Editorial: Rules and royalties

Losing the European market is bad business, bad national strategy and a sure way to weaken Israel. Avoiding that requires a smart, less-confrontational resolution.

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October 10, 2010 01:47
3 minute read.
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Last week the Knesset Economics Committee issued a declaration of principle opposing any form of retroactive revenue hike to be imposed on companies that find and extract natural resources and fossil fuels. Any future increase of royalties, levies and assorted taxes must not apply to existing agreements, stressed the committee, and certainly not in situations where considerable investments have already been made.

This may all sound like a very elementary restatement of the standards of equitable practice, which boils down to the notion that rules can’t be changed to the detriment of any player mid-game.

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But what may be obvious in the marketplace is hardly so in the political arena, where raising royalties is an emotive demand. And a furor over the issue has indeed arisen from the 2009 discovery of the offshore Tamar gas field, which is still being developed but is estimated to contain 238 billion cubic meters of natural gas.

The American Noble Energy firm owns 36 percent of the Tamar venture, Yitzhak Tshuva’s Delek Energy owns a 31.25% stake, Isramco Negev owns 28.75% and Dor Gas Exploration owns the remainder.

The hypothetical rich pickings, none of which have yet been realized, have sufficed to whet appetites. The Treasury has eagerly joined the clamor for upping state royalties from the already contracted 12.5% – perhaps to 20%. An alternative mulled by the Sheshinski Committee, charged with examining Israel’s policy regarding natural resource royalties, is a specific tax on gas companies’ profits.

THE FINANCE Ministry’s motives are clear. Initially it settled for lower royalties – maybe too low – as bait to lure exploration ventures. However, once these appeared successful, it began to covet a bigger cut to fill its coffers.

Some of the political outcry emanates from a rather different place. Led by communist Hadash MK Dov Henin and buttressed by the New Israel Fund among others, it cites the danger of exploitation by big business and greedy financial conglomerates. Natural resources, the argument goes, belong to the entire population and it’s iniquitous for the developers to rob the people of what’s rightly theirs.



The righteous indignation is compelling; the argument is persuasive – as persuasive as the case against profits reaped by big pharmaceuticals at the expense of ordinary patients. The problem there is that without profit there’s no incentive to invest in research and without investment there would never be new breakthroughs.

The same is true here. Without incentive, no one would invest in offshore exploration, which doesn’t come cheap.

Moreover, any retroactive tinkering with existing contracts would risk frightening off further potential foreign investment in our country. Noble is already threatening to sue Israel in the International Court of Justice, should the state do anything akin to almost doubling previously agreed-upon royalties.

Violating written agreements by one means or another would also risk impairing our critical relations with the US. Would any additional income be worth the bad press and severe damage to Israel’s credibility and reputation as a hospitable business environment? A short-term revenue increase might simultaneously blight Israel’s image with third world unreliability.

UNTRUSTWORTHINESS AND fickleness do produce consequences. Russia, Europe’s current major gas producer, has proven too high-handed and unpredictable for some of its clients, who now avidly seek other options. The Tamar field could capitalize on that and usher Israel into the club of energy suppliers.

But the opportunity is no secret. It’s evident to all our neighbors, foremost to Iran. It and Lebanon, with Syria in tow, have already announced plans to benefit from the Tamar discoveries and drill for gas directly next to Tamar facilities.

The danger that Israel could lose the European market altogether is not marginal. While we are expending energies and risk losing time on bitter arguments about royalties – and may perhaps find ourselves tarnished in overseas litigation – hostile nations that we have no interest in enriching are gearing up to seize the opportunities we may neglect.

We might be left with higher revenues on the books but no profits to share. This is bad business, bad national strategy and a sure way to weaken Israel. And avoiding that requires a smart, less-confrontational resolution.

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