The person who chose the site for the signing ceremony for the sale of 25% of Leviathan to Woodside Petroleum Ltd. (ASX: WPL) last Thursday is apparently familiar with Jerusalem. The Armon Hanatziv Promenade is a favorite location for couples to take their marriage pictures. The Old City with the golden copula of the Dome of the Rock in the middle could have warmed the hearts even of the Australian gas executives.
Yitzhak Tshuva and his partners arrived for the ceremony at 7:30 pm and waited for the Australians, who stayed at their hotel. They were waiting for a brief phone call between Woodside CEO Peter Coleman and Israel Tax Authority director general Moshe Asher. For over a year, Woodside and the Tax Authority had been in talks on whether the Tax Authority would allow rapid depreciation on Woodside's payment for Leviathan. At issue were $1.2 billion of the $2.71 billion that Woodside was paying Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG), and Ratio Oil Exploration (1992) LP (TASE:RATI.L) for a stake in Leviathan.
The Tax Authority position was that the investment should be depreciated over the project's 30-year lifespan. Woodside initially wanted only three years Woodside's executives fought hard to narrow the gap during their visit to Israel last week. On the eve of the signing ceremony in Jerusalem, Woodside was willing to accept depreciation over 10 years, while the Tax Authority held out for 25 years.
Tax Authority officials now believe that the gap cannot be bridged. At 7:45 pm on Thursday, Coleman told his stunned hosts that he was leaving. The tax break Woodside wanted totaled hundreds of millions of dollars. The partners in Leviathan noted that every textile plant in the Galilee can obtain accelerated depreciation, not to mention Intel Corporation (Nasdaq: INTC), which secured $1 billion in tax breaks. On the other hand, Intel creates thousands of local jobs, while Woodside has yet to create a single job in Israel.
The decision whether to accede to Woodside fell wholly on Asher. He had to make the decision even as he was still embroiled in the fallout from an interview given the day before to "IDF Radio" ("Galei Zahal"). Former Labor Party chairwoman MK Shelly Yachimovich preceded him, saying, "The regulators are the poodles of the gas companies." She reiterated her mantra that deals were being concluded behind closed doors without the public knowing the details.
Asher had to respond, on air, to questions about taxpayers, just before making a decision affecting them. He began with an erudite explanation that was cut short by the interviewer who demanded to know why the public was not mentioned, even though it owns 55% of the gas.
Asher chose the most logical solution available to him: the decision whether bringing in foreign investors like Woodside justified foregoing tax revenues should be taken by the prime minister and finance minister, not the Tax Authority director. Prime Minister Benjamin Netanyahu and Minister of Finance Yair Lapid are willing to go all the way to Beverly Hills and Silicon Valley to sell Israel to foreign investors, but to tangle with Yachimovich's big mouth is apparently too much.
Sissi and Erdogan as successors to Woodside
If we ignore their public embarrassment for a moment, the initiative by the partners in Leviathan to bring their bride all the way from Australia to a ceremony in Jerusalem has proven worthwhile, even though they were stood up so theatrically. The pending ceremony became the effective deadline that spurred the closing of processes with the Antitrust Authority and the Ministry of National Infrastructures
The all-night talks with the Ministry of National Infrastructures the day before gave the partners in Leviathan licenses that both sides are pleased with. The ministry has guaranteed a minimum amount of gas for the Israeli economy and jobs for Israelis in the gas industry, and the partners won a 30-year license without the need for material changes in the development plan for the gas field. Although the amount of gas guaranteed for the "Israeli pipeline" is much larger than projected actual demand, it is exactly equal to the amount of gas needed if Jordan and the Palestinian Authority are taken into account.
Woodside's threatened walkout is a painful, but not a lethal, blow to Leviathan's development. Woodside was prepared to invest in a floating liquefied natural gas (FLNG) facility to export LNG to Far Eastern customers. This project would only be ready in 2020, after Leviathan is already hooked up to Israel's gas pipeline.
The immediate damage to Leviathan's partners from Woodside's cancellation is mostly financial. Woodside was due to pay the partners $850 million in cash by the end of June, and $350 million later this year. Without this money, the partners, especially Ratio, will find it difficult to raise their shares of the $5 billion investment for Leviathan's first stage of development. This is a double blow, because without Woodshare's share of this investment, the partners' proportions will increase accordingly.
However, things could change dramatically if the Leviathan partners sign a big gas export deal with Egyptian or Turkish customers. Such a deal, which could reach $30 billion, could make the Woodside deal history.
Woodside knows this, and it is one of the strongest incentives for investing in Leviathan. Obviously, without the Woodside option, the Leviathan partners' bargaining position with Egypt's General al-Sissi and Turkish Prime Minister Recep Tayyip Erdogan is weakened, but the risk does not appear to be too great at the moment.
Published by Globes [online], Israel business news - www.globes-online.com - on March 30, 2014
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