This is the second section of a two-part article. For part one, please click here.
Partners Shiri Shaham and Simon Weintraub at Israeli law firm Yigal Arnon & Co. explore the natural gas industry in Israel.
The Judicial Process:
Fueled by heated public discourse questioning the government’s policy considerations, a number of interested and political groups challenged the Framework before the Supreme Court of Israel in its capacity as the High Court of Justice. The appeal hinged on the legality of the government to adopt this type of legislative-like agenda not by way of primary legislation of the Knesset (Israeli parliament). The five Supreme Court judges methodically reviewed and comprehensively analysed each issue, with each judge expressing slightly different opinions on the various issues. The majority opinion, issued on March 27, 2016, determined that the Framework in its current form was not adopted properly, primarily on account of the legal status of its Stability Clause. The government was granted one year to resolve this issue.
The Revised Stability Clause:
The government promptly addressed the Court’s concerns and on May 22, 2016, announced its amended Framework with a more lenient Stability Clause. While the new clause still refers to a 10-year long regulatory climate in the natural gas sector which is intended to attract investment, it no longer guarantees nor does it mandate that the government will abstain from and oppose the enactment of any material changes. Rather, the new clause provides that the government will carefully consider future regulatory changes which relate to the “government take” from the leaseholders’ profits and other matters dealt with in the Framework when such changes could have a material adverse effect (in the eyes of a reasonable investor) on the leaseholders. In the event of a material change of this kind, the government will undergo an evaluation process, which will explore and form solutions in order to sustain the economic viability of the projects. Such evaluation process must be concluded during a fixed and relatively short time table and will take into account, inter alia, conformity with OECD and other worldwide standards, amounts already invested in the projects as well as the existence of approved export agreements. As in the previous version of the clause, these governmental undertakings are conditional upon compliance by the leaseholders with the provisions of the Framework. This improved Framework has thus far gone unchallenged although it cannot be ruled out that additional petitions will be submitted to the Court.
Going forward and conclusions
In our opinion recent events in Israel’s natural gas sector are an encouraging reality for foreign investment in Israel. The recent deliberations and legal proceedings surrounding the Framework have showcased Israel’s vibrant democracy and strong rule of law. The High Court of Justice’s opinion outlines a clear separation of powers between Israel’s executive and legislative branches, effectuating political, legal, and regulatory certainty – imperative for direct foreign investment. From an investment perspective, it is the hope that the Framework will serve as a stimulus in expediting the development of Israel’s natural gas reserves and for promoting trade agreements with neighbouring eastern Mediterranean countries. Such trade agreements can hopefully serve to foster geopolitical stability in the region. By way of example, it was reported that Leviathan partners and British Gas were close to signing a US$30 billion deal to supply 105 billion m3 of gas over 15 years to British Gas’s liquefaction facility in Idku, Egypt. It has also been reported in the media that Israel and Turkey are coming closer to a gas deal as well including the possibility of a pipeline through Turkey. While relations between the two states have been shaky as of late, a trade agreement would advance the rapprochement that interests both sides. Additionally, in February 2016, it was reported that the Tamar partners signed a letter of intent with private customers in Jordan to supply 1.8 billion m3 over 10 years. Lastly, in April 2016 it was announced that the Palestinian Investment Fund received a provisional permit and would soon publish tenders for building a US$600 million power station to be supplied with natural gas from the Leviathan field. The power station is intended to provide 450 megawatts of electricity to West Bank residents.
The Framework is already spawning a boom in discussions on foreign investment and M&A activity in Israel. Under the Framework, the Leviathan field will need to be developed rapidly requiring the infusion of billions of dollars most of which will likely be funded by sources from outside of Israel. Moreover, it was announced recently by the Israeli government that there will be a new round of exploratory permits (likely in the fall) to be granted by the Israeli government as the country’s EEZ continues to prove fertile. For example, this past January, it was reported that the partners in the Daniel gas field off the coast of Ashdod and near the Gaza Strip, have a geological report estimating such field to hold 8.9 trillion ft3 of natural gas.
We are optimistic that the major regulatory hurdles have now been overcome so that Israel can finally find its place as a global energy provider as well as a home base for safe investment opportunities.
The authors Shiri Shaham and Simon Weintraub are partners in the Israeli law firm of Yigal Arnon & Co. specializing in Banking and Oil & Gas. Most recently, Shiri and Simon represented JP Morgan, CitiGroup and HSBC, as the lead underwriters in the Delek Group $2 billion bond offering in connection with the development of the Tamar lease.
Adapted by David Bizley
Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/24062016/israeli-natural-gas-industry-where-do-we-go-now-part-2/