Don't Pop the Gas Bubble

Is the Israeli government about to kill the golden goose, before it lays its first egg?

According to the Wall Street Journal, a group of oil companies, led by Israel's Delek Energy Ltd. and Texas-based Noble Energy, are about to begin exploratory drilling on what is potentially one of the world's largest natural gas fields. According to seismic data, the Leviathan prospect, located about 85 miles off Israel's northern coast, might hold enough natural gas to supply all of Israel's needs for 100 years. This follows the recent discovery of the offshore Tamar field, which was the world's largest natural gas discovery in 2009.

Needless to say, these developments could be real economic and political game-changers for Israel. Before long, a country that had long been frustrated by its inability to discover any meaningful hydrocarbons in a region which seems to be awash in oil and natural gas could become a net exporter of energy.

However, even on the threshold of such momentous developments, Israel's government seems determined to mess things up. Finance Minister Yuval Steinitz has ordered a review of the methodology through which Israel taxes oil and gas exploration. Some lawmakers are considering an increase in royalty rates on existing leases from 12.5% to 20%, according to the Journal.

While these lawmakers are surely congratulating themselves over their ability to exercise their leverage at a seemingly perfect moment, I find their actions to be foolhardy and reckless. One of Israel's greatest strengths in the energy race is the reputation its business and political sector have garnered as relatively stable and sane entities, in contrast to the rogue states which surround it. Why is Israel suddenly acting like Turkmenistan? Trying to hold its partners over a barrel at this stage will only discourage potential partners from contributing their significant capital and expertise to Israel's nascent energy industry in the coming years. In the oil and gas business, shifting royalty schemes can be a real turn-off. Is Israel really willing to throw away so much long-term benefit in the name of increased short-term tax revenue?

One can only hope that Israel's leaders can quickly be cured of their economic myopia, and that the nation will indeed reap the benefits of these seemingly wonderful opportunities.