The

Oil and Gas

Law Review

Second Edition

Editor
Christopher B Strong

Law Business Research

 The Oil and Gas Law Review

The Oil and Gas Law Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Oil and Gas Law Review - Edition 2
(published in November 2014 – editor Christopher Strong).

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Nick.Barette@lbresearch.com
 The
Oil and Gas
Law Review

Second Edition

Editor
Christopher B Strong

Law Business Research Ltd

THE LAW REVIEWS
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 EDITOR’S PREFACE

It is a privilege to have been able to participate in the second edition of The Oil and
Gas Law Review. As with all the titles in this series, this volume is intended to serve as
a practical reference for attorneys working in the oil and gas field, whether they are in
private practice, in-house at energy companies, in government service or in academia.
I would like to thank all of the contributing authors for providing excellent articles
describing the legal regime for oil and gas within their respective jurisdictions, together
with updates of notable recent developments.
The Oil and Gas Law Review is divided into 29 chapters, each covering a
different jurisdiction. The authors of the chapters have been chosen on the basis of their
demonstrated expertise within their jurisdiction. In selecting the jurisdictions to be
covered by this volume, we have tried to ensure that our coverage is as broad as possible,
with representation across most of the major producing regions.
Some of the most exciting legal developments in the oil and gas space in recent years
relate to jurisdictions that have newly opened up to foreign investment, whether through
the discovery of new producing basins in regions that previously had no significant oil
and gas activity or through legal changes in jurisdictions that had previously been closed
to foreign investment. Mexico is a prime example. Although its hydrocarbon industry
is well established, since the late 1930s it had been closed to foreign investment and
monopolised by state-owned producer PEMEX. All of that changed with the reforms
that were passed late in 2013 and implemented over the course of 2014, with a carefully
crafted legal regime designed to attract foreign investment while safeguarding the
interests of the people of Mexico. For those readers interested in developments in Mexico
or industry regulation in general, I would highly recommend the excellent chapter
contributed by Carlos Ramos Miranda and Miguel Ángel Mateo Simón.
Among the jurisdictions with newly discovered petroleum reserves, I should
mention Israel and Mozambique. Hardly on the radar a few years ago, recent offshore
discoveries in those jurisdictions promise to be transformational, and each of these
jurisdictions continues to develop its legal regime in order to adapt to fast-moving
developments. Of particular note is Mozambique’s new Petroleum Law, which came

vii
 Editor’s Preface

into effect shortly before publication of this volume and will no doubt be of significant
interest to practitioners advising clients there.
Established jurisdictions have seen significant developments as well. For
example, Norway had new tax rates come into effect, while the implementation of the
recommendations of the UK’s Wood Review promises to have a significant impact on
operators in the UK’s North Sea. On the other hand, Nigeria’s long-awaited Petroleum
Industry Bill still awaits passage. Perhaps it can be covered in a future edition of this
volume.
Developments like those mentioned above are precisely what make international
oil and gas law so challenging. We hope that by summarising developments in as many
jurisdictions as possible, we can provide a useful resource for practitioners.

Christopher B Strong
Vinson & Elkins LLP
November 2014

viii
 Chapter 15

ISRAEL
Shiri Shaham, Simon Weintraub, Noam Meir and Josh Hersch1

I INTRODUCTION

Ancient Israel was a centre of civilisation since the beginning of recorded history, yet it
was never thought of as a source of natural resources. Modern-day Israel was established
in 1948. Its first years as an independent nation were dedicated to the development of
its infrastructure with a later focus on human capital and most notably on its high-tech
industry.
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 metres (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. Luckily, more fields have been
discovered since then, chief among them are the Tamar field off the coast of Haifa,
holding an estimated 283bcm of natural gas, which commenced commercial production
in April 2013, and another maritime reservoir, the Leviathan field (535bcm), which is
expected to be operational within a few years. Due to these discoveries, a significant
portion of Israel’s natural gas demand is now met by local production, independent of
foreign import.

1 Shiri Shaham and Simon Weintraub are partners and Noam Meir and Josh Hersch are
associates at Yigal Arnon & Co. The authors would like to thank Doron Tamir, Ofir Levy,
Orly Rottenberg and Roni Osborne for their assistance in drafting this chapter.

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 Israel

According to the Ministry of National Infrastructures, Energy and Water Resources

(the Ministry of Energy), as of July 2014, exploration activities have been carried out
under seven leases and 37 licences, with the majority of the activity occurring offshore.
Israel continues to develop its energy sector and is in the early stages of developing the
oil shale industry.
Below, we will discuss various aspects of Israel’s oil and gas industry. We will
elaborate on its regulatory regime, tax policy, export issues and current developments,
including the steps Israel has taken to attract foreign capital and be considered investor-
friendly.

II LEGAL AND REGULATORY FRAMEWORK

With the recent discoveries of significant offshore natural gas reserves in Israel, the oil
and gas industry as a whole, as well as the legal and regulatory framework that governs
its activities has come into the spotlight, resulting in significant public scrutiny and
serious debate surrounding the current regulatory regime, especially with respect to the
licensing, taxation and exportation of petroleum assets.

i Domestic oil and gas legislation

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, 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.
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.
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, licence or lease, and no person may produce petroleum without a licence or
lease. The Petroleum Commissioner, in consultation with the Petroleum Council, is
responsible for all matters relating to the grant of petroleum rights, namely preliminary
permits, licences and leases. This process is further detailed in Section III, infra.
One main uncertainty in the upstream sector surrounds the application of
Israeli law to natural gas discoveries that have been made in areas that are not in Israel’s

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territorial waters, yet are part of Israel’s exclusive economic zone. On 15 January 2012
Deputy Attorney General (Economic-Fiscal), Avi Licht, published a legal opinion stating
that under the current legal regime, certain Israeli laws and regulations concerning oil
and gas, environmental matters and fiscal matters do in fact apply to certain offshore
areas outside the territorial waters of Israel. On 17 December 2013, a draft of a proposed
Offshore Areas Law was publicised for public comments. The proposed law attempts to
establish Israeli jurisdiction over certain offshore areas, including areas outside Israel’s
territorial waters, and defines the rights and authority of Israel over such areas.

ii Regulation
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.
In addition to his responsibility for licensing activities as described in the following
section, the Petroleum Commissioner is tasked with the collection of royalties and fees, as
well as the regulation of various midstream conveyance activities, alongside the Natural
Gas Authority. Under the Petroleum Law, a lessee must pay the Israeli government a
royalty equal to one-eighth 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
lessee is required to pay a small lease fee on the area covered by the lease. In the event that
the holder of a petroleum right 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.
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.

iii Treaties
Israel has ratified numerous international treaties affecting oil and gas regulation. These
treaties include, inter alia, the Convention for the Protection of the Mediterranean Sea
against Pollution, which sets guidelines for preventing the pollution of the Mediterranean
Sea;2 the Convention on the Continental Shelf, which delineates the territorial boundaries

2 It should be noted that there are nine protocols annexed to this treaty and that Israel has only
signed/ratified some of these protocols to date.

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of the continental shelf and provides for the right to explore and utilise resources
contained therein, including, inter alia, the installation of infrastructure necessary to
extract such resources; the International Convention for the Prevention of Pollution from
Ships (MARPOL), which sets out regulations to prevent various kinds of sea pollution;
the Convention on Biological Diversity, which promotes the conservation of biodiversity
and attempts to ensure the sustainable use and equitable sharing of genetic resources; the
International Convention on Oil Pollution Preparedness, Response and Cooperation,
which promotes preparation and implementation of readiness and response plans by
relevant authorities as well as the owners of facilities for the exploration and production
of petroleum and natural gas, in order to better handle incidents of sea and coastal
environment oil pollution. In addition, Israel has entered into a bilateral agreement with
Cyprus with respect to the delimitation of the exclusive economic zone of each country.
Currently, there are no additional treaties in place with other neighbouring countries.
Additionally, Israel is currently party to 52 double taxation treaties which, inter
alia, provide for a lower rate of withholding tax on various sources of income including
on account of interest, dividends and royalty payments.
Israel is also a signatory to the Convention on the Recognition and Enforcement
of Foreign Arbitral Awards. In addition, the Israeli Foreign Judgments Enforcement Law
1958, provides that an Israeli court will declare a foreign judgment regarding a civil
matter enforceable if according to the applicable laws of such jurisdiction, the courts
were competent to render such judgment, the judgment is final and enforceable in the
jurisdiction in which it was rendered, such type of order is generally enforceable in Israel,
the content of the judgment does not contradict the public policy, security or sovereignty
of Israel, the defendant had adequate opportunity to fairly present its case, and the
judgment was not obtained by fraudulent means. In addition, a foreign judgment is also
not generally recognised in Israel if it was rendered in a state that by law does not enforce
Israeli judgments.

III LICENSING

The Petroleum Commissioner, in consultation with the Petroleum Council, is responsible

for the licensing regime in Israel in relation to oil and gas exploration. There are three
main rights that may be granted under the Petroleum Law: a preliminary permit, a licence
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 licence in the permit area for a period of up to 18 months.
A licence confers upon the licensee: the right to explore for petroleum in the
licence area (such area is defined in the licence and is limited to a maximum area of 400
square kilometres) and outside such area in certain circumstances; the exclusive right
to conduct test or development drilling in the licence area and to produce petroleum;
the right to obtain a lease after having made a discovery in the licence area. Licences are
granted by the Petroleum Commissioner, in consultation with the Petroleum Council.

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 Israel

The licence includes a work programme to be carried out, which would typically include
at least one exploration well. A licence 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 licence.
Once the Petroleum Commissioner recognises that a discovery has been made in
a given licence 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.
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 programme. 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.

IV PRODUCTION RESTRICTIONS

i Restrictions on exports
The Petroleum Law establishes that a leaseholder is allowed in principle to export
petroleum. In June 2013, upon the recommendation of a committee, known as the
Zemach Committee, appointed to examine government policy in the natural gas sector
and its future development in Israel, the Israeli government adopted a resolution that
limits natural gas exports to approximately 40 per cent of production (with the exception
of reservoirs in existence prior to the adoption of this policy, which may export up to 50
per cent of production) (the Government Resolution). The Government Resolution sets
forth various additional restrictions on petroleum exports, including the requirement
to allocate a portion of all reserves to satisfy a mandatory minimum supply quantity
to the domestic market (as further detailed below), as well as requiring the Petroleum
Commissioner’s approval for the export of natural gas.

ii Requirements for sales to local markets

Suppliers of petroleum may be (and typically are) required to supply petroleum
to consumers in Israel. Under the Petroleum Law, the Energy Minister may, after
consultation with the Petroleum Council, require lessees to first supply petroleum, at the
market price, as required for local consumption. However, no lessee shall be required to
produce from any well an amount exceeding its maximum rate of efficient production or
supply a percentage of production greater than the percentage required from any other

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 Israel

lessee, unless the Energy Minister sees fit to deviate from this rule either to prevent waste
or inequity towards a particular lessee or for national security reasons.
Furthermore, the Government Resolution sets forth a number of requirements
pertaining to domestic supply. Such requirements include a requirement that at least
540bcm of natural gas must be guaranteed for the benefit of the domestic market;
that each leaseholder must connect its natural gas reservoir to the domestic market,
in accordance with the volumes, timing and terms set forth in its respective leases; all
existing and future leaseholders of natural gas reservoirs must allocate a portion of their
reserves, proportionately to the size of the reservoir, to the domestic market; and facilities
for exportation must be located in Israel (including its exclusive economic zone),
unless stipulated otherwise in a bilateral treaty between Israel and another country. A
re-examination of the Government Resolution is expected to take place in June 2018
in order to implement amendments (if necessary) to government policy according to
domestic market needs and considering the natural gas supply.

iii Price setting

The Petroleum Law grants authority to the Energy Minister, after consultation with
the Petroleum Council, to require lessees to first supply petroleum and petroleum
products that are required for local consumption at market price. In addition, the Price
Control on Consumer Goods and Services (Application of the Law to Natural Gas and
Determination of the Level of Control) Order 2013, requires all gas sellers and producers
to report, on a semi-annual basis, the prices of natural gas sold by them as well as their
profit margins to an inter-ministerial committee of the Ministry of Finance and the
Ministry of Energy. This requirement is intended to assist the committee in determining
whether price controls in the form of a maximum price for the sale of natural gas in Israel
should be implemented.

V TRANSFER OF INTERESTS

Rights granted under the Petroleum Law, such as a licence or lease, may not be
transferred or pledged in any manner whatsoever (with the exception of inheritance),
without the prior permission of the Petroleum Commissioner. This restriction applies
to the transfer or grant of any interest or benefit in petroleum rights, including rights
to royalties. Where, following consultation with the Petroleum Council, the Petroleum
Commissioner approves a transfer, the transferee shall be subject to all obligations and
enjoy all rights to which the transferor was subject.
In order to regulate such transfers of petroleum rights, in November 2011 the
Energy Minister published draft regulations regulating the procedures for submitting
applications to transfer petroleum rights, and setting forth guidelines according to
which the Petroleum Commissioner may exercise his or her discretion to accept such
applications, stipulate various terms and conditions or reject an application (the Draft
Transfer Regulations). Despite the fact that the Draft Transfer Regulations have not been
formally adopted, the Petroleum Commissioner has stated that requests for the transfer
of petroleum rights under the Petroleum Law will be considered in accordance with the
principles set forth in the Draft Transfer Regulations.

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 Israel

The Draft Transfer Regulations specify the relevant procedure for filing an
application for the transfer of petroleum rights and set forth terms for such transfer.
Such terms relate to, inter alia, timing for filing, fulfillment of the terms of a lease,
the petroleum exploration experience of the transferee of the lease, fulfillment of the
percentage holdings required for an operator, financial capability and the ability of the
transferee to maintain performance in accordance with the development plan submitted
to the Petroleum Commissioner. The Petroleum Commissioner may, in consultation with
the Petroleum Council, permit the transfer subject to the provisions of the Petroleum
Law and the provisions of the Draft Transfer Regulations, and may condition the transfer
upon the fulfillment of any terms that the Petroleum Commissioner deems fit, or reject
the application.
The Draft Transfer Regulations further state that the Petroleum Commissioner
shall not permit the transfer of petroleum rights or of a benefit relating to petroleum
rights if, in the Petroleum Commissioner’s opinion, any of the following conditions exist:
a the transfer may significantly harm competition in the field of petroleum
exploration and production;
b the transfer may harm the security of the state of Israel or its foreign relations;
c the transferee or its controlling entity violated the provisions of the Petroleum
Law in relation to other petroleum rights held or previously held, violated the
terms of such petroleum rights or acted inefficiently or irresponsibly with respect
to such petroleum rights;
d the transferee, its controlling entity or any of their respective officers have been
convicted of an offence, which due to its nature, severity or circumstances renders
such person unsuitable to hold a petroleum right; or
e due to other special circumstances, the transfer is not in the public interest or the
interest of the energy sector in the state of Israel.

With respect to pledges, the Draft Transfer Regulations clarify that in the event the
Petroleum Commissioner has granted permission to pledge a petroleum right, this does
not constitute a permission to transfer the pledged right upon realisation of the pledge,
and the transfer of the petroleum right to the pledgee or another transferee may only take
place if the Petroleum Commissioner expressly permits the transfer.
It should be noted that the Petroleum Commissioner has full discretion about
whether or not to grant an approval for the assignment or pledge of petroleum rights.
However, pursuant to the Petroleum Law, the Petroleum Commissioner’s decision is
subject to appeal before the Energy Minister within 30 days of receipt of the decision, such
ruling of the Energy Minister being final. It should be further noted that the Petroleum
Commissioner has a duty as such to act in good faith, in a reasonable manner and to provide
reasons for any decisions. Based on such grounds, both the Petroleum Commissioner’s
decision and the Energy Minister’s ruling can be challenged before the competent courts.

VI TAX

There are two key elements of taxation relevant to the oil and gas industry in Israel.
The first element relates to the royalties that a holder of a lease must pay to the Israeli

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 Israel

government in the amount of one-eighth 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 is designed to capitalise on
the economic dividend arising from each individual petroleum reservoir and is imposed
only after the holder of a lease achieves a full return on its investment plus an additional
yield to compensate for some of the financial risk. 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 initial rate of the levy is 20 per cent and it gradually increases up to a maximum
of 45.52 per cent. The exact rate is determined based on a complex formula taking into
account the ratio between the accumulated income and the accumulated investments.
The formula typically causes a deferral of the payment of such levy. Transition provisions
in the law provide that only 50 per cent of the levy will apply during the years 2012–
2015.
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 recognised as a
deductible expense for income tax purposes.

VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING

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,
a the generation, handling, use, storage, transportation, disposal and remediation
of hazardous or regulated materials and waste, including petroleum and its by-
products;
b climate change;
c the discharge and emission of such waste and materials into the environment;
d the protection of natural resources;
e human health and safety; and
f 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.
In December 2013 the Ministry of Energy and the Ministry of Environmental
Protection published draft guidelines for existing and new petroleum drilling activities
with the aim of regulating the environmental aspects of drilling operations during the
exploratory, development and production stages. While these draft guidelines are still
under discussion, if adopted, they would govern all stages of petroleum drilling, from

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 Israel

submission of applications through drilling, production and abandonment and would

include, among other things, a requirement that leaseholders prepare a comprehensive
environmental survey and an emergency plan for treating marine oil spill pollution. It
should be noted that although the draft guidelines are not completed and have not been
adopted, the Petroleum Commissioner may still require leaseholders to act in compliance
with such draft guidelines. Additionally, the various leases and licences typically include
bespoke environment-related provisions.
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
environment-related 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 Licences, 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.
The Petroleum Law does not contain detailed provisions relating to the
decommissioning of offshore petroleum facilities. It does state that upon expiry of a
petroleum right, a rightsholder must remove all its possessions and structures from the land
within the period determined by the Petroleum Commissioner and leave the land in the
state, from a safety perspective, as instructed by the Petroleum Commissioner. However, the
leases themselves may include requirements regarding submission of a decommissioning
plan and other decommissioning obligations and usually petroleum rightsholders are
required to submit a bond or guarantee to the Petroleum Commissioner to ensure they
fulfil their obligations under the submitted and approved decommissioning plan.

VIII FOREIGN INVESTMENT CONSIDERATIONS

Historically, Israel has been quite friendly to foreign investment in general, and in the oil
and gas industry in particular. The current legal and regulatory regime does not contain
onerous laws regarding foreign exchange and local labour as may be found in other
jurisdictions.
Israeli oil and gas operations are typically carried out by limited partnerships due
to various tax considerations. Many of these partnerships raised funds in the Israeli capital
markets in the initial stages of their operation and issued ‘participation units’ that are listed
for trade on the Tel Aviv Stock Exchange. Under Israeli law, such limited partnerships are
considered a transparent entity for tax purposes and therefore tax is imposed not at the
partnership level but rather the individual partners are taxed directly with respect to the
profits of the partnership. Investing through such a partnership structure may sometimes
allow individual investors to offset their losses against taxable income from other sources.
Foreign investors may freely operate in Israel, including through the incorporation
of a local entity or the registration of a foreign branch, both of which require relatively
simple regulatory processes.

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Current applicable laws and regulations do not require any specific local content
or hiring requirements, however, such requirements may be incorporated into the
leases themselves. For example, the recently granted lease relating to the Leviathan field
contains a number of local hiring requirements, including a requirement to submit a
detailed plan to the Petroleum Commissioner regarding the hiring and training of Israeli
citizens and residents as workers and experts to carry out the development, installation
and operation of the Leviathan production system.

VIII CURRENT DEVELOPMENTS

i Oil shale
Israel is continuously looking for energy sources. Many fields of oil shale have been
discovered in Israel and it persists in its endeavours to develop this industry, 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, which recently
opposed the exploration drillings in the Judean foothills in a position paper published
in August 2014. Such environmental concerns, among other things, led the District
Committee for Planning and Building to reject the Judean foothills pilot project in
September 2014.

ii Natural gas
Israel is currently focused on its natural gas industry. As this industry is in its infancy,
most of its legal and regulatory aspects have only recently been developed. While
an extemporaneous approach was employed in earlier days, most regulators today
understand the strategic importance of this industry to the state of Israel and how vital it
is to be investor-friendly, if it is to allow the tremendous amounts of capital required to
finance this industry to flow into Israel.
Israel’s legal system provides a stable framework, facilitating a business-friendly
environment. Among other things, it allows parties to engage in agreements governed
under foreign law; enforces foreign judgments and arbitral awards; enters into treaties
for the avoidance of double taxation; grants state-sponsored insurance protection in the
event of property damage (for example, to the Tamar platform) caused by war or warlike
activities or hostile acts against Israel; and continues to develop the legal framework
concerning its natural resources (e.g., by promulgating regulations concerning the
transfer of petroleum rights, which are aimed at promoting greater certainty).
The incredible demand and oversubscription for the recently closed US$2 billion
bond offering by two of the partners in the Tamar project, Avner Oil LP and Delek
Drilling LP, coupled with news of an important non-binding letter of intent signed on
3 September 2014 between Noble Energy Mediterranean Ltd and the National Electric
Power Company of Jordan regarding the intention to negotiate an agreement for the
supply of 45bcm of natural gas over a 15-year period from the Leviathan project makes
it abundantly clear: Israel’s gas industry is on the rise.

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ABOUT THE AUTHORS

SHIRI SHAHAM
Yigal Arnon & Co
Shiri has extensive experience in a wide range of issues covering corporate, commercial,
banking and securities law.
In her banking practice, Shiri represents international and domestic banks in
complex banking and commercial matters and has advised leading international financial
institutions such as ISDA and ICMA in Israel in regulatory matters as well as in relation
to the use of various financial instruments under Israeli law.
In addition, Shiri advises in the financings of some of the largest oil and gas
projects in Israel, the Tamar and Leviathan offshore natural gas projects, including the
recent:
Shiri has represented JP Morgan, CitiGroup and HSBC as the lead underwriters
of a private placement of senior secured notes in the amount of US$2 billion issued by
Delek & Avner (Tamar Bond) Ltd.
Shiri has also represented Barclays Bank Plc, as arranger, Bank Mizrahi Tefahot,
as facility agent and a number of Israeli institutional lenders in a US$225 million credit
facility and refinancing transaction with Dor Gas Explorations Partnership, a partner in
the Tamar field.
In her corporate practice, Shiri represents many clients in mergers and acquisitions,
public securities and debt offerings, as well as private placements and joint ventures.
Shiri received her law degree magna cum laude from the Hebrew University of
Jerusalem in 1990 and an LLM first class from Cambridge University in 1992, where she
was also nominated Pegasus Scholar.
Shiri joined the firm in 1992 and became a partner in 1998.
Shiri is repeatedly top ranked by legal global guides such as Chambers & Partners,
Legal 500 and IFLR 1000.

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 About the Authors

SIMON WEINTRAUB
Yigal Arnon & Co
Simon is a partner in the international department and banking group at Yigal Arnon &
Co, with a focus on project finance transactions and cross-border lending transactions,
with an emphasis in the field of oil and gas. Simon regularly represents global banks and
financial institutions investing in Israel and has been involved in some of the largest cross
border transactions involving Israel in recent years. In particular, Simon led the Israeli
legal team representing the investors in most of the financing work to date surrounding
the Tamar and Leviathan offshore natural gas projects. Most recently, Simon acted for
the joint book-running managers JP Morgan, CitiGroup and HSBC in a US$2 billion
private placement of senior secured notes issued by Delek and Avner and also acted for
Barclays Bank Plc, as arranger, Bank Mizrahi Tefahot, as facility agent and a number
of Israeli institutional lenders in a US$225 million credit facility and re-financing
transaction with Dor Gas Explorations Partnership, a partner in the Tamar field. Simon
received a degree magna cum laude in political science from York University in Toronto
in 1995 and completed his LLB in business law from Bar Ilan University in Ramat Gan,
Israel, in 1999. Simon was admitted to the Israel Bar Association in 2000. The Legal 500
(2009–2014 editions) recommends Simon in the banking and finance field.

NOAM MEIR
Yigal Arnon & Co
Noam is an associate in the international department of Yigal Arnon & Co., with a focus
on project finance transactions in the field of oil and gas and in cross-border lending
transactions. Noam also acts for private and public hi-tech companies at all phases of
their development as well as for VC funds in M&A transactions, ‘growth equity’ and
later-stage financing, venture lending and various other private equity transactions.
Noam has gained extensive experience representing Israeli and foreign banks
and financial institutions in various credit facilities in connection with the financing of
the Tamar and Leviathan offshore natural gas projects. Most recently, Noam acted for
the joint book-running managers JP Morgan, CitiGroup and HSBC in a US$2 billion
private placement of senior secured notes issued by Delek and Avner.
Noam received his LLB from Bar-Ilan University in 2006 and earned his LLM in
2009, graduating from the European master in law & economics programme. Noam is
fluent in Hebrew and English and is conversant with Italian and French.

JOSH HERSCH
Yigal Arnon & Co
Josh is an associate in Yigal Arnon & Co’s international corporate department. Josh
represents both Israeli and foreign financial institutions and corporations in a wide range
of financing transactions, including some of the largest project finance transactions in
Israel’s oil and gas industry. Most recently, Josh has been involved in various transactions
in connection with the financing of the Tamar and Leviathan natural gas projects.
Josh’s practice also focuses on representation of venture capital funds, startups,
and multinational corporations in various commercial transactions, as well as providing

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 About the Authors

ongoing consultation on a variety of legal issues, including corporate governance,

commercial and technology law, and labour law.
Josh received an LLB with distinction and an MBA with distinction, both from
the Hebrew University.

YIGAL ARNON & CO

1 Azrieli Center
Tel Aviv 6702101
Israel
Tel: +972 3 608 7851 / 7864
Fax: +972 3 608 7713 / 7734
shiri@arnon.co.il
simonw@arnon.co.il
noamm@arnon.co.il
joshh@arnon.co.il
www.arnon.co.il

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