Final Sheshinski recommendations likely to be softened

The Sheshinski Committee is considering lowering the tax rate after claims that the initial recommendations to raise the government tax on gas revenue to 67% was above the OECD norm.

Changes are likely on the Sheshinski Committee's final recommendations on oil and gas royalties and taxation: it is considering lowering the tax rate in response to claims that the initial recommendations to raise the government take on oil and gas revenue to 67% was higher than the OECD norm. The committee is holding its final meeting this evening before publishing its recommendations.

Alfia & Alfia CPA managing partner Shlomo Alfia, an expert on the gas and oil exploration industry, told "Globes" that onshore oil and gas exploration could stop if the Sheshinski committee's current recommendations are implemented. He is advisor to Delek Group Ltd. (TASE: DLEKG), controlled by Yitzhak Tshuva. Delek and its partners are trying to get the Tamar gas field exempted from the Sheshinksi recommendations.

"Globes": Will partnerships like Givot Olam Oil Exploration LP (TASE:GIVO.L), which invest in onshore exploration, be hurt more than partnerships in offshore exploration?

Alfia: "Offshore wells like Tamar have huge costs in setting up drilling platforms, and pipelines to bring the gas to shore. Onshore wells do not have these costs."

The Sheshinski committee decided that oil and gas for export will be taxed at a normative price (the transfer price), which has to be determined. Why do you think that this will hurt exports?

"The Tamar discovery is expected to meet the Israeli economy's needs for more than 20 years. The possibility of gas exports is the main incentive for developers to invest in other gas discoveries. Israel's gas exports potential is affected by the risks seen by the developers and banks that are supposed to finance the projects. For example, the building of an export infrastructure faces huge hurdles in finding available land, if it is decided to build a liquid natural gas facility, as well as geopolitical obstacles if it is decided to build an undersea pipeline to Europe.

"Given the many built-in risks in the export option, the uncertainty arising from the committee's recommendations stands out. This only exacerbates the uncertainty that already exists, and spreads a deeper shadow on the possibility of promoting such a project.

Published by Globes, Israel business news - - on December 26, 2010

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

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