Offshore Natural Gas Sale to Jordan Triggers Tax-avoidance Concerns

Noble Energy and Jordan recently signed a nonbinding agreement for the sale of 8.5% of Leviathan’s gas over the course of 15 years, for as much as $15 billion.

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Drilling at the Leviathan natural gas field off the Mediterranean shore.
Drilling at the Leviathan offshore natural gas field. Noble Energy signed a deal to provide Jordan with 8.5% of the gas.Credit: Courtesy Albatross
Avi Bar-Eli
Avi Bar-Eli

The preliminary deal for the sale of gas to Jordan from the Leviathan offshore reserve calls for a subsidiary to sell the gas, not the Leviathan partners themselves. The Leviathan representatives say this is due to geopolitical necessity – to remove Israel’s name from the gas entering Jordan – and promise that the company will operate transparently. Yet selling a taxed product through a foreign subsidiary happens to be a common strategy for evading taxes, and the Israeli government has cause for concern – it still hasn’t set a policy regarding the taxation of natural gas for export.

Last week, Noble Energy and Jordan signed a nonbinding agreement in principle for the sale of 8.5% of Leviathan’s gas over the course of 15 years, for as much as $15 billion. Noble is one of the partners in Leviathan.

The negotiation process was assisted by the U.S. ambassador to Jordan, Stuart E. Jones, and had the support of U.S. Secretary of State John Kerry.

In its report to the stock exchange, Noble stated that the Leviathan partners would sell the gas to a foreign subsidiary, which would then sell the gas to the Jordanians. The report did not include details about the subsidiary. The partners later added that this was for political reasons, and said the company would have no assets or operations aside from transferring the gas. They have given no specific indications that this structure is indeed a tax trick.

Yet companies around the world use shell companies to avoid taxes – the company sells the taxed item at a low price to the shell company, which is registered in another nation, and that second company sells the goods onward at a higher price, untaxed.

Israel’s regulators were concerned that something like this could happen in Israel’s gas industry, and have been working on drafting regulation for more than a year.

Israel’s natural gas is taxed at up to 60%, in line with the Sheshinski committee’s recommendations, which were passed into law following the discoveries of Leviathan and its sister reserve, Tamar.

Yet back in May 2013, TheMarker revealed that the new legislation does not address the issue of gas exports. In the meanwhile, the partners in Leviathan and Tamar have been working on export contracts.

Due to the high-level contacts involved in drafting the preliminary Jordanian gas sale, and the diplomatic implications of changing its terms, Finance Ministry officials may have an even harder time now trying to impose regulation.

The Finance Ministry stated in response that it was working to draft a bill based on feedback it received after publishing its previous proposal.

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