In her Matzav piece, Allison Good does justice to the importance of the recent Israeli Supreme Court decision that rejected the government’s volunteering to give up some of its rights – indeed obligations – to govern over the natural gas market. The court rendered unconstitutional the so called Stability Clause, which committed the government to change nothing for a decade in the regulatory environment that might affect the natural gas shareholders.

But the importance of the issue goes far beyond the legal grounds on which it was rejected or the direct effect of the court’s ruling, as these will soon be resolved. The gas deposit shareholders are already on record looking for a quick alternative to a clause that until recently they claimed was a ‘do or die’ condition, and government experts are already hard at work looking for a solution which passes the test of legality. But will it pass more important tests?

The subject is far more important than the natural gas market mismanagement which brought it about. Indeed, the government’s handling of this important sector of the economy over the past decade has been a sad example of the disturbing state of decision making on strategic issues in our country. This has been uniquely inexcusable by virtue of being a new sector, where one can learn from the best and the most experienced; instead, we knew better, hence repeated others’ and invented our own mistakes. Things have gotten so bad that a respected anti-trust commissioner resigned in protest; a cabinet member could not take the pressure so returned his portfolio to the prime minister (worry not, only to receive another); the prime minister sought Knesset approval but withdrew his request to avoid being voted down; and now this, the Supreme Court ruling that the government had no authority to undermine its own bargaining power.

The consequences of this convoluted process will be felt for decades to come and will not be confined to the energy market alone. The enormously powerful natural gas monopoly that is being secured these very days, will affect our lives in ways hard to imagine. But responsibility for the sorry state of this industry – where domestic prices are outrageously high and no export venue has been secured – does not rest with the government alone. The shareholders – Americans and Israelis – had something to do with it as well. Ms. Good accurately portrayed Noble Energy’s public resentment of the court’s decision, but privately Noble must feel grateful. The decision, which grants the government a year to replace the illegal clause with another, has (inadvertently) for all intents and purposes extended Noble’s concession over the Leviathan deposit.  The concession was to expire if no development investment is made by a date certain, but as Ms. Good pointed out, the shareholders have no intention of investing in field development before market conditions change anyway, something she (and they) do not expect to happen before 2020 – well after the concession’s investment/termination deadline. Now the shareholders were provided with the best reason possible for not doing so for 12 months: the need to wait for a government solution.

It should be pointed out that the Stability Clause has been outrageous for reasons that have nothing to do with the legal grounds on which the court rejected it. By providing it, the government accepted part of the Leviathan commercial risk with no reward. Moreover, it enshrined a ‘floor’ for gas prices on the Israeli market, which are totally out of line with current market conditions. To add insult to injury, local price is hardly relevant to Leviathan development which, in our saturated market, has no domestic anchor buyer, and is — certainly until Tamar is depleted — primarily for export.

I find it ironic that Noble’s inability to mobilize the required investment is also pinned on this clause (or, more accurately: on its absence). Indeed, as Ms. Good correctly points out, the prerequisite for the banks to issue the required credit is not the character of the regulatory environment but the availability of an anchor buyer with whom a long term gas contract (GSPA) is concluded and who is credit worthy. Here enters another catch: the government’s agreement with Leviathan requires reducing domestic prices if exported gas is cheaper. Thus, it is no wonder that the shareholders have signed no contract while overseas prices are as low as they have been.

Although by their nature LNG imports are no competition to piped gas and thus Egyptian short term imports from Qatar or elsewhere are no deterrent for long term contracting with Leviathan, in the meantime Egypt found a nice new reservoir of its own – indeed, a huge one; the Sisi stability brought investors back; reserve development picks up speed and before too long the balance between supply and demand is projected to be restored with potential excess production for export.

It is here that Leviathan might be in trouble: by the time the shareholders conclude that market conditions justify the required huge investment, will there be an anchor buyer nearby to contract with?Jordan is too small a market to serve as an anchor buyer; Egypt may not need our gas for more than 5-7 years – far too short a period for the banks to see an adequate stream of income; and Turkey too may not wait for us. The government messed it up. The shareholders can still make it happen, if only greed can be contained.

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