Natural resources belong to the people, the Sheshinski Committee declares, giving the state a 66% share of income from future profitable oil and gas projects.
By Avi Bar-Eli

Seven months after its establishment, the Sheshinski Committee has declared a revolution in the distribution of monetary gain from Israel’s oil and gas reserves. Natural resources belong to the public, the committee has declared, and the public should get the lion’s share.

The panel headed by economist Eytan Sheshinski on Wednesday released its interim recommendations, more than doubling the state’s share of income from future profitable oil and gas projects to 66% compared with 30% today.

The actual royalty rate will remain unchanged at 12.5%. What will change is the tax regime governing the oil and gas exploration and drilling companies. Their tax liability would be a function of their varying costs after they return their investment, the committee recommends. Its recommendations remain contingent on the government’s approval and enactment into law.
Eytan Sheshinski

Eytan Sheshinski at press conference, flanked by Yuval Steinitz, left, and Eugene Kandel on November 10, 2010.
Photo by: Daniel Bar-On

“The basic question before the committee was to determine a more fair distribution of natural resources between the general public and investors, maximizing total gains,” the committee stated in its presentation on Wednesday.

It task was to balance interests: Israel has an interest in the hydrocarbon reserves’ development, but unless it pays for the companies to invest and undertake the risk, they won’t touch the industry. And, there is the public’s interest in receiving its share of income from exploitation of national resources.

An outdated law

Until now, the royalties paid by the drilling companies had been governed by a law enacted in 1952. The realities have changed since then, the committee said in its presentation, including through the discovery of massive reserves of hydrocarbons in the deep sea and Israel opening itself to foreign investors.

“Almost all the countries drastically changed [their laws]. Here nothing happened,” Sheshinski said at Wednesday’s press conference. “In 2002 an attempt was made to institute change, but it failed. After the great discoveries off Israel’s shores, it became clear that change had to be made.” He noted the committee’s underlying sense that natural resources belong to the public, which was not receiving its fair share.

Under the Oil Law enacted 58 years ago, the state’s share of revenue from the sale of its natural resources was 30% (collected through royalties on revenues and corporate tax ). That is the lowest such ratio in the world, Sheshinski said, and in 2016 that proportion was slated to shrink to 25% as corporate tax was reduced.

“Tax breaks given to the oil and gas companies offset – and more – the royalties they were supposed to pay,” the professor said.

TheMarker has reported that Delek Group and Noble Energy paid the state NIS 650 million in royalties during 2004 to 2009. But they saved NIS 740 million on tax during that time.

Five principles

The Sheshinski model outlined on Wednesday has five principles: First, progressiveness, which means the actual tax collected by the state would be flexible. It would depend on each project’s profitability; second, return of investment, which means the economic feasibility for the developer would be preserved by raising the state’s share only after the investment was returned; third, incentivizing exploration; fourth, economic efficiency; and fifth, adjustment to changing market conditions.

The changes the committee suggests will apply – assuming they are enacted into law – starting in 2011 to all hydrocarbon drilling and exploration in Israel, including the Mari-B site producing gas off the Ashkelon shore and the Tamar field, which is undergoing development.

Regarding the possible reaction by oil baron Yitzhak Tshuva, Sheshinski said he believed any debate would be businesslike and that the people would be grateful if Tshuva would accept the conclusions.

Eugene Kandel, chairman of the National Economic Council, said he was glad Sheshinski had stood strong against the attacks. “I don’t know if I could have,” Kandel said. “The committee did thousands of hours of work and studied every detail.”

He dwelled on the issue of the high risk that the oil companies face. For the great risk they undertake, they deserve a relatively high rate of return, he explained. Asked whether Prime Minister Benjamin Netanyahu had been part of the process, Kandel replied that at no stage had the prime minister intervened.

The final report is due out near year’s-end. The recommendations won’t become law before January or February at the earliest.