Discussion on whether royalties are keeping IOCs away from Israel's Levant Basin.

1. Expert Legal Insight from
Asaf-Rimon
Oil & Gas update: are royalties keeping IOCs away from
Israel’s Levant Basin?
Israel’s Minister of Energy and Water Resources, Mr. Silvan Shalom, hopes to
see more international oil companies (IOCs) entering into Israel’s emerging oil
and gas exploration market.
With global scale offshore natural discoveries such as the Tamar field in 2009
(estimated 9 TCF) and the Leviathan field in 2010 (estimated 16 TCF) together
with a stable democratic regime and arguably a favourable government
take (52% – 62%) one would expect the sea of Israel to be bustling with IOCs’
drilling activity. However, with the exception of American explorer Noble
Energy and Australian Woodside, there is a very limited presence of IOCs in
Israel. The reasons for this may vary from the government’s natural gas export
policy to the complex geopolitics of the East Mediterranean.
I would like to suggest another barrier, albeit less obvious and less glamorous
– royalty interests. Many of the oil & gas exploration licences and production
leases in Israel “suffer” from an unusually large number of sometimes very
complex royalty interests attached to them, in addition to the government’s
12%.
While the actual terms of the royalties vary from case to case, in principle the
party that owns the royalty interest will receive a portion of the revenue from
the sold petroleum without bearing any share of the costs needed to
produce it. This situation is the result of years of private companies and
individuals selling participating interests in exploration licences in return for
royalty interests, in times when no one seriously believed Israel would discover
commercial natural gas or oil reserves and no one was willing to pay
considerable cash consideration for licence interest.

2. “As Israel’s oil and gas market evolves, we may
see that royalty interests will become a thing of the past...”
The problem Israel is facing is that, in the current climate, IOCs looking to
farm-in to exploration or producing assets may struggle to come to terms with
the sometimes extensive royalty situation their lawyers will discover during the
due diligence exercise. These may raise anti-bribery and corruption concerns,
as well as commercial and legal difficulties. The royalty situation may also
present a legal challenge for international banks asked to provide financing
for the development of any discovered fields. The tricky question of creditors
order of priority will need to be resolved to the satisfaction of its credit
committee before the investment.
As Israel’s oil and gas market evolves, we may see that royalty interests will
become a thing of the past as acquirers buy out the royalty holders as part of
the transaction to acquire the licence, and as licences are sold at higher
valuations for cash, reducing the need to pay in part with royalty interests.
Such was the case in the evolution of a number of jurisdictions.
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