Israel's Electricity Supplier Sees Potential for a 35% Cut in Gas Prices by 2023

Israel Electric Corporation (IEC) expects to reduce its natural gas bills by 35% in the first half of the next decade, according to IEC chairman Yiftah Ron-Tal.

Ron-Tal said that the company's contract with the Tamar Partnership, IEC's sole natural gas supplier stipulates a "price opener" clause that would enable each of the contract's signatories to open the contract and to demand a change of up to 35% in the gas price. The clause comes into effect in 2021 when a 25% change in price will be allowed. In 2023, another 10% of the price can be changed. (The clause allows for both an upward or downward revision of price.)

IEC pays $5.5/million British thermal units) for the gas it receives. Under the terms of a 15-year contract, the price is linked to the CPI (the American Price Index) + 1% for the first eight years of the contract. In the final seven years, the price will remain linked to the CPI – 1%. Experts estimate that by then the price for gas could go reach up to $7.5 MMbtu.

From what Ron-Tal said, it's not clear whether the price cut would come from the base price for gas stipulated in the contract or from the indexed price.

The company chairman said that despite the relatively natural gas high price, the contract is a good one, one that enabled the development of the Tamar field.

The contract was signed in 2012 when oil prices and natural gas prices were still high.

"The realisation of the energy revolution [in Israel by supplanting oil and coal for power generation by natural gas] was possible due to Tamar's development," Ron-Tal said. "Tamar was developed due to the agreement the IEC signed with the Tamar Partnership, headed by Noble Energy and Delek Group. Four years later the contract is being criticised. However, without this agreement, every month without gas from Tamar would have cost the Israeli economy NIS 1 billion ($250 million) a month. In a year, it would be around NIS 12-14 ($3 billion to $3.5 billion) and I am conservative [in that estimate]. Therefore I think this agreement is saving lives."

Ron-Tal also criticised the antitrust authority for declining IEC's demand to get the lowest gas price from the Tamar Partnership due to competition considerations. "IEC's board of directors demanded that since the company would be the anchor customer that enabled Tamar's development, it would be able to get the cheapest price in future deals and that if a price control were imposed, the IEC would be part of that control. The two demands were not accepted by the antitrust commissioner."

Ron-Tal said that despite the importance of Tamar, the fact that Israel is still dependent on one natural gas reservoir with only one pipeline connecting it to its shores is damaging its energy security. "Before we solve the price problem we have to deal with energy security," he said.

As an emergency measure, Ron-Tal proposed the construction of a second offshore LNG terminal that would, at least, double the current capacity of the first offshore LNG terminal that was built a few years ago. "My professional opinion is that it is right to initiate an emergency project that will enable us to [receive] another LNG shipment because otherwise, the potential damage to the economy, in the case that supply is interrupted by a technical failure--not necessarily a terror attack, God forbid--because of power outages [could be enormous]. That is the situation in which the state of Israel will be in the next 5 years."

Ya'acov Zalel