Delek, Isramco pledge to fight gas tax

Energy partners slam Sheshinski Committee plan to cut their profits.

November 11, 2010 23:58
LIQUID GAS: If there is sufficient gas in Israel’s Leviathan field for export, it will need to be co

gas tanker311. (photo credit: Courtesy)

Gas exploration companies Delek and Isramco Ltd., who are partners in the Tamar offshore gas field, on Thursday harshly attacked the new tax on energy profits proposed by the Sheshinski Committee on Wednesday and warned that financing and development of the major gas field could be threatened.

“In the case that the interim recommendations are accepted, they are expected to greatly increase the tax burden on the participating partners [in the field] and negatively affect the partnerships’ business and operations,” Isramco said in a statement. “After the partnership receives the committee’s draft recommendations and reviews their repercussions, including on financing and development of the Tamar project on the basis of the original plan, it will consider its steps accordingly.”

The Delek Group, controlled by Yitzhak Tshuva, and its subsidiaries Delek Drilling and Avner Oil and Gas, who are partners with Isramco in the Tamar gas field, criticized the committee’s interim recommendations. Delek Drilling and Avner are also partners in the Leviathan natural-gas site and in the Yam Tethys field offshore from Ashkelon.

In practice, the proposed gas-tax model would apply to the Tamar and Yam Tethys gas fields, as well as future fields such as Leviathan, if gas discoveries are realized.

“The presented recommendations are not acceptable to the company, and we will act to change them in front of a hearing before the committee and by other means in the government and the Knesset in an effort to enable continued financing and development of the Tamar field according to the original plan and exploration activity,” Delek in a statement.

Following the publication of the interim recommendations by the Sheshinski Committee, Delek Drilling shares fell 6.6 percent to NIS 13.31, Isramco dropped 5.8% and the Delek Group lost 3.5% on Thursday.

In January 2009, the discovery of the Tamar natural-gas field 90 kilometers offshore from Haifa, in which Noble Energy has a 36% working interest, was made by the US-Israel consortium including the Delek Group, through its subsidiaries Delek Drilling and Avner Oil Exploration, Isramco and Dor Gas Exploration.

Tamar is the largest exploration discovery in Noble Energy’s history. Earlier this year, Noble increased its expectations for gross recoverable gas resources at Tamar by 33% to 8.4 trillion cubic feet as a result of updated reservoir studies and said the Tamar project remained on schedule for sanction in 2010 and first gas production sales in 2012. The Leviathan natural- gas site off the Haifa shore could be twice the size of the Tamar prospect.

National Infrastructures Minister Uzi Landau said in reaction to interim report that it was essential to ensure that development of the Tamar gas reserve continued. It was the committee’s job to formulate recommendations, he said, but ultimately the government’s responsibility to make a decision.

“There is need for the personal intervention of the prime minister,” Landau said.

If the interim recommendations are approved, Israel, which currently has the lowest government take from natural resources, at 30%, would boost its share of proceeds from large oil and gas fields to 66%.

In the interim report, the Sheshinski Committee, which was appointed by Finance Minister Yuval Streinitz seven months ago to examine the country’s fiscal policy on royalties and taxes from natural resources, decided to leave the royalty rates at 12.5%. It instead 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.

The tax would be levied 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. It would be levied on an individual gas field rather than an individual company, since the majority of projects consist of partnerships between developers.

At the presentation of the interim report on Wednesday, Eytan Sheshinski said the tax model that is being recommended would not have an impact on the cash flow of oil and gas exploration companies, since it will not be applicable in the first years of a project, which are the most relevant in terms of costs.

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 for a small field.

Sheshinski said in the case of financing problems caused by the recommendations at fields, which are at the stage of development, the committee will suggest alternative solutions with the aim of advancing the development process.

Meanwhile, analysts expressed doubt over whether the proposed recommendations will be fully implemented as presented.

“The recommendations are preliminary proposals, and they may be approved only partially or be disapproved completely,” Tal Shirizly, an energy analyst at Psagot Investment House, said Thursday. “The full implementation of the recommendations will hurt the value of the partnership units.”

Shirizly estimates that the value of the Tamar site would be hurt by 40%, falling from $6.4 billion to 3.9b., as a result of the changed tax regime.

The committee also recommends the cancellation of the depletion allowance that gas-field developers now enjoy in the form of a tax exemption, which is neutralizing income the government generates from royalties, according to Sheshinski.

“The recommendations are interim proposals, and there is still a long process expected until the final recommendations and the new government policy is passed,” Migdal Capital Markets analyst Eran Yunge said Thursday.

“We estimate that the cancellation of the depletion allowance will hurt net profit generated from the fields by 10% to 15% and will result in raising royalties from the current 12.5% to 18%- 20%.”

In the coming weeks, the oil and gas exploration companies and the public will get an opportunity to respond to the interim recommendations before a final draft is published in December, after which it will need to be passed by the Knesset and turned into legislation.

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