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Friday, December 31, 2010

How Leviathan changes the Middle East

The Wall Street Journal looks at some of the fallout of Israel's massive new gas discovery, known as Leviathan (Hat Tip: Memeorandum). Like the media here in Israel, much of the attention is focused on the Israeli government's likely effort to retroactively increase the royalty rates on the existing leases, including Leviathan.
Earlier this year, Finance Minister Yuval Steinitz said he was considering changing terms retroactively—meaning the government could extract better terms on previously assigned leases. Noble and Israeli oil executives went on the offensive.

A retroactive change would be "egregious" and "would quickly move Israel to the lowest tier of countries for investment by the energy industry," Noble's chief executive, Chuck Davidson, wrote Mr. Steinitz in April.

The company enlisted high-level negotiators, including the U.S. State Department and former President Bill Clinton, to lobby against any change.

Mr. Clinton raised the issue in a private meeting with Israeli Prime Minister Benjamin Netanyahu in New York in July, according to a Clinton aide. "Your country can't just tax a U.S. business retroactively because they feel like it," the aide said Mr. Clinton told Mr. Netanyahu.

Mr. Netanyahu was noncommittal, the aide said. A spokesman for Mr. Netanyahu declined to comment on the meeting.

Finance Minister Steinitz has so far ignored the pressure. Last month, he said a government-appointed committee had made preliminary recommendations to abolish tax breaks for energy firms and impose steep tax increases of 20% to 60% on windfall profits. Any tax changes are subject to approval by Israel's cabinet.

"Israel is sovereign to make its own decision and change its tax regime," Mr. Steinitz said in an interview.
My guess is that there will be some increase in the tax rates to bring them more in line with the practice in other Western countries. By the way, from the little I know of our tax law on this issue I don't believe we have an oil depletion allowance, which has been a fixture in the US for 50-60 years (at least). Perhaps that could be a tradeoff with the oil exploration companies.

But the Journal actually has little to say about how the natural gas discovery changes the Middle East.
On Wednesday, the frenzy got fresh fuel: Noble confirmed its earlier estimates that the field contains 16 trillion cubic feet of gas—making it the world's biggest deepwater gas find in a decade, with enough reserves to supply Israel's gas needs for 100 years.

It's still early days, and getting all that gas out of the seabed may be more difficult than it seems today. But Noble and its partners think the field could hold enough gas to transform Israel, a country precariously dependent on others for energy, into a net-energy exporter.

Such a transformation could potentially alter the geopolitical balance of the Mideast, giving Israel a new economic advantage over its enemies.


Even before Leviathan, a series of finds had put the so-called Levant Basin, stretching offshore in the Mediterranean, on the international energy map.

In March, the U.S. Geological Survey released its first assessment of the zone, estimating it contained 1.7 billion barrels of oil and 122 trillion cubic feet of gas. That's equal to half the proven gas reserves of the U.S.
Much of that gas hasn't been found yet. Even if it is found, it's still less gas and oil than the Arab countries have, it won't make the West dependent on us the way they are dependent on the Arabs, Russia and Iran, and anti-Semitism (which still exists and likely always will) will likely temper any moves in Israel's favor.

Moreover, the business community is very concentrated and closed. I recognized just about every name in the Journal article, and even have done business with one of those people in another field. In the best case scenario, the average Israeli will save some money on his or her utility bills. Any taxes the government collects will be used to spend more and will not be passed on in the form of lower taxes.

Change? Not likely.

The picture at the top is a rig at the nearby Dalit well.

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At 2:41 PM, Blogger NormanF said...

The best case is it makes Israel energy self-sufficient and removes pressure on the country to concede on its vital national interests.

As for the rest, I wouldn't look for much to change.


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