Uproar over Israeli plan to hike gas taxes

Jan. 5, 2011 at 11:57 AM
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TEL AVIV, Israel, Jan. 5 (UPI) -- The Israeli government, buoyed by a major natural gas bonanza in the eastern Mediterranean, is preparing a sharp hike in oil and gas taxes that is likely to rake in billions of dollars for the state treasury.

But the U.S. and Israeli energy companies that found the vast offshore gas fields are up in arms about moves to overhaul laws on profit-sharing dating to the 1950s that will take a healthy bite of the profits they anticipated under those regulations.

The gas finds, totaling an estimated 30 trillion cubic feet, are in contested waters that have sparked a dispute with neighboring Lebanon that could eventually encompass the eastern Mediterranean and involve Syria and the Palestinians.

But these could pale against the ferocity of the domestic dispute that is erupting over the proposed tax hikes and the impact it could have on Israel's economic future.

Finance Minister Yuval Steinitz, who supports a hike, declared he was convinced the proposed tax and royalty regime would "encourage energy corporations to proceed with their activities -- not just to produce, but also to explore."

The tax and royalty increases were proposed by a government appointed panel led by Eytan Sheshinki, an economics professor at the Hebrew University.

On Monday, the committee recommended, subject to government and parliamentary approval, that the current state share of revenue from oil and gas fields be raised from 30 percent to 52-62 percent.

That's a smaller share of oil and gas profits that are taken by Norway or the Netherlands from their North Sea fields but higher than those imposed by the United States and Britain.

The figures listed by the committee marked a significant scaleback from its interim recommendations, unveiled in November, which called for an even higher levy and other measures that would raise the government stake to 60-66 percent.

Steinitz denied that the committee had reduced its original proposals because of intense corporate lobbying by Houston's Noble Energy and its key Israeli partner, the Delek Group headed by Israeli billionaire Yitzhak Tshuva.

Noble had reportedly pressed Washington to lean on Israeli Prime Minister Binyamin Netanyahu's coalition government to relent.

Steinitz also attacked the gas industry for making "illegitimate threats," including warning that it wouldn't develop the newfound fields.

The biggest field is Leviathan with estimated reserves of 16 trillion cubic feet of gas and possibly 1.4 billion barrels of oil. That makes it the world's largest deep-water gas discovery of the last decade.

Tamar, the other major find, which contains an estimated 8.5 trillion cubic feet, enough to turn Israel, long dependent on energy imports, into a major producer.

The two fields are expected to start producing next year.

Steinitz said the proposed hikes, endorsed by the International Monetary Fund and the Organization for Economic Cooperation and Development, were "important to Israel's future."

The companies, led by Noble Energy, which spearheaded the exploration program that discovered the gas fields, are warning that the hikes could scare off foreign investors who are needed to exploit the gas strikes.

That, they argue, would undermine the potential for Israel, long bereft of natural resources, to become a major gas exporter and transform its economy.

Noble, which has the largest stake in the two biggest gas fields, has threatened to sue the Netanyahu's government if there is any retroactive amendment to the conditions that existed when it began exploration in 2007.

"I'm really disappointed with the recommendations," said Gideon Tadmor, head of Delek Energy, the Delek Group's oil and gas arm. "It will be very hard to encourage investors to continue to invest in this sector."

The proposed hikes, he said, would reduce the returns on investment in gas projects to less than 12 percent from the "minimum" returns of at least 25 percent needed to attract investors to the Jewish state.

But the Financial Times quoted industry analysts as saying foreign companies were still likely to see Israel as a lucrative prospect if oil is discovered in sufficient quantities below Leviathan's gas layers.

"The investors will come in spite of the upcoming changes in the tax regime if they see prospects for oil and for exports," said Amit Mor, chief executive of Eco Energy, an Israeli consulting and investment firm.

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