It was on January 2009, when it was first announced the finding of Natural Gas caches off the shores of Israel that is estimated at roughly 250 BMC, or an expected worth of 15 billion USD. Ever since, there is an ongoing battle between the drilling companies that found these Natural Gas caches and the Israeli government over the income tax on oil and gas royalties.
In particular, how much, if any, should these companies pay to Israel for these newly discovered resources? In order to tackle this question, the Israeli House of Representatives appointed an independent committee headed by Prof. Sheshinski in order to suggest a layout for how the government should tax these companies for these newly discovered energy resources. A couple of days ago, on Wednesday, November 10th the committee presented its suggested layout. I have referred to this committee’s main findings in an earlier post.
Analysis:
Despite the committee’s layout of how these energy companies should pay for the natural gas recourses they have found, there is still along way from approving this layout by the committee members to the time natural gas and oil companies will be paying the levy. These suggestions made by the committee need to be approved by the House of Representatives, and by the Government before it will be become a law. Rests assure that the lobby of the companies will be very active towards fighting off this levy.
However, does this levy is fair towards these companies?
It depends who you ask; however, if we consider several facts about the circumstances the answer could become a bit clearer. Let’s consider the following facts:
- Most of the drills and sunk investments were made by Israeli companies owned by the state of Israel in the past before the drilling escapades were handed to private sector; This means that part of the total drilling and searching investment was made Israel;
- The licenses for drilling were allotted to very few companies and as a result it left no reason for other energy companies to bid for licenses to drill and search Natural Gas. In other words, the conditions given to the Israeli drilling companies were of a Monopolistic nature, with little to none competition. There is merit for doing so, especially since the region wasn’t vast and as a result it increased the chance of fewer companies fighting over what could be little to none findings. Nevertheless, as a monopoly there is also merit to further tax these companies that enjoy such a low competition;
- Did these companies expected in the event of finding Natural Gas, to pay extra levy for it, and had they known in advance that they will have to pay this levy they wouldn’t have gone for the trouble of investing their time, money effort towards drilling at sea? I think the answer is a big fat No for both questions. Since according to the Sheshinski committee’s layout, the companies will not pay this levy until they had retrieved 100% of their investments, including all the search and drill escapades costs, and on top of it an additional 150% gain, before starting to pay the levy, this provides a very lucrative investment far beyond the expectations of investors, even when considering the risk in such an investment. After all when you win the lottery you shouldn’t be surprised that you will have to pay more taxes.
For now, the battle seems far from being over, however the investors did react immediately as the conclusions of the committee were published and all the stocks related to the Natural Gas drilling companies plummeted on Thursday, 11th of November, among them are: Delek Energy by -7.71 %, Israemco by -5.78%, Delek drillings by -6.61%.
This reaction was expected, especially after these companies’ stocks were rising for the past several months, but will these stocks continue to fall, that will rely on the outcome of the this tax levy and whether or not it will be approved in the House of Representatives, in any case Israel is expected to have a heated battle in the next several months over Natural Gas.