Where are the $15 billion in royalties that the state had to collect from the gas companies exploiting Israel's natural resources?
15.01.2023 | Yishai Gelb
In 2015, the prime minister of Israel pledged to the Israeli public that extracting natural gas from Israel's shores would enrich the country with $15 billion by 2022, and $600 billion over the gas field's lifetime. So far, only $1.8 billion have been collected, less than 15% than initially promised. So where is the money?
The big natural gas drilling companies, Delek and Nobel energy acquired the license to drill and produce natural gas from the gas field in Israel's territory. Since the Israeli government never suspected that such quantities of resources would be found in its borders, the royalty on exploiting the nation's resources was set to just 12.5%. For the sake of comparison, in the USA the royalty is 51%, in Canada it's 55% and in Norway, it’s 75%.
Why are royalties so high around the world?
Royalties are the payments given on behalf of a company that extracts a natural resource as compensation to the public for exploiting the resource. According to this concept, which exists in all countries of the world, the resources, even if they have not yet been discovered, belong to the public for generations. Extracting natural resources means using them today, and therefore the public must be compensated for the inability to use them in the future.
Since the royalties on the exploitation of natural gas in Israel were unacceptably low, in 2009 finance Minister Yuval Steinitz appointed a public committee headed by Professor Eitan Shashinsky, a committee known as the "Shashinsky Committee", to examine the taxation policy of gas and oil discoveries in Israel.
The committee suggested raising the royalties to 62.5%, but after immense pressure, was reduced to 50%, and only after the gas partnerships’ revenue from gas sales pass 150% of their initial investment. Meaning that they only started paying royalties in 2018, over 10 years after they initially started selling the natural gas.
Up until 2023, the revenue from royalties reached less than $2 billion. Just the cost to defend the gas wells reaches nearly that amount. What's even more absurd is that it is the IDF and the Israeli Navy who protect the gas wells. Not only does the Israeli public not see any profits from their own natural resources, but their sons and daughters who serve in the IDF protect the tycoons while they enrich themselves.
How did the gas companies, and similar interest groups get their way? Israels, like any other county in the world, is plagued with the turning doors phenomenon. A situation where big corporations who seek to influence government policy start by pressuring key players to decide on policy in their favor, and in many cases, also promise these key players in the government and bureaucracy top positions in their corporation in return for favorable policy.
During the committee's deliberations, heavy pressure was exerted on Knesset members, officials, and ministers from the gas partnerships not to raise the royalties.
Steinitz himself testified shortly after his retirement from the position of Minister of Finance that he was put under very heavy pressure. He testified:
“A very senior strategic advisor met with me and told me, listen, I have come to save you. You better hurry to reach a compromise, otherwise, you will crash. Investigative committees will be used against you, they will look for dark things in your past, and they will check if you have ever taken drugs, cheated on your wife, or maybe expanded a balcony without a license. If they don't find something with you, they will look into your extended family. And that will be the end of your career as finance minister. So before you lose your office and go home, do yourself a favor and get off the Shashinsky committee.
More horrifying than that, Steinitz testified that:
“The second scary moment was when the pressures from the White House started. The energy companies hired American lobbyists, including former President Bill Clinton, who sent letters and held talks to dismantle the Shashinsky Commission and stop the tax bill. American congressmen asked me for clarification. A feeling of pressure began as if we were doing something improper in the trade relations between the two countries. I tried to explain that we are in the lowest place in the world in state profits from oil and gas reserves, that we get nothing, and that the citizens of Israel have a moral right to profit from their public resource no less than the private companies.”
Lobby groups met with over 30 officials, including prime minister Benjamin Netanyahu to see all talks for increasing the tax. They went so far as to threaten not to extract the gas if the royalties are raised.
After the gas partnerships exerted heavy pressure, they continues to phase two of their strategy. Senior officials, as well as journalists, and many officials who worked for the public interest, were appointed to senior positions in the gas companies owned by Yitzhak Tshuva, and in the Delek companies. For example:
Yossi Abu, a former adviser to the Minister of Finance, was appointed CEO of Delek Drilling
Bentzi Zilberfarb, the former CEO of the Ministry of Finance became a board member of the Delek Group.
Udi Nissan, the former head of budgets at the Treasury, was appointed chairman of Delek Israel.
Yoram Torbovich, former head of Prime Minister Ehud Olmert's office and antitrust commissioner, was appointed chairman of Delek Energy. And the list is long
This is just one case out of many like it that plague the Israeli government. The public interest is undermined by officials who end their public service and are then magically appointed to high positions in the same corporations they just regulated. Unfortunately, this isn’t a problem of left or right, conservative or liberal, but simply bad behavior by powerful people. So who truly has the public interest at heart? People with good intentions before they cannot stand up to the pressure any longer.