For Israel energy explorers, bad news may be good news

By DAVID WAINER on 4/6/2016

TEL AVIV (Bloomberg) -- The latest bout of bad news for Israel’s natural gas extraction plans may turn out to be a boon for energy explorers.

Plans to develop the country’s largest gas field, Leviathan, ran aground again last month after the country’s highest court ruled that the government overstepped its boundaries by promising a consortium of U.S. and Israeli companies no changes in regulations for 10 years. But explorers may end up with a better deal as the government weighs a range of possible incentives in an effort to salvage the project, Energy Minister Yuval Steinitz said.

“The result of this very unfortunate supreme court decision is that we are now considering giving things that we refused to give in the past,” Steinitz said in an interview late Tuesday. “The companies had asked for these gestures before.”

Among the options the government may dangle are debt guarantees and financial compensation for damages resulting from regulatory changes, Steinitz said in an interview. It is also considering legislating or softening the clause the court struck down, he said, declining to elaborate further. A government decision on how to move forward could come “soon,” he added.

Steinitz’s comments on the ruling’s possible silver lining to developers reflected the government’s frustration with its inability to move ahead on a gas strategy delayed by political, legal and regulatory challenges. The government’s failure to craft an approved regulatory framework for the industry since two large fields were discovered in 2009 and 2010 has held up Leviathan’s development and hindered production at the smaller Tamar reserve. It’s also blocked export deals and antagonized investors, with the regulatory uncertainty making it harder for the companies to secure financing at a time when energy prices have tumbled.

Entrenches monopoly

Critics say the plan entrenches a gas monopoly and will increase prices for Israeli consumers. Antitrust Commissioner David Gilo resigned in protest over the plan last year.

The gas deal can’t go ahead without some kind of government commitment to cushion developers against possible regulatory instability, led by U.S.-based Noble Energy Inc. and a unit of Israel’s Delek Group Ltd., against the regulatory uncertainties that have held up their work for years, Noble and Delek executives have said.

Eytan Sheshinski, who advised Steinitz in forming the government’s current gas policy, said he expected Israel to provide debt guarantees to the companies.

Because low oil prices have frozen investments worldwide, “the government has more urgency than the companies at the moment,” said Sheshinski, a professor emeritus at the Hebrew University of Jerusalem. “The least costly route for the government are debt guarantees and other arrangements made directly with the companies.” Guarantees wouldn’t require legislative approval, he said.

Next move

The companies have said they are keen to move forward on the Leviathan investment and are waiting for the government to make the next move, though Noble called the court ruling “another risk to the project.” Compensation for damages is among their preferred choices because it protects investors, according to a person familiar with the matter who spoke on condition of anonymity because he wasn’t authorized to discuss confidential talks.

The top court’s ruling, which approved most other aspects of a blueprint designed to regulate the energy industry, gave the government a year to revise its plan. Steinitz said the court’s decision sets a bad precedent for doing business in Israel.

“If our supreme court comes up with such an unreasonable decision, that government can’t make decisions that will somehow bind future governments, this is very harmful and unprecedented in the world,” Steinitz, a former finance minister, said. “What kind of message does that send to investors who want to make long-term decisions in Israel?”

While mechanisms such as debt guarantees would go through the finance ministry, it is the cabinet that will decide how to proceed, he said. He anticipates a legal challenge to whatever option the government proposes.

“It will probably be challenged,” he said. “What can I do? This supreme court takes up a high percentage of cases and I’m sure they could end up revisiting this as well.”

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