1. Does your jurisdiction have an established upstream oil and gas industry? What are the current production levels and what are the oil and gas reserve levels?
The State of Israel was established in 1948. In its early days, Israel's oil industry had some modest success. The ﬁrst oilﬁeld, Heletz, was discovered in 1955, and yielded 17.2 million barrels of oil. Unfortunately, only small amounts of oil have been discovered since then, though the exploration continues, with the hope of discovering more ﬁelds.
Israel's natural gas industry was set up in 1999 with the discovery of the Noa reservoir oﬀ the coast of Ashkelon by the Yam Tethys partnership. A few months later another reservoir, Mari B, was discovered. It was estimated that these reserves held about 45 billion cubic meters (bcm) of natural gas, which provided a limited amount of natural gas to the Israeli market and primarily to the Israeli Electric Corporation, its main customer. Today, these ﬁelds are nearly depleted. More ﬁelds have been discovered since then, chief among them are the Tamar ﬁeld oﬀ the coast of Haifa, holding an estimated 283 bcm of natural gas, which commenced commercial production in April 2013, and another maritime reservoir, the Leviathan ﬁeld (535 bcm), which commenced commercial production at the end of December 2019, as well as the Karish and Tanin ﬁelds that are set to start production in 2021. Due to these discoveries, a signiﬁcant portion of Israel's natural gas demand is now met by local production, independent of foreign import. As of March 2019, Israel estimates that its seabed contains 75 trillion cub feet of gas and 6.6 billion barrels of oil.
2. How are rights to explore and exploit oil and gas resources granted? Please provide a brief overview of the structure of the regulatory regime for upstream oil and gas. Is the regime the same for both onshore and oﬀshore?
The petroleum sector in Israel is regulated by way of two primary laws: the Petroleum Law, 1952 (the "Petroleum Law") including the Petroleum Regulations, 1953 promulgated thereunder (the "Petroleum Regulations") and the Natural Gas Sector Law, 2002 (the "NG Law").
The Petroleum Law governs and regulates Israeli upstream activities (onshore and oﬀshore) with respect to exploration and production of petroleum, broadly deﬁned in the Petroleum Law as: petroleum ﬂuid, whether liquid or gaseous and oil, natural gas, natural gasoline, condensates and related ﬂuid hydrocarbons and also asphalt and other solid petroleum hydrocarbons when dissolved in and producible with petroleum ﬂuid.
The NG Law governs the midstream and downstream activities and sets out a licensing regime for Israeli natural gas infrastructure, including distribution, transmission, storage and LNG facilities. For more details see question 17.
All petroleum resources in Israel and its continental shelf belong to the state. The Petroleum Law provides that no person may explore for petroleum without a preliminary permit, license or lease, and no person may produce petroleum without a license or lease.
The Petroleum Law falls under the jurisdiction of the Minister of National Infrastructures, Energy and Water Resources (the "Energy Minister") who in turn is tasked with appointing a Petroleum Commissioner (the "Petroleum Commissioner") to be responsible for matters related to oil and gas exploration within the territory of Israel, in conjunction with the Petroleum Council that advises the Energy Minister and the Petroleum Commissioner (the "Petroleum Council"). The Petroleum Council is comprised of 15 members, with at least seven representing the public and is required to meet at least four times a year.
3. What are the key features of the licence/production sharing contract/concession/other pursuant to which oil and gas companies undertake oil and gas exploration and exploitation?
The Petroleum Commissioner, in consultation with the Petroleum Council, is responsible for all matters relating to the licensing regime. There are three main rights that may be
granted under the Petroleum Law: a preliminary permit, a license and a lease. Such grants are all recorded in the Petroleum Register by the Petroleum Commissioner and are part of the public record.
A preliminary permit confers on its holder the right to carry out preliminary testing investigations, not including test drilling, in order to ascertain the prospects for discovering petroleum. The Energy Minister may grant a permit holder priority rights for the receipt of a license in the permit area for a period of up to 18 months.
A license confers upon the licensee: the right to explore for petroleum in the license area (such area is deﬁned in the license and is limited to a maximum area of 400 square kilometers) and outside such area in certain circumstances; the exclusive right to conduct test or development drilling in the license area and to produce petroleum; the right to obtain a lease after having made a discovery in the license area.
The license includes a work program to be carried out, which would typically include at least one exploration well. A license is granted for an initial term of three years and can be extended in accordance with the conditions set forth in the Petroleum Law to up to a total term of seven years from date of grant of license.
Once the Petroleum Commissioner recognizes that a discovery has been made in a given license area, the licensee may be granted a lease in respect of any area chosen by the licensee within the licensed area (not exceeding 250 square kilometers). Such lease confers upon the lessee the exclusive right to explore for and produce petroleum in the leased area for the term of the lease. The term of a lease is generally 30 years from the grant date, and may be renewable for an additional term of 20 years, subject to various terms and conditions that may be set by the Energy Minister in consultation with the Petroleum Council.
A lessee may also construct pipelines for the transport of petroleum and petroleum products and install other facilities required therefor. The Petroleum Commissioner must approve the route of all pipelines, other than gathering pipelines leading to tankage, within, or adjacent to, the leased area. Additionally, the Petroleum Commissioner may, after consultation with the Petroleum Council, require the owner of an approved pipeline to allow other lessors to use its pipeline to transport petroleum (to the extent that the pipeline is not required by its owner), on such reasonable terms as the Petroleum Commissioner may prescribe.
The lease holder is required to produce with respect to each lease an autonomous, unconditional, irrevocable bank guarantee to the State of Israel, denoted in New Israeli Shekels and increasing at the diﬀerent stages of development, up to a maximum of US$ 50 million per lease upon commencement of the ﬂow of gas. The guarantees shall ensure the adherence to the leases and permits, and as a condition to the granting of the leases. The guarantees shall remain in force even after the expiration of the leases, until such time as the Petroleum Commissioner declares them no longer necessary.
The Petroleum Commissioner is entitled to collect all or part of the guarantee, if: (i) the lease holder failed to implement the development plan, construct the facilities or did not begin commercial production or pumping to the reception facilities on the speciﬁed dates in the lease; (ii) a safety or environmental accident occurred and the lease holder failed to rectify the fault; (iii) the lease holder failed to carry out abandonment in accordance with the provisions of the lease; (iv) a claim or demand was ﬁled against the State of Israel for payment of compensation pursuant to damage caused due to violation of the terms of the lease; (v) the State of Israel suﬀered damages or expenses due to cancellation of the lease; (vi) the lease holder failed to carry out the required inspections, or failed to submit required documents or reports; (vii) the lease holder failed to comply with the provisions regarding insurance as stated in the lease or by the law; (vii) the lease holder did not comply with the provisions of the lease with regard to the guarantee; or (viii) the lease holder committed a material breach of other conditions of the speciﬁc leases.
The Petroleum Law provides that the Petroleum Commissioner may cancel an owner's petroleum right, subject to 60 days' prior written notice, for non-compliance with any of the provisions of the Petroleum Law, Petroleum Regulations, any condition of the petroleum right, or the submitted work program. Additionally, if a lessee fails to produce petroleum in commercial quantities in the initial three years of the lease, or has thereafter ceased commercial production, the Energy Minister may condition the continuation of the lease on the production of commercial quantities of petroleum within a deﬁned period (which will be at least 60 days), subject to various restrictions set forth in the Petroleum Law. If production is not resumed as required by the notice, the lease will expire at the end of the period determined by the Energy Minister.
4. Are there any unconventional hydrocarbon resources (such as shale gas) being exploited and is there a separate regulatory regime for unconventionals?
Many ﬁelds of oil shale have been discovered in Israel and endeavors to develop this industry persist, using both in situ and ex situ processing. However, it should be mentioned that, as has occurred in other countries, various environmental concerns have been voiced in connection with this industry, including by the Ministry of Environmental Protection. The Ministry of Energy has issued permits for oil shale rights and exploration in the Rotem Plain (one in 2001, and two in 2018) and in Oron (which is set to expire January 16, 2020). To date, no shale gas has been extracted in Israel although interest remains. The Petroleum Law and its underlying regulatory regime also applies to unconventional hydrocarbon resources including shale gas.
5. Who are the key regulators for the upstream oil and gas industry?
The Petroleum Commissioner, in conjunction with the Petroleum Council, has primary responsibility for regulating all upstream oil and gas activities. Other regulatory bodies, including the Ministry of Environmental Protection, the Natural Gas Authority and the Public Utilities Authority – Electricity, are responsible for the regulation of environmental matters and various aspects of the midstream and downstream activities.
6. Is the government directly involved in the upstream oil and gas industry? Is there a government-owned oil and gas company?
The government is not directly involved in the upstream oil and gas industry, however, pursuant to Regulation 2592 adopted by the Israeli government in 2017, the government owned Israel Natural Gas Lines Co. (INGL) was tasked with the
establishment and operation of a pipeline system to connect the oﬀshore gas wells to the shore for productions stemming from small and medium sized ﬁelds.
7. Are there any special requirements for or restrictions on participation in the upstream oil and gas industry by foreign oil and gas companies?
Prior to the implementation of the Natural Gas Framework in 2016 (the "Framework") (as further described in question 18), the biggest impediment to foreign companies' participation in Israel's upstream oil and gas industry was the deemed monopoly held by the few companies which dominated this industry in Israel. The Framework, mandated speciﬁc divestment and relinquishment of holdings by the primary leaseholders in order to encourage more foreign investment and diverse participation in the industry. Under the Framework, each of the Delek Group, an Israeli limited partnership publicly traded in Tel Aviv ("Delek") and Noble Energy, a Houston based energy company and publicly listed on the U.S. Stock Exchange ("Noble Energy"), were required to make certain divestments of their rights in the Tamar, Karish and Tanin ﬁelds. Noble Energy, sold their rights in Karish and Tanin to Delek, and Delek, in turn, sold all their rights in each of Karish and Tanin in December 2016 to Energean Oil & Gas, a Greek company. With respect to the Tamar ﬁeld, Noble Energy is required to sell a portion of its rights and Delek all of its rights, by the end of 2021. Both have taken steps to meet these requirements, beginning as early as the summer of 2016 and continue to do so in a piecemeal manner, which has allowed new foreign players to enter the market in their place. The Israeli Ministry of Energy has held meetings with international energy companies in order to encourage international participation, with some minimal success. Currently, ﬁve companies (including Israeli and international companies) submitted proposals to explore for oil and gas in twelve new blocks out of nineteen which the Ministry of Energy has tendered.
8. What are the key features of the environmental and health and safety regime that applies to upstream oil and gas activities?
Israel's oil and gas operations are subject to a complex and varied body of health, safety and environmental laws, regulations and other requirements, which address, inter alia, (1) the generation, handling, use, storage, transportation, disposal and remediation of hazardous or regulated materials and waste, including petroleum and its by-products; (2) climate change; (3) the discharge and emission of such waste and materials into the environment; (4) the protection of natural resources; (5) human health and safety; and (6) noise pollution.
These laws are enforced through various sanctions, such as ﬁnes, suspension of operations and revocation or delayed renewal of permits.
Under the Petroleum Law and the Petroleum Regulations, drilling activities are to be carried out with due caution in order to prevent the uncontrollable release of gases and liquids, leakage into the ground, and penetration from one geological layer to another. In addition, it is forbidden to abandon a well before it has been properly sealed and marked.
Companies conducting gas and oil exploration drilling or gas production under the Petroleum Law and the Petroleum Regulations are required to submit an environmental report, which includes a background monitoring program for the marine environment, and an emergency preparedness plan for the treatment of oil pollution events. The Ministry of Environmental Protection continuously supervises the implementation of the submitted plans, by reviewing environmental management reports, as well as determining conditions to be included in permits and licenses that will ensure that the public and the environment will not be harmed as a result of the operations.
In addition to the environmental guidelines of the Ministry of Energy and the Ministry of Environmental Protection, holders of petroleum rights may be subject to environmentrelated requirements issued from time to time on behalf of other governmental bodies, including, inter alia, the Israel Lands Administration, the Ministry of the Interior (regional committees for planning and construction), the Water Authority and the Nature and Parks Authority. Certain permits for the dumping and ﬂowing of sewage and waste into the sea, which is otherwise prohibited, can be granted by the Committee for the Grant of Licenses, pursuant to the Israeli Prevention of Sea Pollution
from Land-Based Sources Law 1988 and in accordance with the terms of such permits. According to the Hazardous Substances Law 1993, a holder of petroleum rights must obtain a permit from the Ministry of Environmental Protection to work with certain hazardous materials. In addition, a holder of petroleum rights must obtain an Emission Permit According to the Clean Air Law 2008.
It should be noted that local activists, namely communities in the Haifa Region, took steps to halt activities from the Leviathan rig, including demonstrations and seeking a court injunction. On December 17, 2019, a district judge in Jerusalem issued a temporary order halting the commencement of the production phase from Leviathan as he assessed environmental and health concerns raised by activists. Ultimately, the judge decided that not enough evidence was provided to refute claims that production would cause a serious health and environmental hazard and the injunction was overturned the following day. The court, however, left open the possibility for further injunctions and as a result, it appears that the courts may take a more active role in reviewing public health and environmental concerns as they relate to the oil and gas industry in Israel.
The Barcelona Convention deals with the exploration and production of natural gas and oil in a dedicated protocol called "The Protocol for the Protection of the Mediterranean Sea against Pollution Resulting from Exploration and Exploitation of the Continental Shelf and the Seabed and its Subsoil", 1994. The protocol came into force in March 2011. Israel has signed this protocol on October 1994 however the government of Israel has yet to ratify the protocol.
9. How does the government derive value from oil and gas resources (royalties/production sharing/taxes)? Are there any special tax deductions or incentives oﬀered?
The Petroleum Commissioner is tasked with the collection of royalties and fees, in addition to his other responsibilities regulating the oil and gas industry. Under the Petroleum Law, holder of a petroleum right ("the holder") must pay the Israeli government a royalty equal to one-eighth (12.5%) of the wellhead value of the petroleum produced from the leased area, subject to certain exclusions set forth in the Petroleum Law. The Petroleum Commissioner may elect to collect the royalties in cash or in kind. Additionally, the holder is required to pay a small lease fee on the area covered by the lease. In the event that the holder fails to make timely payment of any fees or royalties, the Petroleum Commissioner is entitled to place a lien on all of the rights to such holder's stored petroleum, facilities and equipment and to seize anything so attached until payment is made.
There are three key elements of taxation relevant to the oil and gas industry in Israel. The ﬁrst element relates to the royalties that a holder must pay to the Israeli government in the amount of one-eighth (12.5%) of the wellhead value of the petroleum produced from the leased area, as further described above.
The second element is a levy imposed on proﬁts derived from the sale of petroleum pursuant to the Petroleum Proﬁts Tax Law 2011). The levy applies only to the proﬁts from petroleum production (upstream operations) and is not intended to apply to the midstream and downstream segments of the petroleum chain. The levy is calculated and imposed separately for each project and each holder of a petroleum right in a petroleum project is required to pay the levy according to its proportionate share in the petroleum right. Any levy actually paid is also recognized as a deductible expense for income tax purposes.
The third element is Corporate Income tax at a rate of 23% for 2019. Historically, holders of petroleum rights incorporated as a partnership so as to be transparent for tax purposes. Accordingly, search expenses attributed to the holder's lease are considered as deductible expenses or a deductible asset. Any levy actually paid according to the Petroleum Proﬁts Tax Law 2011 is also recognized as a deductible expense for income tax purposes.
Foreign entities operating in the Israeli Petroleum industry are obligated to establish a
branch in Israel that is then deﬁned as the entity's Permanent Establishment in Israel.
Further, pursuant to the Framework, as discussed in more depth in Question 18 below, qualifying loans from foreign lenders in the ﬁnancing of natural gas projects may be subject to a ﬁve percent tax withholding rate on interest payments (unless a lower rate applies due to a tax treaty). The intention of this leniency was to encourage foreign investments and diversify sources of funding.
10. Are there any restrictions on export, local content obligations or domestic supply obligations?
The Tamar and Leviathan leaseholders are obligated under the Framework to invest in "local content", by investing US$ 500 million over the course of eight years in such content. "Local content" is deﬁned to include, inter alia, purchase of goods and services from Israeli registered entities, investment in research and development, and professional training and donations in the area of social responsibility. Up to US$ 80 million may be spent on engagements with Israeli employees. Reports shall be provided on a yearly basis to the Authority for Industrial Cooperation at the Ministry of Economy regarding previous and planned investments.
The Framework also provides a domestic supply obligation, namely that gas exports are restricted to a predetermined quantity of natural gas calculated as a pro rata percentage of all natural gas resources available for the domestic market, in order to ensure an aggregate minimum quantity of at least 540 bcm for local consumption. Further restrictions provide that set percentages of natural gas derived from individual reservoirs are reserved for the local market as well (50% for reservoirs of 200 bcm or greater, 40% for reservoirs of 100 bcm or above, and 25% for reservoirs in the range 25-100 bcm).
On December 16, 2019, the Energy Minister approved the ﬁrst export permits to export a maximum quantity of about 85 bcm from Israel to Egypt for a period of 15 years. Under the agreement between the Tamar Partners, Leviathan Partners and Dolphinus (an Egyptian gas company), Tamar and Leviathan would each supply Dolphinus with total gas volumes of about 25 bcm from the Tamar reservoir and about 60 bcm from
the Leviathan reservoir. The Energy Minister conditioned approval of the export permit on an undertaking from Delek Drilling and Nobel Energy (two of the major partners in Tamar and Leviathan) that domestic pricing would never exceed the export pricing.
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Previously published in The Legal 500 & The In-House Lawyer Comparative Legal Guide.
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