leviathan gas drill.
(photo credit: (Albatross))
Israel’s decision to reconsider its tax and royalty regime for energy is creating an atmosphere of uncertainty and risks future exploration, the partners in the giant Leviathan natural gas project said.
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Charles Davidson, the chief executive officer of Texas-based Nobel Energy, and Gideon Tadmor, CEO of Nobel’s partner, Delek Energy, stopped short of saying development of Tamar, Leviathan and other fields would be frozen, but they hinted future development could be jeopardized.
“It puts a lot of uncertainty on the Tamar project. We need quick resolution to maintain that schedule,” Davidson said at the Israel Business Conference in Tel Aviv Sunday about government plans to revise the royalty and tax regime. “It would be a major policy shift for Israel and remove a major incentive to explore.”
Once energy poor, Israel has discovered vast reserves of natural gas off its Mediterranean coast in the past decade, prompting the government to consider ways of increasing its stake in the profits. The 2009 discovery of the Tamar field was the biggest in the world that year and the Leviathan field, for which results are due in the next few weeks, is considerably larger.
A government panel, chaired by Eytan Sheshinski, recommended increasing the state’s take in natural gas revenues to 60% of the total – but taxes would only be imposed after producers have recovered all their investment plus another 50%.
Rabbi Michael Melchior, whose Israel Civic Action project has led the
campaign for increasing the government’s take, said he was satisfied
with the Sheshinski recommendations, although they would collect less
from energy producers that the campaign’s stated goal of 80%. He said
he wasn’t concerned that increasing the state’s share would discourage
producers to develop Leviathan or future fields.
threatened everywhere that that’s what they will do, but they are not
going to risk tens of billions of dollars in profits,” Melchior told The
“We think they [the Sheshinski committee] were too
generous to the gas companies, like letting them earn 150% profit before
taxes, but the committee did a courageous job,” Melchior said.
Sheshinksi recommendations, which are interim and must be approved by
Israel’s parliament before they become law, have spurred a debate in
Israel about striking a balance between a fair distribution of the
country’s natural resources and the need to keep profits high enough to
encourage new investment.
At the conference, the depth of
distrust and disagreement emerged as the panel discussion unraveled into
shouting match between business executives, Rabbi Melchior and others.
Davidson didn’t participate in the panel that followed his address.
said Israel had little choice but to tax energy profits at a relatively
low rate because of the high costs and limited markets the company and
its partners can sell to.
The Tamar gas reserves are deep under
1,700 meters of water. The production systems have to be installed by
robotics and development will involve one-of-a-kind equipment, including
the largest transport barge in the world. Moreover, the Tamar partners
are under pressure to get its gas on line and into the market before
other fields run dry, a factor that will add to costs, he said.
“There are a lot of challenges and logistics. This is a very complex construction and engineering project,” Davidson said.
advised the government to take into account the energy savings the
economy has enjoyed from natural gas, a rate he estimated at $1 billion
annually and a figure that could reach $7 billion, depending on the side
of reserves and energy demand in Israel over the coming years.
Tamar field is eight trillion cubic feet and Leviathan, whose reserves
are subject to confirmation, may be 16 trillion cubic feet.
Simhon, a senior adviser to Israeli Finance Minister Yuval Steinitz,
said businesses shouldn’t object to changes in the tax and royalty
regime so long as it was done in an orderly and transparent manner as
Israel has done.
But Delek’s Tadmor vehemently objected to the
tax and royalties regime being implemented retroactively. He said
Melchior and Simhon were wrong for saying that Israel could increase its
stake and change rules.
“Israel remains unattractive. How is it
possible that after the two big discoveries no big international
producer has come here?” Tadmor asked.
Despite the big reserves
of gas in Israel, the sector isn’t that attractive, he said, because the
domestic market isn’t big enough to take all the gas, Israel’s
geopolitical situation remains problematic and the gas is located under
very deep water.
The average government take in countries
belonging to the Organization for Economic Cooperation and Development
(OECD), a group of the world’s most developed economies, is 47%. In
calculating Israel’s new tax-and-royalty regime, the Sheshinksi panel
mistakenly took its cue from undeveloped economies, he said.