Israeli court blocks government's natural gas plan in blow to energy firms

By Ari Rabinovitch

JERUSALEM (Reuters) - Israel's Supreme Court blocked a controversial plan to develop the country's natural gas fields on Sunday, dealing a blow to energy companies operating in the eastern Mediterranean and drawing fire from the government.

Prime Minister Benjamin Netanyahu reached a deal last year with Texas-based Noble Energy (NBL.N) and Israel's Delek Group (DLEKG.TA) that would leave them in control of the country's largest gas field, Leviathan, while forcing them to sell smaller, yet sizeable, assets.

The agreement also provided an outline for the next decade, with the government committing to leave taxes, export quotas and other regulation unchanged, and the companies agreeing to develop Leviathan at an accelerated pace.

The court, however, said the government was not in a position to make such long-term commitments.

A commitment "that binds the government to the outline, including no changes in legislation and opposing legislative initiatives for 10 years - cannot stand," the court said in its ruling.

The cabinet could try to pass a law in parliament, the judges said, but given the strong opposition and Netanyahu's single-seat majority, such a move seemed unlikely.

The court gave the government a year to come up with an alternative arrangement or the outline will be cancelled.

"(The) decision severely threatens the development of the gas reserves of the state of Israel," Netanyahu said of perhaps his biggest political setback since re-election a year ago.

The prime minister even made the unusual step of defending the deal in the Supreme Court last month.

"Israel is seen as a state with excessive judicial interference in which it is difficult to do business," he said. "We will seek other ways to overcome the severe damage that this curious decision has caused the Israeli economy."

Noble and Delek have held off on developing Leviathan, a $5-$6 billion investment, until the deal was approved.

In a joint statement, they commended the court for opposing just one section of the outline.

"In order to allow us to meet the framework goals, primarily the development of Leviathan by the end of 2019, we call on the government to facilitate the stability provisions in a short time frame," the companies said.

Expect a sharp drop in gas companies' share prices on Monday in Tel Aviv, said Noam Pincu, an analyst at the Psagot brokerage.

The deal would have also encouraged new energy companies who have been waiting for regulatory uncertainty to clear up before investing in exploration.

However, it also drew a lot of opposition including from public advocacy groups and opposition lawmakers, who said it would still have left Noble and Delek in control of too much of Israel's gas.

Leviathan, with an estimated 22 trillion cubic feet of gas, was one of the world's largest offshore discoveries of the past decade. It is earmarked mostly for exports and the developers have inked a number of preliminary, multi-billion dollar deals.

Analyst Yehonatan Shohat of Leader Capital Markets, one of Israel's top investment banks, said he expected Netanyahu to return to the negotiating table rather than seek a new law.

"The bottom line is that it's bad news for the partners, but in our estimation, and given the sensitivities of the subject, the last word has yet to be spoken," he said.

(Reporting by Ari Rabinovitch; Editing by Alison Williams and Digby Lidstone)