Israeli Justice Ministry Braces for Noble Energy Suit Over Delayed Gas Deal

U.S. company likely to seek billions of dollars in damages in suit that could delay Leviathan development.

Offshore Leviathan natural gas drilling site.
Albatross

Worried that Noble Energy is readying to seek billions of dollars in damages over delays in getting the natural gas framework approved, Israel’s Justice Ministry has retained the services of a major New York law firm specializing in international arbitration.

The U.S. energy firm, which is the operating partner in the Tamar and Leviathan fields, has not filed any claims, but officials expect it to act if the framework agreement isn’t approved soon. The company would seek international arbitration in Geneva, a forum that in the past has proven to be hostile to Israeli interests.

As approval of the framework, which sets out terms for the natural gas industry and will allow Noble and its partners to begin development of the Leviathan field, drags on Noble has signaled that it would sue.

Nearly all the negotiations in recent years between Israel and the Texas-based company have been conducted through the latter’s Cyprus subsidiary, Noble Energy Mediterranean. That would enable Noble to take advantage of a 1998 treaty between Israel and Cyprus that allows companies in each of the two countries to sue governments through a private tribunal.

Clauses entitling companies to seek arbitration through tribunals are a controversial issue. The draft version of the Trans-Pacific Partnership, a proposed trade agreement between the United States and other Pacific Rim countries, contains such a clause, which allows them to pursue enormous damages in closed-door proceedings, with no appeal to a regular court.

Israel has a treaty with Cyprus that includes a similar clause entitling companies to launch suits through secret, international arbitration to recover lost profits. The Israel-Cyprus agreement, however, is narrower than the Trans-Pacific Partnership draft and, for instance, doesn’t allow companies to sue for losses taken by governments as part of their statutory powers, for instance raising the corporate income tax.

But the agreement does allow companies to sue for specific acts taken against them. The fact that Noble chose to negotiate with Israel through its Cyprus unit suggests the company was acting in expectation it might make use of the Israel-Cyprus agreement rather than the terms contained in the Israel-U.S. Free Trade Area agreement, which offers fewer protections.

Noble’s Cyprus unit was formed three years ago as the Israeli government’s Sheshinski Committee was deliberating revising policy for taxes and royalties on natural gas profits. The Sheshinski terms were in fact a setback for the company, but it appears Noble opted for negotiations.

A more serious breach between Noble and the government occurred after David Gilo, who was antitrust commissioner until he stepped down this month, reversed an agreement he had reached with the gas partners, which include Delek Group. Prime Minister Benjamin Netanyahu has failed to override Gilo’s decision, leaving the framework deadlocked.

Sources said that the U.S. company will seek billions of dollars in damages in a process that could take three to four years. While the proceedings are underway, Noble will continue to freeze investment in Leviathan, causing a significant delay in putting the giant reserve into production.

Israel would have few options for fighting back, for example by nationalizing the fields. Nor could it move ahead with implementing the gas framework, for instance requiring Noble and Delek to sell the tiny Karish and Tanin fields.