* About $100 mln at stake, seen as not enough to break deal
* Talks ongoing, differing views on when resolution likely
* Extra pipeline requirement seen pushing costs over budget
* Israel kept right to take greater gas share in emergency
By Oleg Vukmanovic and Ron Bousso
MILAN/LONDON, April 3 A tax dispute between
Israel and Australia's Woodside threatens to delay gas
production from the flagship Leviathan field, while the
government is also forcing oil firms to spend more on pipelines
than they expected.
Israel is preparing to become a supplier of liquefied
natural gas (LNG) around the end of the decade, when Qatar,
Australia, Russia and North America are also boosting their
presence in the market. Timing will be important to securing
By bringing in Woodside, an LNG specialist, to take a
quarter stake worth up to $2.7 billion, the U.S.-Israeli group
of oil companies developing the project and its 540 billion
cubic meters of reserves are looking to access a broader market,
especially in Asia.
In the tax dispute, the government wants to depreciate
Woodside's initial $1.2 billion investment over the 30-year
lifespan of the Leviathan field, while the company argues for a
shorter 10-year term, a source close to the talks said.
A shorter depreciation period shields more of Woodside's
investment from tax. At stake is a sum of up to $100 million, a
source at one of Woodside's partners said, meaning it is
unlikely to be a deal-breaker.
"The question is how to tax Woodside's initial investment,
down payment in the project and what type of tax structure they
receive," the source said.
Other points under discussion include the tax treatment of
the investment itself.
"Treating it as a loan could mean that all of it is
tax-free, whereas treating it like a capital investment removes
that tax shield," the first source said.
It is only the latest dispute between Woodside and the
government. Tensions first arose a month ago, when the finance
ministry moved to halve Woodside's previously agreed investment
Woodside had been banking on 17 to 19 percent of the profits
made from Israeli gas sales to Asia, but the government offered
just 6 to 8 percent, the first source said.
Last week Woodside pulled out of a high-profile signing
ceremony for its purchase of the quarter stake, while talks with
the government continued.
A spokeswoman for the Israel Tax Authority declined to give
any details on the issues being discussed, but said both sides
had agreed the talks would continue. Officials at the Finance
Ministry did not comment.
"Most of these outstanding issues have been resolved and
agreed upon. The disagreement is over the taxation of the
investment, not the gas exports," the second source said.
The industry expects first Israeli LNG output from around
2021. The talks are expected to be concluded in several weeks
following the Jewish Passover holiday later this month, the
second source said.
Others said, however, that a resolution could be further
off. All voiced optimism that a compromise could be reached.
At the same time that tax issues delay the entry of a
critical partner for realizing Leviathan's export potential, the
government seized an opportunity last week to pin down
infrastructure commitments from the other Leviathan investors.
As part of a 30-year field lease sale to the four existing
stakeholders - Noble Energy, Delek Drilling,
Avner and Ratio Oil - the government
secured pledges for the construction of 12 billion cubic metres
(bcm) of pipeline capacity from Leviathan to Israel.
One clause in the lease may require investors to build
pipeline capacity for potential exports to neighbouring Egypt,
Turkey and to a proposed gas liquefaction plant offshore.
"Noble and Delek of course don't like this as it implies
more investment and could make the project a billion (dollars)
or more over budget," the first source said.
The partners also would be required to build the added
capacity on an "open access system", which would open the
infrastructure for use by other companies.
The lease follows a year of negotiations and debate over how
much of its gas Israel should keep at home, a sensitive issue
after it suffered an abrupt cut in Egyptian gas supplies in
Israel's cabinet last year ruled that only 40 percent of its
new gas could be exported, disappointing exploration companies
which initially expected a larger share.
Another condition of the lease stated, as expected, that
exports from Leviathan cannot interfere with flows to Israel of
at least 9 bcm.
Israel also reserved the right to divert any Leviathan
output for domestic uses at times of national emergency. That
clause will not apply, however, to gas volumes pre-sold to
foreign consumers, protecting would-be exporters such as
Export pipelines heading out of Israel for Egypt or Turkey
will need to be linked back to pipelines carrying gas to Israel
as a fail-safe in case the domestic line is bombed or
malfunctioning, industry sources said.
(With additional reporting by Ari Rabinovitch in Jerusalem;
editing by Jane Baird)