‘Public must be realistic about natural gas revenues'

Energy specialist says Sheshinski Law has found right split of revenues between public and private sectors, impact will relatively small.

By NADAV SHEMER
March 30, 2011 18:50
3 minute read.
Leviathan gas site.

Leviathan drill 521. (photo credit: Albatross)

The Israeli public needs to have realistic expectations about natural-gas revenue because its portion of gross domestic product will be minor in comparison with the world’s biggest gas and oil exporters, energy specialist Dr. Amit Mor said Wednesday.

“Revenues from domestic gas production in the next decade are not foreseen to make a significant impact on the Israeli economy,” he told The Jerusalem Post by telephone prior to the final Knesset vote on the Sheshinski bill on the taxation of Israel’s natural-gas and oil resources, which later passed into law with a resounding majority.

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“This can be changed, of course, if significant amounts of oil will be discovered in the future and exploited,” Mor said.

“[However], the likelihood of quick export projects of Israeli gas from the Leviathan field, for example, is not likely.”

It would take at least a decade to develop a pipeline or other method to export gas, he said, and “even then the quantities and revenues, although they might be significant to the developers, in terms of the public share will not have a significant impact on the GDP.”

Under the Sheshinski Law, which replaces the old tax regime introduced in 1952, the state’s share of the net profit from the sale of oil and gas will increase from the current one-third to between 52 percent and 62%.

The initial levy on the companies will stand at 20% and rise gradually to 50%, depending on the amount of excess profits, while the rate of royalties will remain 12.5%. The levy imposed on the companies by the state will decrease as the company tax rate increases, and vice versa.

The Tamar field, located roughly 80 kilometers off the coast of Haifa and which is currently being developed, is expected to supply Israel’s gas requirements for about 30 years. The even larger Leviathan field, discovered in June 2010, has a quantity of gas that should enable Israel to become a gas exporter. On Wednesday, the Leviathan partners raised their minimum estimate of gas to 11.3 trillion cubic feet with a 90% chance of success, up from 10.5 trillion cubic feet.

Mor, the CEO of Herzliya-based economic and financial consulting firm Eco Energy, which specializes in the energy and environmental sectors, said the law was “important” and had found “a reasonable split of revenues between the private sector and the public sector.” It was preparing a framework in which the country would benefit if more important gas and oil discoveries are made and export markets developed, he said.

Increasing the state’s share in gas and oil profits to about 60% had brought Israel in line with the global average, Mor said. But even by 2025, the government’s share of the profit would be in the range of only $500 million to $700m., he said. This would constitute just “a fraction of a percentile of GDP,” which today stands at almost $200 billion, and in a decade might be about $300b., he said. Such figures pale in significance when compared to energy exporters such as Saudi Arabia, where oil revenues constitute almost half of the GDP, he added.

On the positive side, Mor said the relatively low revenues should see Israel protected from so-called Dutch disease, a term coined by The Economist to describe the decline in the manufacturing sector in the Netherlands after the discovery there of large natural-gas reserves strengthened the nation’s currency, making its exports prohibitively expensive.

Mor, who worked for 18 years as a consultant to government and financial organizations, including eight years at the World Bank in the 1990s, said Israel should create a sovereign-wealth fund into which it could inject the state’s share of oil and gas revenues, to gain valuable experience and to ensure those revenues would benefit future generations.

Bank of Israel Governor Stanley Fischer made the same recommendation on Wednesday when he released the bank’s annual report. In a letter addressed to the government and to the Knesset Finance Committee, he wrote that the Dutch disease “can be offset by the creation of a sovereign- wealth fund, which would invest only abroad. Properly managed, that would help also in the intergenerational distribution of the benefits from the gas discoveries.”


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