will be able to bypass the fixed price, like supervising the yield (instead of the unit price), guaranteeing contracts to the smaller reserves, or setting price limits only on the largest player though each of these solutions carries its own drawbacks.
Third, lowering the price - without the consent of the investors - means revisiting signed contracts. Such a drastic move could have consequences for Israel’s ability to attract foreign investors and could even lead to its being taken to international arbitration.
But even if we ignore the foreign threats, it is more than likely that a drastic cut in the price of natural gas will lead to a response from the investors. One possible scenario is to halt the process of connecting industrial plants to the natural gas - which would lead to intensive pressure on the government on behalf of manufacturers.
Thus, if the price setting has any hope of succeeding, the government will have to display a reserve of resolve and patience in the face of the many outside pressures.
Published by Globes [online], Israel business news - www.globes-online.com - on August 10, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015