Woodside Delay Rehashes Controversy Over Tax Benefit

Most analysts remain optimistic that Australian company will, in fact, sign on as partner of Leviathan gas field.

Albatross

The last-minute refusal of the Woodside Petroleum to sign on as a partner in the Leviathan natural gas field sparked a battle on Sunday over whether Israel should concede some or all of the to the Australian energy company.

Woodside failed to show up for a festive signing ceremony slated for last Thursday with Leviathan’s existing partners – Noble Energy of Texas, the Delek Group and Ratio -- after it balked at the government’s proposed tax regime for the project.

The exact details of the dispute are not known, but the Movement for the Quality of Government nevertheless lashed out at any further concessions to Woodside, whose CEO is Peter Coleman.

“It shouldn’t occur to anyone to offer benefits or breaks without their being based on law,” the group said. “Any such decision would be based on defective judgment, relying on extraneous considerations. Benefitting private business at the expense of the public is not something the authorities should consider when deciding how to tax a company.”

Woodside, which was due to take a 25% share in the Leviathan field for $2.7 billion, is reportedly seeking an accelerated depreciation schedule of 10% even though such a benefit is normally awarded to companies undertaking risky exploration activities.

But because Woodside would be buying into Leviathan after its reserves have been proven, the government is offering it the standard 30-year depreciation schedule. The difference, noted Gil Bashan, an energy analyst for IBI Israel Brokerage & Investments, would greatly affect Woodside’s return of investment in the project.

One source close to the negotiations, who asked not to be identified, urged the government to decide whether it wants to be “wise or just,” pointing to the breaks that the U.S. semiconductor company Intel has received over the years for its manufacturing operations in Israel.

“Intel didn’t just get tax breaks, but was paid a billion dollars to invest here,” the source said. “No one is waiting in line to invest in Leviathan. Anyone who may be waiting will only be interested in the return on investments.”

Tax Authority chief Moshe Asher and Woodside are also at odds over tax rates on gas exports. The government is proposing a certain – though as of yet unspecified – tax on earnings from gas sales after taking into account the costs undertaken by the partners. In addition, the state will set a normative rate of return, which Woodside is reportedly seeking to be in the range of 18% to 19% while Israel wants it to be 10% to 12%.

Zahava Galon, who heads the left-of-center Meretz Party, called on the government to shun special tax breaks for the Leviathan partners. “Awarding tax benefits would be a disaster and significantly hurt tax collection in Israel,” she said, asserting it would only benefits “tycoons and the rich” at the public’s expense.

Experts were divided on how insistent the Australian company would be.

Some observers were saying that the company would hold out for better terms because the cost of developing the giant field will likely increase by some $500 million after the government required more infrastructure investment in exchange for the license it awarded last week to exploit the field.

Nevertheless, the shares of the Leviathan partners suffered only minor setbacks in Tel Aviv Stock Exchange trading on Sunday. Avner fell 1.4% to close at 3.38, Delek Drilling down 1.8% to 19.40 and Ratio 2.6% to 50 agorot. Noble close 3.1% higher at $71.14 in New York.

“There’s no doubt that Woodside’s not signing is a disappointment whose impact is hard to assess, but there is no reason to be depressed," said IBI’s Bashan. He said it was likely Woodside would agree to sign on either under the current terms or in exchange for small concessions.

On the one hand, the Leviathan partners need Woodside’s capital to develop the field; without it, development would be delayed by at least a year. On the other hand, Woodside expertise in liquefied natural gas would be less relevant if the field exports to the nearby markets of Turkey and perhaps Egypt via pipeline.