Israeli Genco Pays up for Tamar Gas
Israel Electric Corporation (IEC) will pay $2-2.3bn too much for natural gas purchased from the Tamar field over the duration of the 15-year gas sales agreement, according to the auditor, the state comptroller.
In a report published May 16 it said it had investigated the history of the gas sales agreement (GSA) between Tamar and IEC over 18 months and laid most of the blame at the door of senior, unnamed IEC officials. Regulators and other government officials took the rest of the heat.
At the heart of the matter is the price mechanism, with a base price of $5.04/mn Btu indexed to the American Consumer Price Index plus 1% for the GSA's first half and minus 1% for the GSA's second half. As a result of this formula, IEC will pay $5.91/mn Btu in 2017 and the price will keep increasing until the end of the GSA.
(Credit: IEC)
Two factors have contributed to this formula: the disruption of gas supply from Egypt to Israel that created Tamar's gas monopoly in the Israeli market and the adoption of the unconventional indexation formula.
Low base price and monopoly
When negotiations between IEC and Tamar started in 2009, the comptroller said, the proposed base price stood at $4/mn Btu. However, following the ouster of the Egyptian president Hosni Mubarak during the 2011 Arab Spring events, terrorists began blowing up the gas pipeline in Sinai and halted gas transport to Israel as well as to Jordan. That created a crisis in the Israel electricity market, as IEC had to revert to purchasing diesel as a replacement when oil prices were at their peak.
The crisis was used by Tamar Partnership in order to hike the base price by a quarter. As for the price index formula, the comptroller couldn’t identify who was the first to propose it.
In its defence, the Tamar partnership argued that the conclusions of the Sheshinski Committee – a committee which raised taxes on gas and oil – had deducted NIS 40bn ($11.3bn) from its revenues, and this justified the terms of the contract. The partnership also referred to the Tzemach Commission's decision to limit exports; the change in Tamar's development plan, which added $500mn to development costs; and the cancellation of the gas storage in the empty Mari B reservoir off the coast of Ashkelon, which caused additional losses.
As for the future, the comptroller has recommended that the Israeli government will insist on price reductions when the re-opener clauses in the GSA come into effect, but the next one is not until 2021.
Ya'acov Zalel