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Israeli Gas Find Could Lead to Prompt Tax Changes

Lorys Charalambous, Tax-News.com, Cyprus

04 January 2011


There has been great excitement in Israel recently, with the confirmation by Houston-based Noble Energy Inc that an offshore gas field called Leviathan could contain 16 trillion cubic feet of gas. This would make it the world’s biggest deepwater gas find in a decade, with enough reserves to supply Israel’s gas needs for 100 years.

Charles D. Davidson, Noble Energy's Chairman and Chief Executive Officer, said, “Leviathan is the latest major discovery for Noble Energy and is easily the largest exploration discovery in our history. In the past two years, we and our partners have made three significant natural gas discoveries in the Levantine basin. Total gross mean resources discovered are estimated to be approximately 25 trillion cubic feet (700 billion cubic meters), with nearly 8.5 trillion cubic feet (240 billion cubic meters) net to Noble Energy's interest. The Leviathan discovery has further confirmed our geologic models and interpretation of this basin and validates that it contains significant natural gas resources.”

David L. Stover, the Company's President and Chief Operating Officer, added: “Our exploration program continues to deliver outstanding results. This discovery has the potential to position Israel as a natural gas exporting nation. For nearly a year now, we have had a team evaluating market possibilities, which includes various pipeline and LNG options. It's our belief that the natural gas resources at Leviathan are sufficient to support one or more of the options being studied. We are excited to be leading the exploration and development in this new basin and look forward to determining the best development option.”

This find could potentially alter the geopolitical balance of the region, with Israel having a new economic advantage over its enemies. Lebanese politicians are already trying to lure companies to explore their nearby waters, while Israel and Lebanon have threatened each other over offshore resources.

A minor diplomatic disagreement has also erupted between Israel and the US, which is lobbying hard against Israel's plans to raise taxes on energy companies, including Noble.

Late last year the Israeli committee headed by Professor Eytan Sheshinski was looking into the taxation of oil and gas developments, and opted for a special tax on profit rather than increased royalties in its interim recommendations.

The Sheshinski Committee recommended maintaining the royalty rate at 12.5% but would also cancel the depletion allowances that reduced royalty revenues substantially.

Sheshinski said that the government's share of revenue from mineral exploitation at about 30% was the lowest in the world and, if nothing was done, the share would fall still further in 2016 when the corporate income tax reduces to 25%. Sheshinski said that if his recommendations were adopted, the state's share would increase from 30% to 66%. Sheshinski's main tax proposal to raise revenues was a special, progressive profits tax based on each individual gas-field's profitability profile.

Shesinski criticized the tax breaks given to oil and gas companies because they more than offset the royalties due. There had been much controversy when it was reported that the two main oil exploration companies, Delek and Noble Energy, had enjoyed tax breaks of NIS740m (USD202m) from 2004 to 2009, more than canceling out the ILS650m royalties paid over the same period.

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TAGS: tax | mining | interest | royalties | Israel | oil and gas | tax breaks | Lebanon

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