The Government recently announced that it would approve the export of 40% of the gas reserves (rather than the 50% recommended by the Tsemach Committee). This seems like welcome news for the owners of the gas fields as well as for the industry as a whole as it allows them to start planning and deciding on how to proceed with the development of the resources. However, a series of other factors mean that it is too early to celebrate.
First of all, various groups and opposition MP’s are seeking to challenge the Government’s decision on both substantive and procedural grounds. There are those who think that the 40% export allowance is too generous – mainly because they believe that Israel’s own future energy needs have been grossly underestimated and therefore Israel will need all of its gas. There is also concern that the decision allows part of the 60% reserved for domestic use to be sold to Jordan and the Palestinian Authority. In light of these concerns, the decision is also being challenged procedurally in order to force the Government to submit the decision to the Israeli parliament for review and approval. If this succeeds, apart from the time implications, the parliament may make significant changes to the export rules.
Secondly, the percentage itself is by far from the full story. For example, the Tsemach Committee also recommended that all of the export facilities should be located in Israeli territory. If this recommendation is adopted, it will put paid to any attempts to use the facilities to be constructed in Cyprus to export Israeli gas. Given planning and permitting issues that are likely to arise, this will impact the timing of the commencement of exports. It is also not yet clear how the gas will be exported – whether by pipeline or by means of an LNG terminal. Different interests in the Government have different opinions, with some ministries supporting the pipeline and others an LNG terminal.
Thirdly, recent reports indicate that the Ministry of Finance is considering a further change in the taxation of gas exports, beyond the changes caused by adopting the recommendations of the Sheshinski Committee. At least according to press reports, the Ministry wishes to change the basis on which the gas exports would be taxed – rather than using an Israeli transfer price for the gas as the basis for calculating the tax, the actual price paid outside of Israel will be used, although the sellers are supposed to be ensured a “normative profit”. The effects of these changes, if implemented, are expected to significantly impact the economics of gas exports.
All of these issues need to be resolved quickly and correctly in order to allow these resources to be utilized efficiently. The question is whether Israel’s Government is able to do so.