Israeli Energy Firms Seek Delay to Start of Tax Payments to Focus on Egypt Pipeline

Energy companies want state to help fund export pipeline to Egypt, estimated to cost up to $2 billion.

Albatross

The government is considering changes to the Oil Taxation Law, popularly known as the Sheshinski law, four years after it was adopted by the Knesset, TheMarker has learned.

Officials agreed to reconsider the law several weeks ago, after the partners in the Tamar offshore natural-gas field, mainly Noble Energy of Texas and Israel’s Delek Group, asked to postpone by two years the introduction of the tax, which is scheduled to go into effect in 2019.

A two-year delay would give the partners between $1.5 billion and $2 billion of cash flow, according to the financial reports of the Tamar partners. The energy companies say they will use the savings to build an undersea natural-gas pipeline to Egypt. The partners in Tamar, Israel’s biggest gas field now in production, contend that since the Israeli economy would benefit from the exports, the government should cover all or part of the cost.

The Finance Ministry is opposed to a delay, and treasury officials contend that the Sheshinski law does not require the government to cover the cost of any gas infrastructure, including through tax breaks.

In a statement to TheMarker, the Tamar partners denied they were seeking any amendment to the Sheshinski law.

“The amounts mentioned [up to $2 billion] in relation to the cost of a gas pipeline in Egypt are totally unfounded and detached from reality,” a spokesman said. “Unfortunately, the delegitimization campaign of TheMarker against Israeli gas industry continues, and it is disseminating false and misleading data.”

As of Monday, sources said the two sides had failed to reach an agreement on the issue despite pressure from Prime Minister Benjamin Netanyahu’s office on officials to reach a compromise over a series of issues surrounding the gas monopoly.

Netanyahu is trying to quickly break a deadlock that emerged after David Gilo, the antitrust commissioner, rescinded a decision last December allowing the cartel to function with only minor divestments. Since then the government has been trying to formulate a new competitive policy, but officials have been sharply divided on what it should be.

Meanwhile, Noble has suspended investment in the still-undeveloped Leviathan field, a move that will delay additional production for Israel and countries nearby that have signed agreements to import Israeli gas.

Egypt is the biggest of the markets, with the Spanish company Union Femosa Gas agreeing a year ago to buy 67.5 billion cubic meters of gas from Tamar, worth about $15 billion, for its liquefied natural gas facility in northern Egypt. To export that gas, the Tamar partners would have to lay an additional pipeline from their gas treatment rig offshore Ashkelon, increase the rig’s capacity and lay another pipeline southward toward the coast of Egypt.

The Sheshinski law imposes a special tax on the energy sector, collected from windfall profits. But those only go into effect after the partners have earned half their initial investment in exploration and infrastructure spending. The tax starts at a 20% rate and rises to as much s 50% over time.

The Tamar field qualifies for special treatment, with the tax only being imposed after revenues have exceeded investment by 200%.

The Tamar partners are presenting the pipeline development as a recognizable investment cost under the Sheshinski law. They argue that increasing Tamar’s capacity by 30% will also serve the domestic market. Treasury officials have rejected that stance.