Sheshinski c'ttee planning 20-60% tax on gas projects

Sharply raising taxes on the Tamar well is liable to reopen bank financing for the development of the gas field.

The Sheshinski committee is planning to recommend a special graduated tax that will apply to the surplus profit margins above a basic rate that will be determined for each gas and oil field. The tax will apply to both the Tamar and Yam Tethys offshore gas fields.

Sharply raising taxes on the Tamar well is liable to reopen the bank financing for developing the gas field and delay gas deliveries to Israel by many months, warn the gas field's partners, ahead of the publication of the Sheshinski committee's interim conclusions.

The warning follows the committee's pending recommendations to raise taxes on both Tamar and Yam Tethys offshore gas fields. Noble Energy Inc. (NYSE: NBL) and Delek Group Ltd. (TASE: DLEKG) are partners in both fields, as well as in the Leviathan leases.

An aide of Minister of Finance Yuval Steinitz said in response, "Yam Tethys does not in practice pay royalties to the state."

The claim contradicts the findings of a report by the Knesset Research Center from six months ago, which said that Noble Energy and Delek each paid NIS 70 million in royalties in both 2009 and 2008.

The Ministry of Finance will today release the interim conclusions by the Sheshinski committee to its members for comments. If the committee members have any objections, they should write a minority opinion, which will be appended to the report. Early next week, after the comments are accepted during the hearing, the conclusions will be released to the general public.

Steinitz intends to publish the Sheshinski committee's final recommendations by the end of December, as the ministry promised the courts in a petition filed by gas exploration partnerships.

The Sheshinski committee proposes levying a specific tax on each gas production project. In practice, the tax will apply to the Tamar and Yam Tethys gas fields, as well as future fields, such as Leviathan, if gas discoveries are commercialized. The special tax will be graduated, probably between 20-60% and apply to the surplus profit margins above a basic rate that will be determined for each gas and oil field.

The Sheshinski committee also intends to propose cancellation of the depletion allowance, a measure that the gas exploration partnerships claim will result in practice in raising royalties from 12.5% to 21%.

The Ministry of Finance said in response today that cancellation of the depletion allowance was a "marginal component" of the Sheshinski committee's recommendations.

While royalties will be levied on gas field developers only when production begins, the special tax will be levied on reserves on after the basic return on costs plus a profit margin.

The pending publication of the Sheshinski committee's interim conclusions is causing considerable tension among the gas exploration companies, including Noble Energy, Delek, and Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), which will be the immediate victims of any retroactive tax hike. Discussions at the companies in the past few days expressed considerable concern that repercussions from a tax hike would greatly harm Tamar, after representatives of the foreign banks financing the Tamar development received messages from the Ministry of Finance that the tax hike would not apply to the gas field.

Published by Globes [online], Israel business news - www.globes-online.com - on November 7, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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