Gas companies take offensive against new tax plan

Panel recommends increasing state's take in natural gas revenues to 60% of total after producers recover natural investments.

December 13, 2010 11:08
4 minute read.
Offshore Leviathan gas field.

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.

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.

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“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.

”They’ve 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 Media Line.

“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.

The 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.

Davidson 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.

He 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.

The Tamar field is eight trillion cubic feet and Leviathan, whose reserves are subject to confirmation, may be 16 trillion cubic feet.

Avi 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. 

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