Israel’s gas market has soared to the top of the national agenda in recent weeks on the backs of the Sheshinski Committee recommendations and the dramatic findings related to the Leviathan natural gas field – the largest discovered in the last 10 years worldwide.As might be expected when talking about an industry worth tens of billions of dollars, widespread controversy is being generated. The debate has centered around the question of how much the “government take” of the profits from the gas fields should be. The Sheshinski Committee was set up to offer an expert opinion on that question, which it did earlier this week. The committee recommended a 52-62% government take, as opposed to the current 30%. While representing a marked increase in the government’s portion, that final recommendation was nonetheless – to the dismay of critics who argue that the state and its citizens should enjoy a still higher share in the profits of such natural resources – lower than the same committee’s interim recommendations from just two months earlier.The Jerusalem Post sat down recently with Delek Energy President and CEO Gideon Tadmor and Alon Natural Gas Exploration General Manager Eli Misgav to discuss their views on the gas market, Tamar, Leviathan, the Sheshinski Committee, and the Israel Corp. deal.Delek and Alon are partners in the Tamar field, while Delek also has a stake in Leviathan. Excerpts: The gas companies have been vociferous in their opposition to the Sheshinski Committee. Why is that? Gideon Tadmor: The committee diverted from its terms of reference.Before the committee was established, it was understood that the committee recommendations would not apply to existing discoveries. Suddenly, two months ago we discovered that the recommendations would include Yam Thetis and Tamar.The recommendations are very extreme and are based on incorrect facts and assumptions.The committee was born in sin. It was created against the wishes of the infrastructures minister, Uzi Landau. It looks like it was created for political reasons.They wanted a populist headline, but today it’s clear – the outcome [to date] ...is that Israel will lose more than $4 billion of revenues from Israel Corp.’s contract.A world precedent is being set: The government is discriminating against local gas in favor of imported gas.The citizens of Israel are the ones who are losing out. All over the world, the market gets assistance. Here, they’re jeopardizing our ability to develop the largest project in Israel.The goal is not simple and the industry is a unique one. All countries around the world are competing for investment.Israel is a unique market for a number of reasons: The Arab boycott – companies can’t work with us and with the Arabs; lack of infrastructures; and the potential here is for natural gas and not oil, which makes it less attractive. We’re talking about ultra deep water, and the gas market is limited.Despite the Ministry of Finance’s assertions, there are no planeloads of investors on the way. Even in the current fiscal terms, Noble Energy (the operator of the Mary B and Tamar natural gas fields) is the only E&P (exploration and production) international investor today.There were two problems with the committee – its behavior and the fact that it overstepped its mandate.Regarding behavior, the committee was created eight months ago. In that time, it did not meet with a single representative of the industry. Without any sort of dialogue, it published its interim recommendations. That’s very hard to deal with. The first time anyone from the industry was heard was two weeks before the final recommendations. The game is fixed.Regarding its mandate, the committee was supposed to compare our tax regime to OECD countries, with corrections made due to Israel’s special conditions.[In the interim report] it compared us to 13 countries in the Third World. It compared us to irrelevant countries rather than to other OECD countries.Second, it was clear the discoveries [Tamar, Yam Thetis] were outside of the purview of the committee. Third, it didn’t address the topic of competition in Israel’s gas market at all.We don’t see any other option except for the prime minister to intervene and decide.What’s more, the tax regime has already been investigated recently. After five years, a committee decided in 2006 – which was not long ago – not to change the tax regime and so we stepped in to invest.We didn’t know then that there would be a serious sin here – the sin of success. We didn’t fail. We succeeded for the benefit of Israel’s citizens and our investors, and all of a sudden we are being punished.It is simply dishonest. Now we are hearing from the banks that all future government representations will have to be done through signed documents from now on.Eli Misgav: We are trying to open up the market for the first time against a giant competitor [Egypt]. And then they go and change the entire tax policy.Nothing has even happened here yet.For Intel, they gave protections. For agriculture too. They are not allowing the industry to flourish and achieve some sort of critical mass. There needs to be a market first.In principle, it’s fine for a government to adjust its tax policy. It’s necessary after speculation.The biggest problem with the committee is its timing. The oil economy is not Highway 6 or a factory. They allowed us to invest and to sweat and now we’re here. So why reassess the tax regime now? Let the market rise. The taxes would only start flowing in six to seven years, so why did we need this committee right now? We have a lot of objections to its methodology, its makeup. They analyzed the market as economists.In my opinion, it’s like [then-Knesset Economic Affairs Committee chair and Likud MK Ophir] Akunis said: I won’t allow Bolshevik economics. It’s a little Bolshevik. If it’s a free market, then don’t interfere or dictate to us how to invest.The committee didn’t even talk about the price for gas at all; the fact that it’s $4-5 per million BTUs (British Thermal Units) here compared to $6-7 in Europe.What’s the significance of Israel Corp. signing a long-term contract with EMG instead of Tamar? Tadmor: The state has lost more than $4b. in income from that deal. The deal will eventually be worth $10b.As the gas market is limited, the only way to recoup our lost contract will be by raising the price of the gas.The Sheshinski Committee has caused tremendous damage. The immediate damage is the Israel Corp. deal. It’s hard to understand how the Ministry of Finance could act against the industry.Misgav: Israel Corp. had been in negotiations with us for a long time.Then they went and signed with the Egyptians. There, they had certainty.The Egyptians are exempt from taxes for 20 years.How do the Egyptians fit in to the domestic gas market? Misgav: There is another source of gas – Egypt. Egypt has massive gas discoveries – 3,000 BCM (billion cubic meters).Their use of natural gas is about ten times ours.Other countries, like Australia, have switched to natural gas to produce cement, food and to run automobiles.Egypt connected to Israel via a pipeline to Ashkelon.Egypt is not Switzerland. They signed a contract in 2002 for $2.75 per one million BTU. Yam Thetis entered under the same conditions.By 2004, the Egyptians still weren’t providing gas, though. Why not? The price was too low. Egypt had started exporting gas to Europe in the form of LNG (liquified natural gas) for a very good price. They had signed contracts with major players like BG (formerly British Gas) and (Italian energy company) eni.So Israel renegotiated the contract to $4 something and the Egyptians started providing gas in 2008.Tadmor: There’s a sense of déjà vu regarding the Sheshinski committee that harkens back to the situation with the Egyptians. Once again, they are giving preference to imported gas.We pay royalties and taxes. It’s active discrimination and it's the same thing we saw in 2008. The Egyptians were given a tax exemption for 20 years.What’s the significance of the Tamar and Leviathan finds? Misgav: After 60 years of oil and gas exploration, the only significant find is Tamar.Only Tamar turns Israel into an upstream player [exporter].Tamar is the first discovery which enables upstream. It holds 250 BCM.Israel uses 5 BCM now and will use 12- 15 BCM within five to seven years’ time.Yam Thetis, by comparison, is only 36 BCM.Tadmor: We are talking about the most expensive infrastructure project in the country – $3 billion.What about Leviathan? Tadmor: We have already invested $180m., according to a decision made in 2009, which is not a small sum: $30m. in exploration and $150m. in drilling. After announcing the Leviathan discovery, it is clear that we will need to build an export option that might cost tens of billions of shekels.The only way to facilitate such a huge undertaking is for the government to ensure a stable and positive investment environment, and to encourage investment for export.What role is natural gas starting to play in Israel and worldwide compared to oil? Misgav: Most of the public does not understand the gas market. It’s a market of risks akin to the lottery.There have been 550 drillings in the 62 years of the state, most on land and 60 in the sea.Israel’s requirements are 11-12 million tons of fuel and 5 BCM of gas. Two to three million tons of oil will be replaced by natural gas.The instant natural gas is found, the world moves to use it, for two reasons: 1) It’s cheaper than oil.2) It’s cleaner. All the transport is by pipe, not trucks, not containers on ships and no refinery is needed. It uses barely any energy.There’s no need for terminals or interim storage.All of the logistics are different. It’s straight from the well to the user.Eighty-five million barrels of oil are used a day around the world. The gas and the oil are usually found together, but most of the world didn’t know how to utilize the gas. Over the last 20 years, the world has learned how to use natural gas.As soon as they figured out how, they moved to use it: 30,000 BCM, or the equivalent of 70 million barrels of oil a day of natural gas, is now being used around the world.For their part, the gas exploration companies are livid with the Sheshinski Committee and its recommendations.Facing a high amount of risk, but also the potential for massive reward, they argue that their efforts to launch the fledgling industry – as well as their profit margin – would be critically undermined if the committee’s recommendations are implemented. Battle is now being joined in the Knesset, en route to final legislation.Viewing Israel as a state rich in natural resources is a new and potentially extremely significant development.While a small gas field, Mary B, run by the Yam Thetis conglomerate is producing gas, the biggest finds so far are as yet untapped. Tamar and Leviathan have the potential to turn Israel into a natural gas exporter, never mind meeting all domestic needs for years to come.But the gas companies say that the Sheshinski recommendations could blight that vision, and specifically could delay the expected launch of the Tamar field in 2013. Israel Corporation Ltd.(the country’s largest holding company, which owns the main oil refineries, chemical firms, shipping firms and more), apparently not content to wait and see how the recommendations would play out, dropped its negotiations with Tamar and recently signed a $5b. deal with EMG – an Egyptian- Israeli conglomerate that provides natural gas from Egyptian reserves.