Coping with the curse of natural gas

Israel’s reserves aren’t big enough to be a factor on the world energy market, but they are big enough to undermine the rest of our economy.

By
December 3, 2010 14:48
4 minute read.
Yizhak Tshuva, Delek Group CEO

yitzhak tshuva311. (photo credit: Courtesy)

 
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The Chinese are reputed to traditionally offer their enemies the backhanded hope “may you live in interesting times.”

They could wish their enemies much worse by expressing the desire that “your land may be blessed with massive reserves of hydrocarbons.”

As curses go, it’s not particularly mellifluous, but the sad history of countries that have found themselves with huge amounts of oil and gas under their soil or seas should ensure that those on the receiving end should cringe at the thought of their bleak future.

Whether it’s John D. Rockefeller, Jed Clampett or Ibn Saud, oil and gas have been associated with fantastic wealth. Now, thanks to the finding of the appropriately named Leviathan gas field off the country’s Mediterranean coast, Yitzhak Teshuva will join in his own modest way. But what does that mean for the rest of us? Unfortunately, that’s where the hydrocarbons curse typically strikes. Not at the owners but at everyone else.

As it courses through the government and the energy barons and into the many hands of ordinary business and consumers, the easy money from oil and gas profits undermines the value of work and honesty. This isn’t Victorian moralizing, but the painful history of countries from Nigeria to Saudi Arabia. If it doesn’t disappear into Swiss bank accounts, the money is poured into vast boondoggles. At its most benign, it creates a culture of laziness.

We might be spared the worst of the hydrocarbons curse, not because we are morally superior to Arabs or Africans and can withstand the temptations of living on oil dividends. Rather, our economy is too developed for hitech entrepreneurs to forsake venture capital and farmers to plow under their fields.

But just as much, we can thank the Sheshinski Committee for preserving our steely work ethic and societal wholesomeness, such as it is. The panel’s recommendations are so generous to the gas industry that the money going to the public in the forms of royalties and taxes from the Leviathan field and any future gas finds will be relatively modest and take years to come.



The royalty rate paid on gas would remain unchanged at a relatively low 10 percent or 11% net of taxes. The biggest pain the Sheshinski Committee proposes administering on producers is the end to the tax breaks that allowed the Yam Thetis group to pay no taxes at all on its gas profits. Alas, the Leviathan partners will have to pay tax, but not until they have earned back their investment plus another 50%. Nor will they have to pay any taxes for the first eight years, at least.

THE SHESHINSKI Committee wants to let the energy industry off with modest taxes by offering up some of the old chestnuts of capitalist economics. The first is that a more draconian tax regime would discourage future investment. The second is that it’s unfair to change the tax terms after the gas was discovered. Both arguments are dubious.

The fact is the discovery of Leviathan and its fellow offshore gas fields has made the risk of exploration infinitely lower. Israel no longer needs to dangle the bait of low taxes to encourage more drilling. In any event, Leviathan alone has so much gas that the country has no reason to encourage more exploration for a couple of decades.

As to the second argument, governments are always changing the tax regime. That is just one of the facts of life. The Leviathan partners could have guessed before they started drilling that the tax structure in place would never survive if any gas or oil was actually found.

The Leviathan partners will no doubt succeed in watering down the panel’s proposals before they go to the Knesset to become law. But the irony is that Yitzhak Teshuva’s gain won’t necessarily be a loss for the rest of us.

Oh well. But maybe we can take vicarious pleasure in being a global energy superpower even as our overdrafts fail to go away? In fact, there’s been a lot of loose talk about how Leviathan will translate into new political power, a counterweight to Saudi oil. This is nonsense.

As big as Leviathan is for us, it’s not that big by world standards. The field is estimated to have 16 trillion cubic feet, but Bolivia has 27 trillion, Trinidad and Tobago 15.4 trillion, Azerbaijan’s Shah Deniz deposit may have 35 trillion and Uzbekistan at least 66 trillion. None of them have been able to leverage their energy resources into significant political gains.

Natural gas has a lot of advantages over oil, but one big disadvantage is that the best way to transport it is by pipeline, which means the producer can’t pick and choose his customers so easily. Just ask Egypt, which is holding its nose while selling gas to Israel. Indeed, there is a great risk that Leviathan is the worst-case scenario for an energy power. Israel’s reserves aren’t big enough to make it a factor on the world energy market, but they are big enough to undermine the rest of our economy. Natural gas will reduce the bill for energy imports, leaving us with a widening trade surplus and a strengthening shekel. That, in turn, will undermine the international competitiveness of our other industries, a particularly dangerous development for a country whose jobs and key hi-tech sector rely on exports.

We needn’t order the Leviathan partners to cap their wells to save us from social and economic disaster. But it would be a fair trade and good policy to offer them a low-tax regime in exchange for a ban on gas exports. Leviathan’s backers won’t be happy because it delays the payback of their development costs, but the rest of us would be better off for it.

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