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Royalties on oil and gas finds
By DAVID J. MARTIN
06/04/2014
If Seshinsky II’s recommendations are adopted, it will cause untold damage to Israeli industry, labor, international investment, and to Israel’s image in the world business community.
 
The Seshinsky Committee II has now announced its findings with regard to royalties to be paid to the state by companies with concessions to exploit natural resources. Not surprisingly, the committee called for a substantial increase in such royalties. Readers will recall that the original Seshinsky Committee was the body that called on the state to retroactively increase royalties on oil and gas finds, which resulted in substantial criticism from oil and gas exploration companies throughout the world. When asked how the state could retroactively increase royalties that were fixed both by contract and by regulation, the committee made the sophistic argument that the increases would not be royalties but rather “taxes,” and taxes could be changed at any time – even in the middle of the game. Presumably, Seshinsky II will make the same argument with regard to its latest findings.

The first reaction from the industry to the conclusions of Seshinsky II was not long in coming. Israel Chemicals announced suspension of a billion dollar investment program which would not be profitable under the new royalty/tax regime.

It is not possible to challenge the Seshinsky conclusions substantively, first because they have not been fully published, and second because it is not expected that the raw economic data on which the conclusions were based will be disclosed. But even without digging, the Seshinsky II conclusions suffer from the same shortcomings as those of Seshinsky I.

Oil and gas explorers and other developers of natural resources have one thing in common: They both invest huge sums of money in the hope that market conditions and production results will make their investment profitable. If the investments are not profitable, the investments literally go into the ground. The government does not participate in these investments. The loss belongs entirely to the investors. It is only if the investments succeed, and profits are made, that the Seshinsky Committee begins to eye how much of the profits can be diverted to the public coffers. That certainly sounds like an unbalanced view.

This approach is not unexpected. The Seshinsky Committee II was composed of 14 members, not a single one of whom was a representative of industry or of labor. In other words, not a single member of Seshinsky Committee II had the necessary experience to understand the factors that go into multi-billion dollar investments in reliance upon existing government royalties, regulations and taxes. Not a single member of Seshinsky II represented some 50,000 households which earn their living from natural resource-based industries. Not a single Seshinsky II member would have to face his business colleagues around the world and explain why Israel was acting like a banana republic intent on increasing the government’s share of the pie without consideration of the effect on industry.

Seshinsky Committee II members were drawn from the Treasury, the tax authority, the Israel Lands Authority and the Bank of Israel. No-one from Israel Chemicals, the Dead Sea Works, the labor unions, the local municipalities surrounding the Dead Sea and other groups with a direct interest – not just in padding government coffers, but in encouraging industry and employment.

When Seshinsky I’s recommendations were adopted by the government, it was a sad day for the State of Israel. Businessmen around the world began to question whether they could actually do business in a country that changed the rules mid-game.

If Seshinsky II’s recommendations are adopted, it will cause untold damage to Israeli industry, labor, international investment, and to Israel’s image in the world business community.

The author is a lawyer.
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