Committee recommends tax levy on energy profits

Government take from resources may rise to 66%.

November 11, 2010 11:16
4 minute read.
Illustrative photo

311_offshore oil well. (photo credit: Associated Press)

The advisory committee on the question of royalties from natural resources has recommended levying a tax on gas and oil profits, while keeping the royalty rate unchanged.

“We are the country with the lowest government take from natural resources, which stands at 30 percent,” committee chairman Eytan Sheshinski said at a press conference in Jerusalem on Wednesday evening presenting an interim report of recommendations.

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“There is no doubt that the public is not getting the benefit from these resources. If the interim recommendations we are presenting today are implemented, the volume of government take according to our calculation is expected to increase to 66%, or twothird of the government’s share of proceeds from large oil and gas fields.”

In recent months, the Sheshinski Committee, which was appointed by Finance Minister Yuval Steinitz to examine the country’s fiscal policy on royalties and taxes from natural resources, has been discussing various models to update and make changes to the Petroleum Law formulated in 1952 and challenged a number of times in the past.

The urgency regarding corrections to the oil and gas law comes after a group including companies controlled by Israeli billionaire Isaac Tshuva’s Delek Group Ltd. and partner Noble Energy Ltd. made record gas finds off the Mediterranean coast in the past two years. The two finds may hold 24 trillion cubic feet of natural gas, double the UK’s proven reserves in 2009, and the whole area as much as 30 trillion cubic feet, Noble said in June.

“There is no doubt that the existing gas discoveries, and the possible gas discoveries in the future, are the biggest and most significant natural resource of the Israeli people,” Steinitz said at the press conference. “It is our obligation to safeguard the Israeli public’s right to benefit from these resources.”

Much of the discussion of the committee surrounded the question of whether to raise the rate of royalties paid to the state on gas and oil found in Israeli territory, which has been steady at 12.5% since 1952, or to recommend other measures, either way trying to avoid reducing the incentives and the ability of gas field developers to conduct very costly exploration work.

The Sheshinski Committee decided to leave gas royalty rates at 12.5% and recommended to levy a progressive tax on part of the gas and oil companies’ profits using a model that takes into account the profitability of a particular gas field as well as world gas and oil prices.

In principle, the more profitable the gas field, the higher the rate of tax the company would need to pay. Hence the larger the profit the higher the government take. The tax would be charged on the profit made by all the gas and oil companies actively exploiting natural resources, after they recouped 150% of their investment on the gas field projects. The tax rate would range from 20% to 60%, depending on the volume of the profits, and would be levied on a field rather than an individual company, since the majority of projects consist of partnerships between developers.

This means that in the first years of exploration and development of a gas field until production begins and it yields a profit, the tax would not be applicable, but the companies would be subject to the payment of gas royalties.

According to the committee’s calculations, the progressive tax would start to be imposed after an average of eight years for a large field and after 15 years in the case of a small field.

“The model we are recommending will not have an impact on the cash flow of oil and gas exploration companies in the first years of a project, which are the most relevant in terms of costs,” Sheshinski said.

In addition, the committee recommended the cancellation of the depletion allowance that gas field developers now enjoy in the form of a tax exemption.

“We found that the tax exemption was neutralizing the gas royalty payments the government was receiving,” Sheshinski said. “A depletion allowance is not granted anywhere in the world and it clearly needs to be canceled.”

Bank of Israel Governor Prof. Stanley Fischer expressed support for the committee’s recommendations, adding that they reflect the need to increase the state’s take from the profits of gas and oil finds, which are a national asset.

“The recommendations made by the Sheshinski Committee although moderate are significant and important.

The model of raising taxes while leaving gas royalties untouched is common in many countries around the world,” MK Shelly Yacimovich (Labor) said.

“Now it needs to be seen if Prime Minister Binyamin Netanyahu will fully realize and implement the recommendations without backing down to pressure from the large capital holders.”

The final recommendations are expected to be published in December, after which they may go into effect starting in 2011.

Bloomberg contributed to this report.

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