Israel Considers Upping Oil & Gas Royalties

US pressures Israel over potential change in oil, gas tax policy

Jerusalem (Platts)–21May2010/638 am EDT/1038 GMT

The US has expressed concern about a possible change in Israel’s tax policy for the upstream oil and natural gas sector, with White House officials and US senators having brought the matter up with the office of Prime Minister Benjamin Netanyahu, according to sources from both countries.

The Israeli finance ministry last month announced the establishment of a committee to study various options, including raising taxes and royalties. The current level of royalties is 12.5%.

The concern is that a change in tax policy would affect US company Noble Energy, which is involved in the Tamar and Dalit discoveries off Israel’s northern Mediterranean coast, the sources said.

The committee will present its recommendations to the ministry by August.

Prime Minister Netanyahu has put pressure on the finance, national infrastructure and justice ministries to limit the scope of the committee to deal solely with future licenses and not existing ones.

But the sources said a particular concern is that finance minister Yuval Steinitz did not state clearly that the committee would refrain from discussing retroactively increasing royalties on current leases and natural gas discoveries, including Tamar.

According to Israeli press reports, a senior US diplomat based in Tel Aviv wrote a letter to the finance minister warning that unless current leases and licenses are exempt from the scope of the committee’s recommendations, it could be undermine confidence in the stability of Israeli fiscal policy and deter international investment.

Finance minister Steinitz said at the time of the establishment of the committee that the substantial discoveries of natural gas and the possibility of future finds require the Israeli government to review its fiscal policy, which was implemented back in 1952, to determine whether it is still suitable.

He said the committee would study all aspects related to the taxation of the oil and gas exploration industry and compare it with that of other Western countries.

The finance minister said it would be up to the committee to propose a fiscal policy for the oil and gas industry for the future.

The committee will be headed by Hebrew University economist Eytan Shishinsky and will include government officials.

In March, Noble Energy chairman and CEO Charles Davidson said he hoped that the Israeli government would not change its current policy.

“This would be a great mistake and send the wrong message to exploration companies,” Davidson said.

He noted that it would lead to higher costs at a time when oil and gas exploration in Israel is still in its infancy.

In February, the Knesset (parliamentary) economics committee began hearings on changing the country’s oil law in order to increase royalties paid to the state from oil and gas discoveries.

Knesset member Carmel Shama of the ruling Likud party said he planned to present an amendment to the current law aimed at increasing the participation of the state in the revenues of gas producers, but said it would not affect existing licenses.
–Neal Sandler, newsdesk@platts.com

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