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Proposed bigger government cut of gas field revenue roils Israel

A panel reviewing Israel's policy on oil and gas resources has recommended more than doubling the government's take of profits. But Israeli and U.S. firms behind recent discoveries are fighting back.

January 05, 2011|By Batsheva Sobelman, Los Angeles Times
  • Israeli Finance Minister Yuval Steinitz, right, and Hebrew University economist Eytan Sheshinski attend a news conference Monday in Jerusalem on the results of an Israeli government committee's recommendation on the taxation of natural gas production.
Israeli Finance Minister Yuval Steinitz, right, and Hebrew University… (Baz Ratner, Reuters )

Reporting from Jerusalem — Big natural gas fields found recently off Israel's coast could be a game-changer for the small country, pumping billions of dollars into the economy. But the prospect of huge profits is igniting a battle to divide the spoils, long before drilling gets underway.

A government committee appointed to review Israel's policy on oil and gas resources recommended late Monday more than doubling the government's take of production profits to as much as 62%.

Committee Chairman Eytan Sheshinski, a retired Hebrew University economics professor, said the revised rate, which still must be approved by the parliament, would create a "balance between the companies' profitability and the public."

But a consortium of Israeli and American companies behind the recent gas discoveries is fighting the move, warning that the higher rate could make the project unfeasible.

The previous 30% rate, established in 1952, reflected a period when the young country had no funds for exploration and no known natural resources. The low rate was designed to encourage private companies to undertake risky investment.

Government officials said the change was overdue, noting that it would put Israel on par with the average government profit-sharing rate in Western countries. The average for the 34 member countries of the Organization for Economic Cooperation and Development, a group of free-market economies that includes the U.S. and Israel, is about 60%.

But executives with the energy firms say Israel is changing the rules in the middle of the game and call the proposed higher rate a retroactive tax.

According to one estimate, the change would cut the companies' operating profits by more than 50%.

Gideon Tadmor, chief executive of Delek Energy, complained to reporters after the committee's decision that instead of encouraging natural gas projects, Israel was "doing everything to keep them in the ground."

Delek, he said, has invested $400 million in drilling so far and the company's investors and bankers may balk at the higher cost.

Government officials countered that, under the new plan, companies starting production before 2014 would receive considerable tax reductions that would increase profits and provide an incentive to stick with the project.

But Uri Aldubi, chairman of the Oil and Gas Exploration Industry Assn. in Israel, said the energy companies face additional risks in the project, including the region's political instability. Lebanon has complained that Israel is infringing on its gas fields, and there is fear that drilling sites could become targets for terrorists.

"Who will want to finance rigs threatened by rockets?" he asked on Israel Radio. He said the government was "dividing a pie that doesn't exist" and might not exist if the recommendations pass.

The struggle follows a string of big discoveries of natural gas reserves off Israel's coast in the last two years. The Tamar field, discovered in 2009, contains 8.4 trillion cubic feet of natural gas — enough to satisfy the country's domestic need for the next few decades — and production is scheduled to begin in 2013.

Another field, Leviathan, is twice as big, and the possibly $90-billion find confirmed last week by Texas-based Noble Energy Inc., which holds nearly 40% of the venture, could make the tiny country a big player in international exports.

Rabbi Michael Melchior, a former lawmaker, contended that the government is justified in taking a higher percentage of the profits as long as it uses the money for public benefit. His group, Israel Civic Action Forum, is lobbying for a higher government take with the slogan "Natural gas belongs to the public."

Melchior wants Israel to adopt a version of the Norwegian model, where natural-resource profits go into a national trust fund to be invested long term and outside the country. The money then would be used to fund such public expenditures as education and environmental projects.

"Moses not only brought us to the land of milk and honey, but also the land of gas, and perhaps oil too," Melchior said, and he hopes "the generation privileged to find the treasure invests it wisely."

Sobelman is a news assistant in The Times' Jerusalem Bureau.

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