Noble Energy threatens to take gas royalties dispute to ICC

US company warns Israel that rectroactive change to agreement would be violation.

Shama 311 (photo credit: Ariel Jerozolimski)
Shama 311
(photo credit: Ariel Jerozolimski)
US oil and gas giant Noble Energy warned the Israeli government Tuesday that the dispute over a controversial proposal to raise royalty payments on potential gas finds could reach the International Court of Justice.
“Retroactive changes to agreements and contracts, which were made to encourage Noble Energy to invest billions in Israel in a project which at the time seemed to have a very low chance of success, would be a violation of the FCN treaty of friendship, commerce and navigation between the US and Israel,” Abraham Sofaer, a former US federal judge, said Tuesday at a special discussion of the Knesset Economics Committee to discuss royalties from natural resources found in Israeli territory.
“If Noble’s rights are infringed, the US government will need to decide whether to act on behalf of Noble in order to receive full compensation for the damages caused to it.,” he said.
“What this means is that such disagreements could be taken to the International Court of Justice. I don’t need to tell you what a tragedy it will be if two allies like the US and Israel will have to resolve disagreements in a European court. Nobody wants that to happen.”
Noble’s natural-gas finds belonged to the country’s citizens, Sofaer said, adding that the Israeli government has lawfully transferred certain aspects of the rights to Noble to sell the discovered resources in exchange for an investment in which it takes the entire risk of exploration and production.
“Israel should not increase the price for the same rights just because Noble found more than anyone would have expected,” Sofaer said. “Israel should stay committed to its legal principles, which helped and enabled the country to attract major commercial investments and become a commercial powerhouse with a sound credit rating.”
Noble, has a 36 percent share in the Tamar gas prospect off Haifa shores, which is estimated to contain 8.4 trillion cubic feet of natural gas, in a consortium with Delek Energy, which has a 31.25% stake through its subsidiaries Delek Drilling and Avner Oil Exploration.
Isramco Negev owns 28.75% and Dor Gas Exploration owns 4%.
“The energy-exploration sector is very important to Israel’s economy and to its geopolitical standing,” Delek Group controlling shareholder Yitzhak Tshuva told the committee. “In the past, there have been 513 wells drilled in Israel that were all barren, and investors lost their money. No one thought to compensate investors, who took all the risk.
“Against all odds, we continued to drill and convinced Noble to invest heavily despite the risk. Looking forward, we need foreign financing from banks, which will be hard to get if there is uncertainty and changes to offered terms.”
The committee discussed Likud MK Carmel Shama’s private member’s bill to raise royalties paid to the government on gas and oil found in Israeli territory from the current 12.5% to 20%.
“We are a banana republic that sold its natural resources at half price,” Shama said. “As the value of gas finds increases, royalty payments must go up, but not retroactively. Investors will appreciate us more if we run an organized market.
Investors are not running away so quickly.”
Another bill that was discussed seeks to concentrate the tax receipts from oil and gas companies in a sovereign fund, similar to what Norway does. It also proposes to raise royalties to 20%, but in the first five years, energy companies would pay royalties of 10%. In addition, the bill includes an entitlement for the Finance Ministry to raise company taxes to 60% on findings.
“The main issue here is the question of retroactivity,” said Labor MK Shelly Yacimovich, one of the bill’s sponsors.
“Most of land is already allocated. If we say they are all exempt, then there’s nothing to talk about. The government is constantly making changes to its taxation policy, which is having retroactive effects on long-term plans like changes in corporate taxes, which companies didn’t know when they decided to build a factory at a certain tax rate years before. The 1952 Petroleum Law is not relevant anymore. It was challenged 10 years ago and now we need to amend it.”
“Reality can not be manipulated much longer,” she said. “I want gas license holders to get rich and make a lot of money to have an incentive to continue and to drill more. None of these discussions will prevent that. Even if royalties change, they’ll still get rich.”
Yacimovich called upon energy companies to backtrack from fighting ugly battles and recognize that the country’s natural resources belong to the public.
Other participants in the discussion raised security concerns, in view of reports that Iran intends to become involved in searching for oil in Lebanese territory, according to media reports this week.
“I’m worried if development takes too long, our neighbors such as Lebanon and Syria, who are already holding negotiations with global energy companies, will sign contracts with these governments instead, as they are seeking alternative sources of energy to Russian dependency,” Minister-without-Portfolio Yossi Peled (Likud) said. “We don’t have time. We need to sit down and quickly close the differences to come to an agreement on royalties. Otherwise we run the risk of losing the momentum.”
Commenting on reports in the Hebrew press that the Sheshinski Committee, which is examining Israel’s fiscal policy on royalties from natural resources, is expected to recommend raising taxes rather than increasing the royalty rate, Udi Adiri, of the Finance Ministry’s Budget Division, said the committee had not yet finalized its recommendations.
He said the committee was expected to present its preliminary recommendations by November 15 and its final report by the end of the year.
Ehud Zion Waldoks contributed to this report.