Netanyahu exaggerates gas royalties expectations

It is unclear why Prime Minister Benjamin Netanyahu implied in an interview that there would be higher than expected royalties.

The government's natural gas royalties will not exceed $125 million in 2013, according to a calculation by "Globes". The figure cannot be larger because of the technical impossibility of delivering more gas through the pipeline, so it is unclear why Prime Minister Benjamin Netanyahu implied in an interview yesterday that there would be higher than expected royalties.

Asked by "Channel 2 News" if tax hikes will be needed to plug the NIS 40 billion deficit, Netanyahu said, "I see no problem for which we will have to raise taxes for a simple reason: the gas royalties may be higher, maybe the markets will recover, and exports increase."

A recovery on foreign markets may increase the Israeli government's revenues, although no recovery is on the horizon. What is obvious today is that Netanyahu cannot rely on gas royalties.

Energy market sources today noted Netanyahu's previous promises that gas royalties would be invested in a sovereign wealth fund, and would not be used to finance the current budget deficit.

Israel currently receives minimal quantities of gas from the depleted Mari B field owned by Delek Group Ltd. (TASE: DLEKG) and Noble Energy Inc. (NYSE: NBL) joint venture, Yam Tethys. Gas flow from the Tamar field, owned by the two companies together with Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) and Alon Natural Gas Exploration Ltd. (TASE: ALGS), is due to begin in April, with deliveries gradually increasing.

The government's take from the gas comes in two ways. The main source is the Petroleum Profit Tax Law (5771-2011), also known as the Sheshinski Law, initiated by Minister of Finance Yuval Steinitz. The law should generate $2 billion in future revenues, but taxation will only be levied after a gas field's developers make a 230% return on their investment in discovering and developing a field. The government will see no revenues under the Sheshinski Law before 2018.

The government's sole current source of revenues from gas is through royalties under the Petroleum Law (5712-1952), which begins from the start of gas flow. The official royalties rate is 12.5%, but Clal Finance analyst Yaron Zar notes that, in practice, after deducting expenses, the rate is 11.4%. On the basis of the flow rate through the Tamar pipeline from April through the end of 2013 - 5.2 billion cubic meters (BCM) - the government's royalties from Tamar will total $125 million.

The royalties will increase to $184 million in 2014, when the gas flow increases to 7.5 BCM, and to $253 million in 2015, when the gas flow will increase to 10.4 BCM.

Published by Globes [online], Israel business news - www.globes-online.com - on January 15, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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