Israeli Public Battles Over Natural Gas Bounty

natural gas pipe israelA government panel proposes a new tax regime for energy profits, cheering social activists and angering explorers.

Israel’s social activists and its energy barons drew their swords on Thursday as the fight over who will get what share of Israel’s natural gas windfall got underway. The lines of battle were laid out by a government commission, chaired by Hebrew University Professor Eytan Sheshinski, which the day before offered its preliminary recommendations about how Israel should tax profits from natural gas and oil. It will now hold hearings with the public before it makes its final recommendations prior to the parliamentary debate.

“There’s a big, big political battle ahead,” Brenda Shaffer, an energy expert at the University of Haifa’s School of Political Sciences, told The Media Line. “The prime minister hasn’t said anything yet and the infrastructure minister is against it. So it’s not clear at all yet what is going to emerge as the final legislation.”

At stake is tens of billions of dollars, which could stay with the energy companies as profits, or go to the government, depending on how the government finally decides to restructure its half-century-old tax regime. Activists say ordinary Israelis should benefit from the country’s natural resources with new government-funded schools and hospitals, but energy companies warn that excessive taxation will deter further exploration and production.

natural gas rig Israel

The bounty from oil and gas has only emerged as an issue for Israel in the last two years as explorers have uncovered increasingly large reserves of natural gas off the country’s Mediterranean coast. The first field, Yam Thetis, was a mere 32 billion cubic meters (bcm) and will be tapped out by 2013. The newest field – named Leviathan, the Hebrew for whale – is believed to hold as much as 600 bcm, although the estimates are very preliminary.

Israel’s current tax regime, devised in 1952, is among the most generous in the world for energy companies, with low royalties and tax breaks that enabled the partners in Yam Thetis to write off more in deductions than the total of the taxes they were required to pay, according to a report in the daily newspaper Ha’aretz.

The Sheshinski panel proposed leaving the royalty rate its current level of 12.5%, but it said the government should eliminate a deduction known as a depletion allowance. It proposed taxing oil profits on each well at a rate between 20% and 60%, rather than on companies, to prevent operators from finding other tax breaks. All told, the government’s share of proceeds would increase to about 66% from 30%.

But developers are only liable for tax after they have recovered 150% of their costs – and then only eight years after production begins.

An industry analyst, who spoke on condition of anonymity because of his ties to the operators, said Israel’s government would not see the tax windfall that social activists have been counting on. With a budget of about $85 billion, gas-tax revenues won’t make a significant addition. In any event, Shaffer said, Israel’s government already has the resources to fund social spending.

“The fact that the government becomes richer doesn’t mean it becomes better,” she said. Israel isn’t a poor country today but it allocates money on a political basis not necessarily what’s best for the future.”

Nevertheless, Israel’s Citizen Action Forum (links to Hebrew), whose chairman, Rabbi Michael Melchior has led the fight for boosting the state’s take of energy revenue, said it was satisfied with Sheshinski.

“We need to closely examine the long waiting time the panel has proposed before the country begins to enjoy tax revenues,” Melchior said in a statement. “Over the next few weeks we’ll have to fight the gas companies, who will do everything they can to undermine the Sheshinski committee’s proposals.”

Under the slogan “Gas belongs to the public – 80% for citizens/20% for gas barons,” the Forum wants the tax boon to fund social needs.

To broadcast its message, the video on the Forum website shows a tycoon lowering an Israeli flag fluttering at the top of an oil derrick and raising a banner with his picture and a dollar sign. Attaching himself to a fuel line, he pumps himself up to giant proportions, casting a show over Israel and picking up the Knesset building. Angry citizens march on the tycoon, removing the fuel line and attaching it to a government network, causing schools, parks and hospitals to spout up from the ground.

The energy companies responded today angrily to the proposed tax regime, arguing that the government is changing the business environment for the worse after they have invested hundreds of millions of dollars in developing the fields. Shares of the leading energy companies, including Delek Energy Systems, Avner Oil Exploration and Isramco Negev, fell in Tel Aviv Stock Exchange trading Thursday.

“We expect a significant increase in taxes imposed on the partners developing the gas fields and a negative impact on the business and operations of the partnership,” Isramco, one of the energy companies, said in a statement. “We will decide what to take after examining the full proposal.”

But the industry analyst said the companies’ protests were exaggerated.

“Putting aside the rhetoric and lobbying, it’s a very convenient tax regime for the producers comparable to other countries,” the analyst told The Media Line.

Read more about Israel’s natural gas:
Israel’s Natural Gas Could Promise Energy Independence
UN Mediates Natural Gas Standoff Between Lebanon and Israel
Corruption Plagues Lebanese Environment Movement and Energy Exploration
Tshuva’s Yam Tethys Gas Company Wins, but the Environment Suffers
Hezbollah Interferes With Israel Energy Exploration

Republished with permission from the Media Line – the Middle East News Source. Images via the Citizen Action Forum

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