Offshore gas discoveries in Israel prompt squabbling over royalties

By Janine Zacharia
Washington Post Foreign Service
Sunday, August 29, 2010; 12:00 AM

JERUSALEM - Recent discoveries of large natural gas reserves off Israel's coast have set in motion a battle between investors and the government over how to divide up the profits.

The finds could be significant. Israel has long been a resource-poor island in the energy-rich Middle East, reliant largely on coal imported from far away in part because of an Arab League boycott. Only Egypt, with which Israel has a peace treaty, exports natural gas to the country.

But the initial euphoria over the prospect of energy independence for Israel is being overshadowed by the dispute between Israeli officials who want to increase the state's share of the profits and U.S. and Israeli investors who say the government's stance threatens Israel's status as a safe place to invest.

Some have estimated the value of recent finds by a consortium led by Texas-based Noble Energy at $300 billion. They could represent only a fraction of the natural gas lying beneath the seafloor in the eastern Mediterranean, which, according to the U.S. Geological Survey, might contain one of the world's largest untapped gas reservoirs.

The prospect that Israel might tap more deeply into the revenues has set in motion a commercial dispute between the Israeli and U.S. governments, with the U.S. Embassy in Tel Aviv warning against any rewriting of the rules.

Under current law, Israel would be eligible to claim royalties of 12.5 percent of the value of the gas, along with some additional charges. But Israeli Finance Minister Yuval Steinitz has appointed a committee to determine whether that formula should be changed. A coalition of socially minded Israelis has also launched an advocacy campaign to educate the Israeli public about the billions in profits it stands to lose.

Noble Energy's chief executive officer, Charles Davidson, flew to Israel this month to ensure that his company's licenses would not be affected. Marc Sievers, former charge d'affaires at the U.S. Embassy, warned that the possibility that Israel will rewrite the formula for energy royalties to affect "current leases and licenses undermines confidence in the stability of Israeli fiscal policy and creates barriers to international investment.''

Steinitz has refused to discuss the issue until the committee issues its final recommendations in October, after which the issue could be brought to the Israeli cabinet or parliament for a decision.

The U.S.-Israeli commercial clash comes as President Obama, who will host a peace summit on Thursday, has sought to repair ties with Prime Minister Binyamin Netanyahu, which were strained amid disputes over Israeli settlements.

The dispute also coincides with a war of words between Israel and Lebanon over whether the gas finds in the eastern Mediterranean extend into Lebanese territory.

Lebanese Energy Minister Jibran Bassil said that "it is very clear'' that Israel's "intentions are to aggress our resources.'' The Lebanese militant group Hezbollah has vowed to defend Lebanon's "natural treasures,'' prompting Israeli National Infrastructure Minister Uzi Landau to warn that Israel would respond "with all of our ability to protect our interests.''

A previous effort by Israel to assert a greater share of the profits from energy discoveries was abandoned in 2001 amid the more pressing outbreak of Palestinian violence.

Israeli officials say the new finds have made a renewed review a higher priority. Last year, the Noble Energy-led consortium announced the discovery of the Tamar field, with an estimated 8.4 trillion cubic feet of natural gas, or enough to supply Israel for more than two decades.

In June, it said it had spotted a field potentially twice as large as Tamar, called Leviathan. Drilling is to start there at year's end.

Such estimations elsewhere would have caused a clamor of international energy companies to compete for licenses. But the Arab boycott, which largely prevents companies that invest in oil-rich Arab countries from investing in Israel, has kept most away. Only Noble Energy, tiny by international standards, came and collaborated with Israeli companies.

With the natural-gas sector in its infancy, "the government should be seeking ways to incentivize exploration and production projects'' not penalize investors, said Bini Zomer, director of corporate affairs for Noble Energy in Israel.

Israeli Finance Ministry officials and grass-roots activists dispute these arguments. A senior Finance Ministry official, who requested anonymity in order to speak freely, said Western countries routinely update taxes and royalties, including after a resource is discovered. No country that did this "said this will be only on future exploration. In all countries, it was on everything,'' the official said.

Rabbi Michael Melchior, a former Israeli government minister who now leads the six-week-old coalition of concerned citizens known as the Civic Action Forum, said that "this is a one-time historic opportunity for the state of Israel to change its priorities and make a social change.''

"The state has the right to give concessions to private companies - who should be plenty rewarded for the investment and risks they have taken. But at the same time, we need very drastically to change the proportion so that the vast majority of the income from this goes to the citizens of the state,'' Melchior said. A former chief rabbi of Norway, Melchior would like to see a Norwegian model adopted in which the state takes the vast majority of the profits.

It is unclear how much Israel would reap as a total of royalties and taxes under the current arrangement once gas from Tamar starts pumping in 2012. The Finance Ministry estimates it at 26 percent; the gas consortium says the percentage is closer to half when all taxes are factored in.

Landau, Israel's infrastructure minister, said he hopes a compromise will be found. "I believe,'' he said, "a line will be drawn between past findings and future findings.''

Special correspondent Samuel Sockol in Jerusalem contributed to this report.

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