Could Regulatory Headwinds in Israel Shutdown Offshore Energy Development?

 

On the cusp of the New Year, we published a chronicle of self inflicted woes that have befallen Israel’s grasp of its energy prize, “Could Israel Lose the Energy Prize in the Eastern Mediterranean?”   The Noble Energy, Inc. (NBL-NYSE) and Israeli Delek Group, LTD, (DELEK-TELV) ( the  Consortium ) has  developed the most significant gas fields in the Eastern Mediterranean with over 32 trillion cubic feet (TCF) which at current market prices might produce a value of nearly $100 Billion. The consortium found itself thwarted by a Consent Decree issued by  the independent Israel Antitrust Authority (IAA). The Decree essentially reneged  on a deal that would  have left  the Consortium in control of the Tamar field with 7.9 tcf . That field  went on stream in April 2013 and potentially the even more significant Leviathan field  was scheduled to  begin production  in 2017 with reserves of more than 21.9 tcf.

Dr. David Gilo of the IAA effectively ruled that the Noble Energy – Delek Consortium constituted a monopoly and would be forced to sell the Leviathan or Tamar fields in Israel’s offshore Exclusive Economic Zone. Gilo was cited by the New York Times saying, “The entry of Delek and Noble into Leviathan has created a situation in which these groups control all the gas reserves on the coast of the State of Israel.” Gilo’s rationale for his ruling was the prior agreed to sale of smaller gas fields Tanin and Karish owned by the Consortium “did not create a real competitive solution to solve the problem of a monopoly in the market.” Globes, Israel Business reported in an article, Regulator decides Tamar and Leviathan form monopoly:

[Gilo] is going back on his decision, subject to a hearing, to let the companies continue holding both the Tamar and Leviathan gas fields. The State will now require the companies to sell their holdings in one of the fields.

Sources in the energy market believe that such a step will delay development of the Leviathan field by several years and could see Israel dragged into the international court of arbitration by US Company Noble Energy, which has been developing both fields.

Gilo wanted the Consortium to consent to a possible sale of the smaller Tamar field at a discount to third parties with an exemption with  the Consortium holding onto the larger Leviathan field.  This reversal of fortune threw off both the schedule for bringing Leviathan on stream in 2017. It also threw into jeopardy a $15 billion deal with two Jordanian companies, Potash and Bromine Works.  That deal  was  brokered with the assistance of special advisor to US Secretary  of State Kerry on world energy security Amos Hochstein . A similar deal   for offshore Egyptian gas facilities was also under discussion.   On January 5, 2015 just before the opening of the trading markets in the US, a new deal was signed between Jordan Potash and Bromine and British Gas offshore Gaza.  The Consortium tried to solicit the Jordanian companies that the original September 3, 2014 deal was still viable pending the outcome of a possible hearing on the IAA proposal. 

But the trading markets were lashing the stocks on both Consortium members. The energy  sector commodity prices continue a fall of over 55 % drop in the six months since June 2014. As of close of trading Tuesday, January 6, 2014 Brent crude per barrel was $50.52.  US Crude was at $47.93 and at one point had touched the April 2009 low of $47.55.  NYMEX natural gas spot future prices over the period from December 23, 2014 fell by 7.5% from $3.18 to $2.99 per Million BTUs.  Since December 23, 2014, Noble Energy common stock had fallen by 15.02%.  The impact was even more severe if you looked at the benchmark date for the halted Jordanian gas deal, September 3, 2014.  The trading values fell  by 41.6%.

Charles D. Davidson , Chairman of Noble Energy , Inc. of Houston Texas

Source: Houston Chronicle

In our NER article, Noble’s Chairman issued an immediate news release on December 23, 2014 blasting the IAA Consent Decree:

Charles D. Davidson, Noble Energy’s Chairman, commented, “The actions of the Anti-trust Authority are another disturbing example of the uncertain regulatory environment in Israel. Specifically, this is a matter that we believed was resolved some time ago and follows on recent assurances from the Anti-trust Authority that approval was forthcoming. We believe this is a harmful precedent for Israel to set and we will vigorously defend our rights relating to our assets.” 

Nobel’s Israel manager immediately notified Israel Shipyards that given the IAA ruling  it was freezing all infrastructure work in the Shipyards 38 acre onshore facility.

 

 

Edouard Cukierman, chairman of Cukierman & Co. Investment House Ltd., and joint manager of the Catalyst funds.

Edouard Cukierman, French- Israeli financier was harshly critical of Gilo’s ruling:

 The bureaucrats and politicians who come along with populist ideas need to understand that it takes two to tango. No international investor will put a cent into oil and gas as long there is uncertainty in the industry. We are freezing the growth of the State of Israel’s economy for many years ahead because of this wretched decision. Noble Energy has announced a freeze on investment that could have contributed 2% to the economy’s growth rate and yielded huge amounts in tax it’s all frozen.

Noble … was fortunate enough to obtain one of the biggest discoveries in the world, and what does he get? Restrictions on exporting in an economy with very limited demand; he gets a change in the taxation method, and now the straw that breaks the camel’s back. It’s exactly the same story, because here too you have bureaucrats who want to be popular. Who will pay the price of Israel making a mockery of itself before the international investment community? The public will pay it.

US Secretary of State Kerry had spoken with Israeli PM Netanyahu about resolving this impass.  Netanyahu indicated that he would have his National Economic Council head, Dr. Kandel prepare an assessment, but indicated that Gilo’s decision was out of his control.  Amos Hochstein, Special Envoy for International Energy Affairs at the US Department of State, who had settled the maritime boundary dispute between  the Israel and Lebanon Exclusive Economic Zones, remarked:

“We’ll support any agreement that will satisfy both parties, the Israeli regulators and the companies, and facilitates developing the gas fields as rapidly as possible. I believe this is also in Israel’s interest.”

Dr. David Gilo Director General , Israel Antitrust Authority

Dr. Gilo defended the abrupt change basically  warning  the Consortium  that if it objected to the Consent Decree declaring the Consortium a cartel owning a duopoly, the Tamar and Leviathan fields, that any delay in development would be the fault of Noble and Delek.  The reason for the three year delay in arriving at the change was allegedly due to a “long and complex” public hearing process.  Further, the prior settlement the IAA indicated  did  not evince any effective competition and the cost of not achieving that was greater than the cost in the delay of completing the Leviathan field. Gilo artlessly dismissed the comments that foreign investors would not take risk in the gas development, because of the uncertainty the Consent Decree created, and that the law had to be enforced. He believes that the duopoly, the ownership of both the Tamar and Leviathan fields would not result in  lower  gas prices to consumers. 

Professor Eytan Sheshinski

Professor Eytan Sheshinski of Hebrew University, who devised the original taxation scheme for the offshore gas program for the Israeli government that had issued the permits to the Consortium ,said:

I’m worried about this euphoria surrounding a split. Forcing Noble Energy and Delek Group to sell Tamar or Leviathan through a legal battle could take 10 years, and the Antitrust commissioner said so himself. I believe that it’s worthwhile embarking on such struggles only when you know that there is a definite advantage at the end of the road. Both experience around the world and economic theory explicitly state that anyone who thinks that a duopoly will lead to perfect competition is wrong. On this question, you can rely on our experience here in Israel.

 Just as I have doubts about a duopoly, I also have objections to price controls. Price controls give a lot of authority to a bureaucratic system, and experience does not justify optimism.

  Addressing Gilo’s comments about prevailing gas pricing, Sheshinski observed:

In my opinion, the goal is to ensure that gas prices in Israel do not differ from those prevailing in similar countries around the world. A revolution in global energy prices is now  taking place The US is becoming the world’s largest oil producer, and prices are sliding – for both oil and gas. In my opinion, this trend will persist, and our goal should be not to pay more than the reasonable price in countries whose situation is similar to ours with respect to gas reservoirs.

The crisis created by the summary change in the Consent Decree proposal of December 23, 2014 is reflective of the peculiarities of Israeli anti-trust law, the role of the IAA and the juridical and regulatory mindset of Dr. Gilo, its Director General. 

Dr. David Gilo,  holds degrees  in Economics and the Law from Tel Aviv University  and a Doctorate in Legal Science from Harvard Law School.  He was  an an assistant professor the Buchmann Faculty of Law at Tel Aviv University  and head of the program on Anti-Competitiveness.  The Israel Anti-Trust Authority (IAA) was created in 1994 through an amendment to Article 41 of the Basic Law.   While it is independent of the Israel I government it may consult with the Ministries of Justice and Trade and Industry on specific competiveness matters. The objective of the IAA is to maintain and enhance competition in the Israeli economy.   The IAA’s institutional independence is reflected in its organization; headed by a Director-General with four Departments, Legal, Economcs, Investigations, Administration and Human Resources.   

IAA  is totally unlike the 100 year old US Federal Trade Commission’s  accountability.  The later having a bi-partisan group of five Commissioners appointed by the President and confirmed by the Senate for a seven year term with one Executive Commissioner. The FTC has Bureaus for Consumer Protection, Investment, and conducts pre-merger clearance under the Hart Scott Rodino Act.

The European Antitrust Review 2015 revealed the significant expansion of authorities of the IAA since Gilo’s assumption of the Director General position.  Noteworthy were the following:

 The Restrictive Trade Practices Law, 5748-1988 (the Law) and the regulations under it have been amended frequently, adding novel measures to the toolbox of the general director of IAA, enhancing his power and increasing his influence.

For instance, in 2011, the general director acquired the authority to take broad and far-reaching actions against members of a ‘concentration group’ to prevent harm to competition or to increase competition. This innovative legislation regulates oligopolies and thus expands the scope of the Law, which previously had dealt principally with the ‘classic’ restraints of trade – restrictive arrangements, monopolies and mergers.

In 2012, the general director gained the authority to impose administrative monetary sanctions in response to certain violations of the Law. Consequently, violation of the Law is not only a civil wrong (and hence exposes the violator to lawsuits) and a criminal act (and hence exposes the violator to penalties), it also bears the risk of considerable administrative fees.

 The Israel economy has been fraught with conflicts of interest, reflected in a dual economy, in which the Labor Federation, Histadrut, had historical ownership of economic enterprises including government monopolies. The most relevant example is the Israel Electric Company, which is partially privatized and the sole national power entity. It is embroiled currently in an embezzlement and corruption case brought against six executives, including  a former leader in the Labor Party and a judge. It is alleged bribes were paid by Siemens  to the accused for the tender purchase of infrastructure management systems in the period 2000 to 2001.

The viewpoint of the current IAA Director General Dr. Gilo is reflected in both interviews and articles in the Global Competition Review.  The October 2014 (GCR) published an interview with Gilo, noting the consumerist slant of his regime:

Since being named director general of IAA in 2011, David Gilo has had the formidable task of leading the authority’s enforcement program. A former academic, Gilo has surprised many in the community by his active and sometimes radical approach to his mandate. Speaking to Katy Oglethorpe, he explains why Israel’s unique economic and political situation makes extra antitrust attention a necessity, and how the IAA can provide the answer to the high cost of living that plagues its country’s consumers.

Ms. Oglethorpe writing in the October 2014 GCR  observed about the IAA’s questionable overreach as regards Israel’s Food Law:

The cost of living is a hot topic in Israel, where the price of food is far above the OECD average. A new Food Law promises to solve these problems through extensive regulation. But the country’s antitrust lawyers worry that the new law is excessive in its prohibitions and that in enforcing it, IAA is acting beyond its jurisdiction.

There have been occasions where the IAA’s  zeal in pursuit of regulatory matters  has overreached its legal authority. As indicated in a GCR article on September 2, 2014 an” Israeli  Supreme Court decision  overturned the Antitrust Authority’s bid to stop a company from appealing against the authority’s decision to block its merger.”

In conclusion, Israel’s unique and formidable antitrust regulatory structure and the execution of the IAA authorities by its current Director General  present a formidable barrier to the development of its valuable offshore energy resources.   Changes in the  IAA’s regulatory practice made under  Gilo’s leadership of IAA   reflect  possible abuses of power catering to populist consumerist resentment of the high costs of living in Israel.  Without  relief  via legal appeals to Israel’s Supreme Court and/or International Arbitration from  IAA’s  proposed Consent Decree  the Noble Energy Delek Consortium , its investors and shareholders,   and the people of Israel could  lose billions of revenues from the  energy prize awaiting development in its offshore Exclusive Economic Zone.