Lior Pick, Advocate (CPA (Isr.)) TEP, Anna Liskanich, Advocate

In view of the number of Oil & Gas discoveries, the gas and oil exploration field has become one of the most enthralling and interesting in Israel over recent years.

Following, is a brief review of the relevant legislation in Israel governing conduct in the Oil & Gas exploration field in Israel.

Introduction

Oil exploration in the Land of Israel commenced already prior to the First World War. At present, the rights and obligations of oil exploration and production companies are regulated in the Petroleum Law, 5712 – 1952 (hereinafter: “the law,” or “Petroleum Law”) and in the Petroleum Regulations, 5713 – 1953 (hereinafter: “Petroleum Regulations”). This law was amended by two major amendments in 1965 and 1989. A proposal for an additional amendment, which relates to the issue of environmental protection, was rejected by The Ministerial Committee for Legislation on June 19, 2011. In view of this there are no vital environmental control mechanisms embedded in the law in all related to oil exploration.

 Enacting the law will be the responsibility of the appointed minister responsible for oil issues to be appointed by the minister and a committee of 9 members, including 5 from amongst the public. The current appointed minister is the Minister of National Infrastructures. De facto, at present the Ministry of National Infrastructures is the responsible regulator of the Oil & Gas exploration field in Israel. Via the oil unit in the Ministry, the appointed minister for oil affairs and the oil committee, determine the oil exploration principles and minimal financial investment required for the purposes of obtaining a license to search for and produce oil and its products.

Pursuant to the law, exploration and production activities can be conducted in three stages as detailed below:

1. An early permit, the crux of which is conducting early inspections in order to produce initial information on the characteristics of the area and potential of the find, excluding a trial drilling.

2. License, the crux of which is oil exploration including a trial drilling.

3. Tenancy, the crux of which is oil production.

Unless with the administrator’s approval, an early permit, license and tenancy are personal non-transferable rights, apart from bequeathals. The administrator maintains an oil register, open to the public, in which any change in the ownership of rights, encumbrance of rights etc. are recorded.

Early Permit

“An early permit” will be granted by the administrator, at his discretion, in an area and under the conditions that the administrator deems fit after the permit holder has provided guarantees for the damages that could be caused by his actions. In order for the permit holder to perform early inspections, the law grants him the right of entry to the land (excluding a building or yard). On the termination of the inspections, the permit holder must restore the previous condition of the land and even pay compensation for any damages caused as a result of his actions.

An early permit is not defined as “an oil right,” pursuant to the Petroleum Law. Furthermore, as a result of the amendments to the law in 1965 in 1977, after consultations with the committee, the minister is empowered to grant priority for receiving oil rights in the area in which it is permissible to apply for an early permit.

The applicant must undertake to perform early inspections according to a work program pursuant to the principles authorized for him by the committee and invest a sum, which does not fall short of the minimal sum determined by the minister for that particular instance, in the oil exploration.

License

A license is an “oil right” pursuant to its meaning in the law. As aforementioned, the purpose of granting a license is oil exploration, including a trial drilling. The validity period for a license is 3 years with an extension option up to 7 years according to the decision of the supervisor of oil affairs.

In order to increase the number of oil explorations, one license shall not be given for an area that exceeds 400,000 dunams. A single person shall not have more than 12 licenses, nor shall he have licenses on a total area that exceeds 4,000,000 dunams, unless with the prior approval of the committee.

A license grants its holder the right to explore for oil inside and outside of the licensed area (solely for the purposes of the chances of finding oil within the licensed area), a unique right to drill and a right to produce oil. The important point is that, after the licensee reaches a discovery, he has the right to receive tenancy of the area.

In addition to rights, the law also enforces obligations on licensees as detailed below:

1. A licensee must pay a license fee at the rates and on the dates set by the minister. The minister is entitled to set different rates taking the validity period of the license and the location of the licensed area etc. into account.

2. A licensee must commence oil exploration within 4 months of granting the license.

3. A licensee must commence trial drilling on the date set in the license terns and conditions and no later than the termination of two years from the date of granting the license.

4. Pursuant to the provisions in the regulations, a licensee must submit reports both during the license period and on its termination. A license holder, who submits a report, can demand maintaining the confidentially of the information detailed in the reports.

5. Should a licensee reach an oil discovery, he is obligated to produce oil as if he was a possessor.

Tenancy

As aforementioned, tenancy imparts its holder with a unique right to search for and produce oil in the area throughout the lifespan of the tenancy. As a rule, a tenancy period is for 30 years and, at his discretion, the minister is entitled to extend this period for an additional 20 years. However, should the possessor fail to commence producing oil in commercial quantities within 3 years, the tenancy it will expire.

The possessor is entitled to refine and process oil, whether it was produced outside of or inside Israel and to convey and export it etc. Furthermore, he is entitled to construct oil pipelines in the region of the wells in the tenancy area with the administrator’s permission.

Possessors, whose tenancy areas are located within the scope of one oil field, are entitled to combine their operations in that field.

There are two courses for obtaining tenancy:

1. A licensee, who has reached a discovery in the area, is entitled to receive tenancy for that area pursuant to the law and regulations. On expiry of the license, the state is perceived to be the possessor.

2. Filing candidacy for competition pursuant to Section 28 of the law, which provides that the Minister is entitled to give notice of competition for possession of the land without oil rights. The minister is not obligated to accept the highest bid.

The possessor must commence drilling a development well within 6 months from the date of receiving the tenancy deed. Furthermore, pursuant to Section 32, the possessor is debited with royalties at a rate of an eighth of the quantity of oil produced from the area in his possession. In addition, he will be charged with a tenancy fee in periods prescribed in the regulations. Royalty payments must be made in cash according to the market value of the royalty according to the well, or in kind. The possessor must maintain records and accounts as detailed in the regulations. The possessor is entitled to request that his records should not be publicized.

Advantages and Disadvantages

Since the establishment of the state, Israel has encouraged the search for and production of oil sources via fiscal incentives and other perks. This is also one of the reasons for legislating the Petroleum Law in which there are many perks and alleviations for those dealing in the field.

Thus, for example, an oil right (license or tenancy), in itself does not automatically impart the rights holder with the right to tenancy of the land. The

oil rights holder is entitled to enter the land solely by virtue of the Lands Ordinance (Acquisition for Public Purposes), or by force of a leasehold pursuant to Sections 40 or 41 of the Petroleum Law, in which it is prescribed that anyone who has an oil right is entitled to demand, from the government, that land be registered in his name or that he will lease it (if it is state-owned land). The law also imparts the minister with the authority to add additional areas to the area of the right.

Furthermore, the law determines that an oil right owner is entitled to drill and search for water and use the water, whether while drilling or during other operations.

One of the significant incentives is exempting the oil rights owner from customs duties on importing machinery, equipment, installations, fuel and haulage systems etc., which are required for the purposes of oil exploration, apart from a motor driven vehicle that is not a Jeep. This exemption will only be granted for materials and equipment that cannot be acquired in Israel. It is hereby emphasized that the customs authorities do not have the authority to delay the imported materials for which a query regarding a customs obligation has been raised. However, the customs authority is entitled to determine warranties until a decision is made (within 60 days). Of paramount importance is that the definition of an “oil right” has been broadened for this exemption so that an early permit holder is a “rights holder” and can exploit the exemption as aforementioned.

Alongside the aforementioned advantages, the law imparts broad governmental powers, such as executing inspections, extending actions/dates to be executed according to the oil right, executing actions to prevent waste or risk that the oil right holder might cause, to adopt any measures to prevent serious damage, imposing an encumbrance to guarantee payments of the license fees, leasehold fees or royalties. The minister, administrator and their emissaries are, at all times, entitled to enter into any location in order to inspect any of the oil right holder’s equipment, documents, accounts and records.

The administrator is also entitled to annul an oil right, should the oil right holder fail to comply with the provisions in this law. An appeal against this decision can be made before the minister within 30 days.

Furthermore, the law stipulates that a deposit of the guarantee against any damages caused by the actions of the oil rights recipient as a result of the oil right and the expenses that the oil right holder must pay is required. A guarantee or warranty pursuant to the law shall remain valid after expiry of the oil rights as well (for a period not exceeding 7 years).

The law prescribes a list of offenses and sanctions such as illegal oil exploration, development and production without a right, waste or danger and a false affidavit in the application to receive an oil right.

The aforementioned contains nothing to serve as a legal opinion and/or an alternative to specific legal advice. We will be happy to be at your disposal for any queries and or explanations regarding this or any other legal issues.

Our office specializes in taxation, , Civil & commercial issues, Oil & Gas laws, Real Estate, Corporate laws & M&A, High tech & venture capital, Hedge funds, Banking & finance, Trust laws & international clients & cross border transactions.

Yours sincerely,

Lior Pick & Co. Law offices