Tethys Sea signs gas deal with Dorad Energy

The Tethys Sea gas and oil exploration and marketing consortium, controlled by the Delek Group, will sell $ 900 mm worth of natural gas to Dorad Energy, a private electricity producer owned by U. Dori Engineering and Adalcom, the Delek Group announced. Two Delek Group companies, Delek Drilling and Avner Oil & Gas, belong to the consortium.
The contract with Dorad is for the supply of 10 bn cm of natural gas over 15 years.

Under the deal initialled by the companies, Tethys Sea, or companies affiliated with the consortium, will purchase 15-25 % of Dorad's stock and invest $ 75 mm-$ 125 mm in the 800 MW power station Dorad will build in Ashkelon.
The power station, which will require a $ 500 mm investment and is slated to supply electricity to private consumers at prices that will compete with those of the Israel Electric Corp. (IEC), is supposed to be inaugurated in early 2007. The chairman of Dorad, Uri Dori, said that he expects additional investors to come on board.

U. Dori notified the Tel Aviv Stock Exchange of Dorad's establishment in November, saying it was founding the company in partnership with other investors. Dorad subsequently received permission from the National Infrastructure Ministry to produce electricity.
The Tethys Sea consortium controls the Mari field of natural gas off the Ashkelon shoreline. It began supplying gas to the Eshkol power station in Ashdod in mid-February 2004. So far, its gas supply operations have generated NIS 24 mm revenues.

Tethys Sea has an agreement to supply gas to the IEC, which runs the Eshkol station, for 11 years or until it supplies 19 bn cm of gas, whichever comes first. The deal is estimated to be worth some $ 2 bn.
Sources in the natural gas industry believe that Tethys Sea will sell the gas to Dorad at the same price it is selling to IEC, or perhaps even less. Details of the deal that have been released indicate that Yam Tethys will supply Dorad with gas at a price of $ 2.56 per 1 mm Btu.

Under the deal, Dorad has undertakennot to enter into negotiations with any other business concern for the purchase of natural gas during the exclusivity period it granted Tethys Sea. For its part, Tethys Sea has undertaken not to sign gas-supply deals with any other entities that could prejudice the supply of gas to Dorad.
Dori said that the private power station constituted a national project of the Israeli government, and would serve as a lever for the promotion of competition in the electricity economy. He added that the energy field would constitute an important additional aspect of the company's business in the future.

If Dorad's private power station is established -- and in the energy industry, there are more doubters than believers -- it will mark the start of real competition in electricity production. The industrial electricity consumer will finally be able to choose among different suppliers, including the Israel Electric Corp. (IEC), which will have to work overtime to ensure that its customers do not defect to the private producer due to its attractive prices.
In the meantime, however, it is too early to celebrate. Till now, nothing has happened aside from the drawing up of plans and media announcements. This is due to the fact that the state is dragging its feet over formulating regulations for the private production of electricity, and no one knows when they will be published.

The regulations have to include an IEC undertaking to back up the private producer if necessary. They also have to determine the price the private producer will have to pay IEC for use of its infrastructure in order to deliver privately-produced electricity to the consumer.
But above all, the government has to provide a safety net for the benefit of the private producer. The state, with its interest in promoting competition in the electricity economy, must share with the private producer the risk involved in investing in a private power station.

The production of private electricity under license means that most of the risk falls on the shoulders of the private producer, because it has to build up a clientele and offer its customers better prices and more attractive terms than those offered by IEC. It is clear, however, that if all the risk has to be borne by the private producer, there will be no private production of electricity.
As a result, the government intends to provide the private producer with a safety net that will allow them to sell surplus electricity for which it finds no market to the state. The price it gets will be lower than the market price in order to encourage it to make a greater effort.

It appears that the day when these rules and regulations will be formulated is still far away, particularly the issue over risk sharing between the private producer and the state.
In any event, Dorad, which has already received a conditional license for the establishment of a private power station from the national infrastructure minister, is not the only entrepreneur waiting for publication of these regulations to decide whether the investment is worthwhile.