Political-Economic Implications of Israel's Natural Gas Find

Home , Delek Drilling, Globes (newspaper)

Shir Hever The Economy of the Occupation A Socioeconomic Bulletin

Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find

№ 27-28 * December 2011

Shir Hever Economy of the Occupation

______Socioeconomic Bulletin № 27-28 Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find ______December 2011 Published by the Alternative Information Center (AIC) http://www.alternativenews.org/

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Editor: Mya Guarnieri Graphic Designer: Tal Hever Printer: Latin Patriarchate Printing Press Cover image and illustrations on pages 25 and 31 by Tal Hever

This research was conducted with the assistance of Diakonia.

The AIC further wishes to acknowledge the partnership of: Advocacy Project, Associazione Comunita Papa Giovanni XXIII, Ayuntamiento de Xixon through the help of Paz con Dignidad, the Basque government through the help of Mundubat, Broederlijk Delen, the Catalan Government through the help of Sodepau, Comite Catholique Contre La Faim Et Pour Le Developemment (CCFD), Diakonia, Gobierno de Espana—Ministerio de Asuntos Exteriores y de Cooperacion through the help of Mundubat, Inter-Church Organisation for Development Cooperation (ICCO), the Irish Government through the help of Christian Aid and Junta Castilla-La Mancha through the help of ACSUR Las Segovias.

Some rights received to The Alternative Information Center (AIC). This work is licensed under a Creative Commons Attribution-Noncommercial License (USév3.0): http://creativecommons.org/licenses/by-nc/3.0/ Table of Contents

Introduction 5

Timing of the Gas Find 6

Extent and Ownership of the Gas Fields 7

Gaza’s Gas Reserves 10

Border Dispute 15

The Struggle for Royalties 17

The Media Takes Sides 23

Taxation is Treason? 26

Politics and Capital 29

The Sheshinski Committee 32

Egyptian Gas 40

The Economic Signiﬁcance of the Gas Find 43

Conclusion 46

Bibliography 47 Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 5

Introduction

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he discovery of natural gas created, in part, by anxiety over the reserves off the shores of Palestinian push for statehood in Sep- TIsrael created much excite- tember 2011 and the growing BDS ment in the Israeli business commu- (Boycott, Divestment, Sanctions) nity. The newspapers used images movement against Israel. Both domes- and phrases hinting that Israel might tically and internationally, there is a become a natural gas empire. Reality debate as to whether Israel can con- quickly set in, however, and long be- tinue to call itself a democratic state fore any gas was produced for com- as its right-wing government clamps mercial use, the public discussion de- down on civil liberties and freedom of scended into a heated argument about speech, while stepping up discrimina- the projected profits, in which capital- tion against non-Jews. ists did not shy away from exerting in- The political-economic analysis fluence through “bought” politicians. of the natural gas discovery offshore The discovery of the natural gas of Israel is a prime example of how came at a critical moment in Israeli a seemingly unconnected issue of the politics. The protests in Arab coun- gas has been dragged into Israel’s eth- tries promised to revolutionize the nic policies, and an indication of the politics of the Middle East and Is- level of irrationality and panic that raeli politics were increasingly mired is creeping into the public debate in unprecedented existential anxiety, in Israel. 6 | Economy of the Occupation

Timing of the Gas Find

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n January 18, 2009, as Israel was in Gaza, which were discovered in ending its battering of the Gaza 2000 but not yet developed because IStrip known as “Operation Cast former Israeli prime minister Ariel Lead,” the Israeli media reported the Sharon prevented the British Gas discovery of commercial reserves of company from drilling in Gaza’s wa- natural gas under the Mediterranean ters (Chossudovsky, 2009; The Econ- omist, 2010; Weiss, The discovery of natural gas in 2010a). The discovery Israel stirred a hornet’s nest of gas off the shores of of politics of anxiety. Haifa mere days after the attack on Gaza Sea, off-shore of Haifa, within Isra- gives rise to the question whether Is- el’s territorial waters. This discovery raeli officials already knew that a large turned out to be more lucrative than discovery of natural gas is likely, and originally expected, with the potential wanted to delay the development of for gas extraction worth many billions the natural gas in Gaza in order to of dollars (Atias, 2010). ensure higher prices for Israel’s gas. The timing of the discovery raises However, both of these speculations some speculations. Some scholars are currently unfounded by facts, and such as Michel Chossudovsky argued no proof exists of the connection be- that Israel invaded Gaza in order to tween the two gas fields and the Is- ensure its control over the gas fields raeli invasions of Gaza. Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 7

Extent and Ownership of the Gas Fields

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oble Energy estimated the are sometimes a combination of value of the natural gas smaller investors, have joined forces Nreservoirs offshore Israel’s in order to distribute the risk of failed coast at about US$ 20 billion, and the drills, and to raise the necessary funds gas drilling is expected to generate net for the drills. profits of about US$ 1.5 billion annu- The biggest owner in the gas fields ally (Portugali, 2010a). is Delek Group, owned by Yitzhak Tshuva (Israel ’s sev - Natural gas was discovered shortly after enth richest man, ac- Israel invaded Gaza and set back the cording to Forbes possibility to develop natural gas there. Magazine, 2011). Tshuva has also become the most visible In June 2011 the discovery of an- face of the exploratory drilling com- other gas field was announced, called panies, and has openly attempted to Mira, but its full extent and profitabil- influence the decisions of the Israeli ity are yet unknown (Bar-Eli, 2011g). parliament and government to favor The table below (p. 8) shows the his business interests. The second big- estimated amounts and values for five gest is US-based Noble Energy. gas fields as well as the distribution Below (p. 9) is a map of the gas of the ownership of drilling rights by fields (Ministry of National Infra- companies. These companies, which structure, 2011). 8 | Economy of the Occupation

Table : Offshore Gas Fields in Israel’s Territorial Waters

Field Namev Estimated Potential Companies Value Amount (US$ billions) (BCM)

Dalit 3 14.2 Noble Energy (36%), Delek group (31.25%), Isramco (28.75%), Alon Gas (4%).

Leviathan 90-100 453 Delek group (45.34%), Noble Energy (39.66%), Ratio (15%).

Noa + Mary B 6 40 Delek group (53%), Noble Energy (47%).

Or (Med Yavne) 0.15-0.2 1 Meimon group (72%), Ratio (12.3%), others (15.7%).

Tamar 50 247 Noble Energy (36%), Delek group (31.25%), Isramco (28.75%), Alon Gas (4%).

Total 149.15-159.2 755.2 Delek group (40.74%), Noble Ener- gy (38.64%), Isramco (9.88%), Ratio (9.26%), Alon Gas (1.38%), Meimon group (0.08%), others (0.01%).

Based on (Bar-Eli, 2011a).

10 | Economy of the Occupation

Gaza’s Gas Reserves

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he untapped natural gas re- the siege conditions in Gaza prevent serves in the Gaza Strip are the development of the gas ﬁelds, and Tconsidered one of the most there is a risk that the Israeli explor- important natural resources for a fu- atory drilling companies will drill the ture Palestinian state (if the two-state gas reserves in such a way that will ap- solution will be adopted), and essential propriate some of the gas reserves of for the state’s development. However, Gaza (The Palestine Monitor, 2011).

Yam Tatis

In 1999 two Israeli companies: Avner ritorial waters. This find proved to be and Delek Drilling, formed a part- modest, and might be exhausted by nership called Yam Tatis (after the 2012 (The Economist, 2010). ancient sea that used to cover what The maps of the gas fields show is now Israel/Palestine). The partner- that the Israeli companies adopted a ship discovered gas off the shore of favorable interpretation of the divi- Ashdod, at the edge of the Gaza ter- sion of territorial waters. But a future Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 11

Gaza’s gas was discovered in 2000. fields, arguing that gas profits could The rights to the offshore field are be used to “fund terrorism” (Ibid.). currently divided between British- But the damage caused by Israel’s Gas (60%), the Lebanese company restriction on the development of Pal- CCC (30%) and the Palestinian Au- estinian gas is compounded by the discovery of natural The Palestinian Authority was prevented by gas in Israel. The Pal- Israel from developing Gaza’s natural gas. estinian’s gas is being delayed while Israel goes ahead in develop- thority Investment Fund (10%). They ing its own gas fields, and as soon as are estimated at 1.4 trillion cubic feet Israeli gas will begin to be exported, (TCF) worth approximately US$ 4 the eventual Palestinian gas exports billion (Bar-Eli, 2007). will meet fierce competition. Israeli Israel is actively preventing the gas companies will get the first choice Palestinians from developing its gas in export markets in the region and

division of the territorial waters might ed (see below, pp. 12-13), the royalty indicate that some of the fields, specif- structure adopted was gradual, and in- ically Noa, Or and Mary, which have creasing over the years. The Yam Tatis already yielded commercial quanti- field, however, got a special exemption ties of natural gas, would lie within from the decision because it began Gaza’s territorial waters. In such a operating before the other fields, and case, Israel might be required to re- received an additional 50% discount in pay the value of the gas that has al- royalties (Bar-Eli, 2011e). This special ready been drilled and depleted from benefit was a response to the threats these fields. of the gas companies about inadequate When the (softened) Sheshinski gas supplies in the short term as a re- recommendations were finally accept- sult of the increased taxation. 12 | Economy of the Occupation will be able to sign deals with custom- drilling for natural resources in the ers, and the Palestinian gas exports OPT (Occupied Palestinian Territo- will have to make do with the left- ry), but the map does indicate several overs, probably paying more for in- dry wells—meaning that the Israeli frastructure (laying longer pipes) and government authorized search-drills receiving lower prices for the gas. in occupied territory. Also, the map According to the map below demonstrates that two gas wells are (p. 14), from the Israeli Ministry of in operation on the border with the National Infrastructure, the state of Gaza Strip, and two oil wells are on Israel is aware of the sensitivity of the border with the West Bank. These

The Sheshinski Committee

The Committee for the Investiga- dations in January 2011. tion of Fiscal Policy Regarding Oil Its recommendations were as fol- and Gas Resources in Israel, known lows: as the “Sheshinski Committee,” was  Leaving the current royalties, set convened by the Israeli Ministry of in 1952 (at 12.5%), in place. Finance in April 2010, and was tasked  Cancelling the exhausting fee. with creating recommendations to re-  Implementation of a progressive form Israeli taxation of the extraction tax on oil and gas profits, starting only of energy resources. It was headed by after a profit of 50% has been accu- Professor Eitan Sheshinski, a profes- mulated. sor of economics at the Hebrew Uni-  The progressive tax will start at versity. The committee included five 20%, and will grow up to 50%, accord- other members. It published a first ing to a formula based on the ratio of draft of its recommendations in No- revenue to expenses. vember 2010, and its final recommen-  Search costs will be doubled for Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 13

drills are done right on the Green tries, but Israel has been taking unilat- Line, and although Israel can claim eral action and the Israeli government that the drilling point is within Israel’s expressed no consideration for the legitimate borders, the actual gas or Palestinians’ possible rights to natural oil reserves are unlikely to follow the resources in their land (Ministry of political demarcation of the land, and National Infrastructure, 2011). some of the product of these wells is likely from the OPT. Normally, such borderline wells are built with an agreement between neighboring coun-

purposes of the tax’s calculation. ommendations, for all the oil and gas  Financial costs will be recognized reservoirs. in the project’s costs, according to the  Investments completed by the LIBOR interest rate with a premium end of 2013 will enjoy 15% acceler- of +3%. ated depreciation.  Payments to third-party partici-  Reservoirs that have already been pants in the projects will be taxable as in operation before the committee was profits. established will pay up to the minimal  Taxation will apply to each oil tax level (20%) for the first year, and or gas reserve separately. Expenses or the result of the formula for calculat- revenues may not be shifted between ing the tax level will be halved. the reservoirs.  Reservoirs that will be devel-  Investments in developing the oil oped no later than January 1 , 2014 and gas projects will enjoy accelerated (but after the committee was estab- depreciation of 10%. lished) will enjoy double the normal  The recommendations will come tax exemption, and their profits will into effect from the day of the publi- only be taxable after their profits will cation (January 3, 2011) of the rec- reach 100%.

Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 15

Border Dispute

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he ﬁrst sign that politi- Minister of National Infrastructure, cal tensions were destined Uzi Landau, was to threaten Lebanon Tto plague the gas discovery with war. Without checking the valid- came just a few days after the gas ity of Lebanon’s claims, Landau stated discovery was announced on January that Israel “won’t hesitate to use force 18, 2009. Lebanon issued a statement to protect the maritime gas reserves” that some of the gas found by Israeli (Goldstein, 2010a). There is a disagreement between Israel Israel’s Minister of National Industries and Lebanon over where threatened Lebanon with war over the the border passes between the two states’ territorial natural gas territory. borders, and Israel impos- es its position with force companies belongs to Lebanon. Na- of arms. Landau, a minister from the bia Bery, chairman of Lebanon’s par- Israel Beiteinu party,* saw Lebanon’s liament, argued that the gas reserves statement as a political challenge are partially located in Lebanon’s ter- thrown against Israel, and a matter of ritorial waters. The response of Israel’s national pride. His statement was not

* Israel Beiteinu is an ultra-right party, which has focused its rhetoric on scapegoating Pales- tinian citizens of Israel, threatening them with deportation unless they demonstrate sufficient loyalty to Israel as a Jewish state. 16 | Economy of the Occupation only an attempt to intimidate Leba- Lebanon without expecting payment non, but also an assurance to the drill- in money, his comment demonstrates ing companies that their profits will that he seems himself as more than be backed by Israel’s military power. a businessman, but also as a states- However, as Israel’s relations with man who can offer incentives to Leba- Turkey have deteriorated recently— non to sign a peace treaty with Israel especially following the attack on the (Goldstein, 2010b). Mavi Marmara in May 2010, in which The UN has, so far, given conflict- nine Turkish activists were killed ing responses to the demand by Leba- (Booth, 2010)—Israeli companies are non (Bassam & Evans, 2011). hoping to export surplus natural gas to Greece. Greece, on its part, might refuse to sign an agreement until Is- rael reaches an understanding with Lebanon over the border (The Econo- mist, 2010). An interesting insight into how the interplay of political and economic interests is revealed through the natural gas issue comes from Tshuva’s response to Lebanon’s demands. Tshuva argued that all of the gas found by his company is inside Israel’s borders, but hinted that Lebanon might also have undiscovered natural gas reserves. He offered to “share his knowledge with Lebanon in exchange for real peace.” Although it is doubtful that Tshuva truly offers to provide services to Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 17

The Struggle for Royalties

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oon after the Israeli newspa- natural resources is much smaller than pers celebrated the high pro- in other countries (Goldstein, 2010c). Sjected value of the natural gas Further, while the government take in Argentina, Ireland, Russia, The gas companies prevented the the UK and the US was update of a 1952 law, which assured increased between 1998 that they would pay very low royalties. and 2007 by an average of 10.8%, the government take in Israel was decreased reserves, ironically depicting the Is- by 7% in the same period (Byte and raeli owners of the gas companies as Switch, 2010). equivalent to Arab “oil sheiks,” it was It was suggested by the social activ- discovered that Israel’s tax system is ists who later formed the Forum for extremely lenient by international Civil Action that Israel should imme- standards, and that the government diately raise the royalties to a more ac- take* in Israel for the extraction of ceptable level, so that the entire public

* “Government take” is a term that describes the combination of direct royalties and direct taxes applied to the extraction of resources, or in other words the percentage of value which remains with the government. Merely comparing royalties could create a misleading picture, because countries in which the company taxes are higher divide extraction profits differently than countries with similar rates of royalties but lower company taxes. 18 | Economy of the Occupation will be able to gain from the discovery ly raised against raising royalties up is of the gas fields. The companies who that the government should not be al- stand to pay these royalties, however, lowed to make retroactive changes to opposed these demands and argued laws and agreements that took place that they invested in the exploratory while the companies made their deci- drilling believing that the royalties sion to look for gas. The argument is would remain low (Sheffer and Kane, that the companies made an economic 2010). decision based on their cost-benefit The graph below demonstrates Is- analysis which was based on a certain rael’s government take (prior to the level of royalties, and invested money changes suggested by the Sheshin- and effort in searching for the gas with ski Committee) compared to other no guarantee that they will find any. countries. However, Israel created the law The argument that was immediate- governing royalties in 1952—a time

Graph : Total Government Take from Natural Reserves

International Comparison, 2007

Note: the figures include all taxes that would apply to the extraction of natural resources. In Israel the gas royalties themselves are only 12.5%, and the figure of 32% of government take quoted in the graph includes corporate taxation as well (Goldstein, 2010c; Byte and Switch, 2010). Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 19 when government-company relations influential families in Israel (Forbes, were resolved in negotiation—and it 2007), and which made a fortune was clear that the royalties outlined from Israel’s phosphates, through pur- in the law are merely a starting point chasing the Chemicals for Israel com- from which the government will go up pany from the government during the when the case becomes relevant. This 1990s* (Rom, 2010). interpretation leads to the conclusion For the past decade, Yitzhak Tshu- that the drilling companies would va, one of the biggest capitalists that have realized well in advance that they stands to gain from the gas discovery, will be expected to pay much higher has been lobbying to prevent the gov- royalties than the ones set by the 1952 ernment from updating the royalties law (Weiss, 2010b). Furthermore, ac- on the discovery of resources (Yachi- cording to Michael Malchior, a former movich, 2010). At the same time, cabinet minister, the gas companies companies investing in the Tamar gas received their licenses to search for field, including Tshuva himself, signed gas for free from the government, a contract with Israel’s Electricity and later sold some of the licenses Company stipulating that the agreed for money, indicating that they have natural gas price could be increased if already received gifts from the state the government will decide to increase (TheMarker, 2010). the taxation over the gas. This sug- In the past, other capitalists in Is- gests that the companies did expect an rael have made their fortunes by tak- increase in the royalties, and prepared ing advantage of Israel’s low taxation themselves for it (Bar-Eli, 2011d). It and the government’s tendency to as- is also noteworthy that since the tax sist capitalists. The most notable ex- only applies to gas profits, not produc- ample is the Ofer family, which has tion, the extra taxes cannot cause the become one of the most powerful and investors to actually lose money, only

* The Ofer brothers have a long history of business with the Israeli government, which has been the source of much of their wealth, through Israel Corp, Zim and other companies (Hever, 2008). 20 | Economy of the Occupation to reduce their profits. Thus, there is University, to head a committee to no economic justification to increase make the decision. The committee the price when the tax is increased was called “the Committee for the In- (Arlozorov, 2011e). vestigation of Fiscal Policy Regarding Nevertheless, the gas compa- Oil and Gas Resources in Israel,” or nies demanded a 40% increase in the “Sheshinski Committee” for short. the agreed-upon gas price. The gov- The committee was responsible for ernment responded by forbidding creating recommendations for updat- the (government owned) Electric- ing Israel’s taxation of oil and natural ity Company to increase the price. gas production. Meanwhile, Tshuva’s company Delek, The committee immediately came which already owns a power plant in under pressure from the companies that stand to profit from Arguments against raising the taxes the gas extraction, as well included biblical references and as from social groups who demand a fairer distribu- comparisons with Holocaust survivors. tion of wealth and by environmental groups. Among Ashkelon, has the right to start two the companies that lobbied the com- more and is trying to get a permit for mittee were the exploratory drilling a fourth power plant. This will give companies (mainly Delek and Noble Tshuva control over the supply chain Energy), Israel Corp and Chemicals from natural gas to electricity, some- for Israel (which also mine for natural thing that the Israeli Electricity Au- resources), Rafael and the Israel Aero- thority is trying to prevent (Bar-Eli, space Industries (weapon companies), 2011f ). and Teva (a pharmaceutical company, Israel’s Minister of Finance, Yu- Korin-Lieber, 2010). val Steinitz, chose not to make such Arguments were mounted to pre- a sensitive decision on his own. He vent the increase of the gas royalties, appointed Eitan Sheshinski, an eco- including the argument that the US nomics professor from the Hebrew has in the past protected its companies’ Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 21 advantage in foreign markets, that the of the Hebrew University Department gas companies are similar to released of Law was hired by the Delek compa- soldiers who are at risk of having their ny to write an opinion which supports benefits revoked after years of service, the company’s view (against raising arguments based on biblical referenc- the royalties) while Professor Barak es and the argument that raising the Medina, the current dean at the same royalties resembles hurting the rights department, volunteered to write his of Holocaust survivors (Sheffer and opinion, which argued that the state Kane, 2010). Later Moti Moral, one of does have a right to increase the royal- Israel’s most famous public relations ties (Levy-Weinreib & Barkat, 2010). experts, assembled a press conference The numerous arguments leveled to represent the “small investors” who against the Sheshinksi committee would lose some of their profits if the seem almost random, but in fact they taxes would be raised, among them a have a clear structure. At their heart Holocaust survivor (Zano, 2010c). is a weak and unconvincing economic At the same time, the compa- argument, that high royalties might be nies tried to use more rational and a strong disincentive for extracting the academic arguments to bolster their gas. But this weak argument is am- claims. plified by appealing to political argu- Three of the companies that own ments, invoking similar reasoning that the enterprise, Avner Oil Searches, is often used to justify Israel’s military Delek Drilling and Delek Energy, and demographic policies. submitted a position paper opposed Meanwhile, Eitan Sheshinski him- to raising the royalties which the state self received anonymous threats on his may collect from them. Their main life (Bassok, 2011c). Sheshinski com- argument was that the royalties may mented that although interest groups not be changed retroactively after the should have a right to express their gas was discovered, but may only be opinions freely, the campaign was dis- changed for future gas finds (Levy- proportionate and unprecedented, as Weinreib, 2010c). was the use of nationalistic arguments Professor Yoav Dotan, former dean (Wolfson, Bing, 2011). 22 | Economy of the Occupation

Moral arguments and physical (Gabizon, 2010). Another estimate of- threats were also accompanied by the fered that the refineries will reap US$ threat that the exploratory drilling com- 360-400 million from the natural gas panies will not develop the gas fields if (Gabizon, 2011). While this suggests their profits won’t be high enough. Be- that Idan Ofer has a clear economic cause Israel’s energy market depends interest to lower the taxation on the on natural gas, and because of the un- extraction of gas, his business sense certainty of gas shipments from Egypt may also tell him that Israel’s right- (see below, pp. 40ff.), this threat proved wing policies could prove much more eventually much more effective than the destructive than a high tax. all other arguments (Bar-Eli, 2011b). Unlike other interest groups in the One of the companies with a clear natural gas, Idan Ofer was not quick to economic interest in low natural-gas find comfort with the extreme right in Israel, seeing that oth- Several Israeli businessmen expressed er economic interests concern that Israel’s right-wing sentiments could be threatened by Israel’s hard-line will bolster the boycott against it. policies. He convened 80 Israeli business- prices is Israel Corp, which owns the men to discuss how Israel’s refusal to refineries in Haifa and several chemi- accept Palestinian statehood could lead cal plants. to widespread boycott against Israel. He Following the death of his father threatened that Israel could become a Sami Ofer, Idan Ofer stands to inher- pariah state “like South Africa” (Zarchia, it his father’s holdings in Israel Corp 2011g). Ofer’s position demonstrates (Hever, 2008). The refineries are ex- that Israeli capitalists are in a difficult pected to increase their profits by US$ spot—because the right wing politicians 130 million in 2011, and an addi- who are willing to protect their domes- tional annual profit of US$30 million tic economic interests are also increasing starting from 2012 from refining the the risks from global economic pressure natural gas extracted offshore of Haifa on the Israeli economy. Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 23

The Media Takes Sides

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wo prominent Israeli eco- of US officials in support of Noble nomic newspapers: Globes Energy in Israel’s consideration of in- Tand TheMarker have launch- creasing royalties is a good example ed a series of articles on the topic, of such corruption (Bar-Eli, 2010a). with Globes clearly favoring the gas The argument that officials from the companies, and TheMarker taking the US interfere with Israeli policy im- view that raising the royalties might plies a breach of Israel’s sovereignty, be acceptable. and brings the topic of royalties on TheMarker is a sister newspaper the gas to a wider political context. of the Ha’aretz newspaper. Both are Thus, Stiglitz has also appealed to owned by Amos Shocken, a media gi- Israeli national pride to make an ant in Israel who sometimes promotes argument about economic justice, Zionist and liberal ideas. though his argument supported the Globes magazine is owned by much social, rather than the corporate, argu- bigger media giant Eliezer Fishman, ment. who also has extensive holdings in Globes retaliated with a story about other media venues, as well as real es- Danny Gillerman, former Israeli am- tate and textiles. bassador to the US. Now a consultant TheMarker interviewed famous for gas companies, Gillerman brought economist Joseph Stiglitz, who argued out the “big guns” by insinuating that that corruption is rampant in the en- Israel’s scramble for international le- ergy market, and that the interference gitimacy is jeopardized by the risk of 24 | Economy of the Occupation raising the royalties. Gillerman, who the International Court of Justice in has been interviewed by the Israeli The Hague if the royalties would be media regarding Israel’s deteriorating increased (Ben-David, 2010). international image, argued that Isra- Gillerman, through Globes, has at- el’s image could be severely hurt by a tempted to win public support for the retroactive move to raise the royalties. corporate agenda for lower taxes by The Globes newspaper tried to gloss appealing to the Israeli public fear of over Gillerman’s connection with the international criticism. Needless to say, international criti- Newspapers took sides in the struggle, cism of Israel does not dedicating hundreds of pages to arguments focus on Israel’s mis- treatment of corporate for or against the tax increase. entities, but on the ag- gression towards Pal- gas companies and emphasize the fact estinians and other minorities, a fact that he wrote his opinion voluntarily which Gillerman chose to ignore. and without pay, while mentioning in After the Sheshinski Committee passing that Gillerman does receive published its recommendations, The- payment from the gas companies for Marker published celebratory articles, consultancy on “different matters” phrasing the titles to create a false (Levy-Weinreib, 2010b). Such words picture as if the government take will from a public figure like Gillerman be higher than it was really said to be. inevitably make a connection between While the Sheshinski Committee rec- the real reason for international criti- ommended a gradual increase in the cism of Israel (cruelty to Palestinians) government take up to a maximum of and the issue of royalties on the ex- 60%, TheMarker came up with the ti- traction of natural resources (“cruel- tle: “Sheshinski Decided in the Public ty” to gas companies). Professor Eyal Interest: 66% of the Gas Income Will Benevenisti has even submitted an Go to the State, ‘Natural Resources opinion to the Sheshinski Committee are the People’s Asset’” (Bar-Eli & that Noble Energy could sue Israel in Zano, 2010). Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 25

A less prominent economic news- and business interests, and hinted paper, Kalkalist, owned by the Moz- that corruption could be swaying the es family (with extensive holdings Knesset’s decisions regarding the gas in Israeli media, Eilam, 2011), also taxation question (Khoval, 2010; Shef- published several reports exposing fer and Kane, 2010; Avital, 2011; the links between Israeli politicians Izisko, 2011).

Yitzhak Tshuva 26 | Economy of the Occupation

Taxation is Treason?

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he political undertones of Sheshinski Committee was popu- the disagreement reached lated by leftists and was inﬂuenced Teven higher levels, once ex- by outside “leftist” forces (such as the treme Israeli right-wing organizations New Israel Fund).* It alleged that the launched a campaign against raising “leftist” agenda was to raise the gas the gas royalties. royalties to scare oﬀ investors, thus The campaign, which is estimated cementing Israel’s dependence on to have cost millions of NIS, included gas imported from Arab countries. It an animated video and large newspa- should be mentioned that Egypt is the per advertisements. Signed by an or- only Arab country from which Israel ganization called “The Forum for the imports natural gas (Zarchia & Bar- Land of Israel,” a small student group Eli, 2010). from Bar-Illan University, the cam- A television show by Micky Rozen- paign refused to declare the source of thal attempted to investigate who is the funding for the campaign. behind the campaign, and whether The campaign suggested that the the energy companies themselves have

* The New Israel Fund is a social fund which invests in projects related to democracy, freedom, justice and equality in Israel. However, it should be noted that the fund does not deal with the occupation of the Palestinian territories, with Israel’s foreign relations issues, and it deﬁnes Israel as a “democracy.” As such, it is a fund for promoting internal Israeli reform and for alleviat- ing social injustice in Israel (NIF, 2010). Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 27

tried to harness anti-Arab sentiments sided with the gas-companies, and in Israel to protect their capitalist only 10.9% believed that the commit- gains, but failed to locate the source of tee’s recommendations hurt the gas the funds (Rozenthal, 2010). companies (Bassok, 2011a). The fact that Israel imports natural One notable exception is the Israel gas from Egypt, a state that has signed Beiteinu party, one of Israel’s most a peace treaty with Israel and which is extreme-right parties. Israel Beiteinu adopted the rhetoric of The Forum for the Land of Israel reliance on low gas royal- suggested that raising the taxes is akin ties as a path for “energy independence” uncritically to promoting “Arab gas.” (Michaeli, 2010). In the government vote on the Israel’s ally in imposing the siege on Sheshinski Committee recommenda- the Gaza Strip, did not matter much tion, the ﬁve ministers from Israeli Be- to the campaign writers. Also, the idea iteinu party were the only opposition that investors might decide not to ex- (Bassok & Zarchia, 2011b). tract the gas if Israel will increase the Landau, Israel’s Minister of Na- royalties to a more acceptable level tional Infrastructure (Likud) threat- lacks any empirical basis, and has ened that Israel’s electricity supply been refuted by experts, such as Pro- could be in danger if taxation would fessor Danny Rabinovitz (Rabinovitz, increase (Basok and Zarchia, 2010). 2010). Another organization was quickly It should be noted that the cam- set up to lobby the government to paign failed to catch much public at- keep the government take as low as tention, and few people took its argu- possible, The Gas Finders Association ments seriously. A survey conducted (Zano, 2010a). in January 2011 showed that a large These organizations tried to pro- proportion of the public (48.3%) sup- mote the idea that lower taxes on ported the Sheshinski conclusions, the exploratory drilling companies is 14.3% believed that the committee in the best interest of the citizens of 28 | Economy of the Occupation

Israel, and is therefore the patriotic The controversy surrounding gas thing to do, although a US company royalties provided a rare opportunity controls 38.64% of the natural gas to highlight the divisions of the politi- finds (Bar-Eli, 2010e). cal map in Israel. The Israeli Zionist The Forum for Civil Action, an left and parts of the non-Zionist left organization formed to demand an in- have organized a demand for higher royalties, comparable with developed countries The Israel Beiteinu party unified in around the world. The blind support for the capital owners. right wing and the extreme-right generally took the opposing view, that crease in the royalties paid by the gas the property of the capitalists must companies, stood in the other corner be defended. Indeed, even within the of the ring. The Forum for Civil Ac- Knesset Finance Committee support tion created petitions, lectures and or objection to raising royalties was citizens meetings and argued that the largely based on the left/right distinc- profits from the gas extractions must tion (Zarchia, 2011b). be divided 80% to the public and 20% This map reveals subtle undertones for the companies (TheMarkerOn- of Israel’s political sphere. At face val- line, 2010a). This argument actually ue, there seems to be no reason for does not object to enriching the al- political groups that support Jewish ready wealthy gas company owners supremacy in Israel, the continuation who profit from natural resources, of the occupation, and the disempow- but merely tries to divide the profits erment of Palestinian citizens in Israel, differently. Their call for an 80-20 di- to help protect the rights of capitalists. vision is arbitrary, and not based on However, the surprising alliance be- any calculation or principle, except for tween the extreme right and corporate outrage that the gas companies will interests reveals a great deal about the keep 68% of the value of the gas to hidden interests behind Israeli politi- themselves. cians’ racist and populist statements. Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 29

Politics and Capital



he Knesset’s Finance Com- in the Equital company, which owns mittee’s first debate on the the Isramco exploratory drilling com- Trecommendations of the pany. For example, Ronen Peretz, Yo m Sheshinski Committee ended in a re- Leyom’s CEO is also a director in jection of the recommendations. This Equital and in Nafta, two companies decision by the Knesset’s Finance that own Isramco. Yom Leyom suf- Committee didn’t mean that the rec- fered from a liquidity crisis in 2003 ommendations would be shelved, but and was bailed out by an anonymous it did undermine their legitimacy and investor, who funneled funds through the chance of them being endorsed by offshore companies registered in Pan- the government. ama. Israel’s state comptroller warned The Knesset committee’s vote was that Yom Leyom is a Shas propaganda decided by Knesset Member Nissim tool, which was essential to the party’s Ze’ev from the ultra-orthodox Jewish- campaign in recent elections. Shas’s religious Shas party. Although the chairman Eli Yishai, who is currently vast majority of the party’s voters are Israel’s Minister of the Interior, used lower-class Israelis, Ze’ev voted for Equital’s fax machine to call on all the corporate interest. Shortly after- Shas members to subscribe to Yo m wards the Kalkalist newspaper found Leyom (Izisko, 2011), but after the out that many senior position-hold- newspaper’s exposé, the Knesset Eco- ers in Shas’s newspaper Yom Leyom nomic Committee convened again and (“Day to Day”) also occupy positions reversed its position, voting in favor 30 | Economy of the Occupation of the Sheshinski recommendations Tirosh’s payroll (Avital, 2011). (Zarchia, 2011e). Another example is MK Haim It should be added that the Knes- Katz (Likud), who is a friend of Kobi set Committee was debating the final Meimon (owner of Isramco), and Sheshinski Committee recommenda- himself an owner of Isramco stocks. tions (see box in pp. 12-13) after they Katz informed the Knesset’s Ethics were already softened following cor- Committee that he will not partici- porate pressure. pate in the discussion regarding the MK Ronit Tirosh (Kadima) offers Sheshinski recommendations because another example of business trick- of his personal stake in the matter, but ling into the Knesset. She attacked at the same time he proposed and suc- Sheshinski and demanded that no cessfully passed a law which was sug- change in the tax policy apply to the gested and promoted by Moti Ben- Ari, a senior manager Several Knesset members had extensive at Israemco, protecting links to the exploratory drilling the rights of bond own- companies. ers (Israemco itself owns more than NIS 200 gas that has already been found. Tiro- million in bonds, some of which are sh also hired Moshe Klughaft as her in a state of uncertainty). Katz in- parliamentary aid. Later, when he was vited Ben-Ari to Knesset discussions working as her outside spokesman, without explaining Ben-Ari’s connec- Klughaft was also the spokesman for tion with him (Shporer, 2011). MK the Forum for Eretz Israel, the organi- Carmel Shama (Likud) accused Katz zation which launched the campaign of threatening to withdraw support against Sheshinski arguing that the from Likud members during the party committee’s recommendations would primaries if they expressed support give a boost to Egyptian gas. Thus, he for the Sheshinski recommendations received money to promote the inter- (TheMarker, 2011). ests of the exploratory drilling com- In June 2011, the Tshuva-owned panies, even though he was on MK Delek Group announced that it had Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 31 hired Roni Hizkyahu, who had previ- ployed by Tshuva to deal with energy- ously supervised a number of Israeli related matters (Rochwerger, 2011). banks. In the past, Hizkyahu had sig- The move sent a powerful message to nificant authority over Tshuva’s busi- government officials: if they deal with ness with the banks, but there is no corporations “properly” they could be evidence that he has used his author- generously rewarded with cushy jobs ity unprofessionally. He will be em- (Peretz, 2011b).

Eitan Sheshinski 32 | Economy of the Occupation

The Sheshinski Committee



he Ministry of Finance made not be increased, citing “security con- the Committee to Examine cerns.” Many of the attendants were TOil and Gas Resource Poli- on the gas companies’ payroll—and cy in Israel, commonly known as the there were fifteen lobbyists present “Sheshinski Committee,” responsible for the seventeen Knesset members who attended. The New The Sheshinski Committee was Israel Fund was forbid- under attack from the outset. den from sending representatives to the discussion (although the for creating recommendations to the NIF was attacked in the discussion), government as to the preferred taxa- but Yitzhak Tshuva himself attended, tion approach for newly found natural and was greeted warmly by Knesset gas reserves. members who argued that the gas ex- Right from the start, the Sheshin- traction was being delayed by “hostile ski Committee was pressured to make elements from within the state.” Only a specific decision. after three hours of discussion was The Knesset’s Economic Commit- a non-Knesset member allowed to tee held a special session about the gas make an argument for increasing the royalties on October 5, 2010. Com- royalties (Saporta, 2010; Zarchia & mittee chairman Ofir Akunis (Likud) Bar-Eli, 2010). held the position that royalties must The brute display of corporate Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 33 power in the Knesset committee con- if it was not exploiting non-renewable vinced MK Moshe Gafni to bar lob- resources (TheMarkerOnline, 2010b). byists from attending the meeting of The committee also stated that the the Knesset Finance Committee in “retroactive” argument used by the gas January 16, 2011 (Zarchia, 2011c). companies is irrelevant, because the At the last moment, however, Gafni law from 1952 was legislated under a changed his mind and lobbyists came different corporate tax system, which to the meeting (Zarchia, 2011d). has been relaxed dramatically over the Yuval Steinitz, Israel’s Minister of past decades. Finance, supported the Sheshinski Additionally, the government take Committee, denouncing the personal will be increased with a special oil and attacks against Sheshinski (Steinitz, gas tax, which will only apply after the 2010). But, as the brunt of the pres- companies accumulate a 50% profit sure fell on the Sheshinski Commit- on their initial investment (Ibid). tee, it appears that by forming the The conclusion of the committee committee, Steinitz successfully de- was that the oil and gas tax should flected the criticism that would have be progressive, so that eventually, the been pointed at him. government take will reach a maxi- On November 10, 2010, the com- mum of 70%, and only after the inves- mittee gave its preliminary conclu- tors received their 50% profit (Bar-Eli sions. The committee found that, & Zano, 2010). under the government’s current taxa- This announcement caused a tion system, the companies were ex- plummet in the stock value of the gas empt from exhaustion tax. In most companies—which lost seven percent countries companies are expected to in one day—dragging down the entire compensate the state for exhaust- Israeli stock exchange (Ozri, 2010). ing publicly-owned natural resources, Nevertheless, a closer look at the in addition to paying normal taxes Sheshinski recommendations shows on their profits. Without this tax in that the taxation levied on the ex- place, a similar-sized company would ploratory drilling companies is not pay the same taxes on its profits, even particularly high. The committee sug- 34 | Economy of the Occupation gested that the companies be exempt them to deduct the payments from from taxes until their profits reach the taxes they would normally pay on 50% (and sometimes 100%) of the their profits. Additional drilling will initial investment, a benefit which grant the companies immediate de- does not exist in other sectors. Fur- ductions on royalties due. ther, the companies enjoy an artificial The rate of depreciation on the inflation of their search costs, so that drilling investments hasn’t been de- money invested in searching for oil termined, allowing the companies to or gas is considered 50% higher than keep demanding better tax conditions (profitable companies usually The preliminary recommendations of the prefer a rapid Sheshinski Committee assured the investors a rate of depre- return of 50% on their investment before any ciation which taxes would apply to them. allows them to pay lower taxes). This means that what the companies actually spent the companies will be allowed to ex- (which translates into an additional ploit much of the gas reserves without tax break). All investments in extrac- paying nearly any taxes, and it would tion of oil or gas will also enjoy an take between 8 to 15 years until the accelerated depreciation—meaning government will begin to collect roy- that the companies will be allowed alties on the various fields. Even then to argue that their investments in ex- the royalties will be low compared tracting the oil or gas lose their value with many countries in the world after 6-10 years, and write them off (Bar-Eli, 2010b). as “expenditure” (thus paying less tax) The rationale of the Sheshinski even if the actual equipment will last Committee was that the high-risk infor much longer. Further, gas royalties volved in oil and gas-searches should would be counted as an additional ex- ensure high profits for investors if penditure for the companies, allowing they find commercial quantities of Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 35

Graph : Exploratory drilling Companies Value

Millions of NIS

Note: this graph shows the total market value of the four major exploratory drilling companies between May 1, 2010 and May 30, 2011. Based on information from the Tel-Aviv Stock Ex- change website: http://www.tase.co.il/tase/homepage.htm. oil or gas. Regardless of how efficient committee (such as an uplift of the the extraction process is and regard- exploration costs and accelerated de- less of the fluctuations in gas prices, preciation), make the expected profits government taxation will only take ef- of the companies even higher (Blum- fect after the companies accumulate kin, 2010). sufficient profits—which were set at An Israeli environmental organiza- a 50% return on the investment. This tion, Adam Teva Vedin, published its profit ratio is already extremely high, opinion that the Sheshinski Commit- but further benefits offered by the tee ruled in favor of the gas companies 36 | Economy of the Occupation

(Adam Teva Vedin, 2010). stock to the public before gas had Despite these generous recommen- been discovered to invite the public to dations, the exploratory drilling com- share the risk of failed drillings. But panies protested and kept demanding when the drillings proved success- further concessions (Bar-Eli, 2010c). ful, the gas companies promoted the Some companies have been quoted as impression that government taxation threatening Steinitz that he will lose would ruin their profits, thus convinc- his job if they lose gas deals (The- ing stockowners from the general pub- Marker Online, 2010c). lic to back down and sell their stocks The above graph (p. 35) demon- (Gorodisher, 2011). After the The arguments that the Sheshinski Committee’s committee published its first recommendations levy excessive tax helped the batch of rec- owners of the exploratory drilling companies to ommendations, buy their own stocks cheaply. Landau publi- cally supported the gas compa- strates that the gas companies’ value nies. Shortly afterwards, two repre- skyrocketed following the discovery sentatives of the Ministry of National of the natural gas and then began a Infrastructure in the committee, who slow decline when the campaign to have supported the preliminary find- increase the royalties started to gain ings, changed their opinions and traction. The companies argued that threatened to pull out of the commit- the Sheshinski Committee’s unfair tee (Bar-Eli, 2010d). recommendations drove stock prices Deutsche Bank financed Isram- down and made it easier for seasoned co’s share in the Tamar field, which businesspeople to buy more of their amounted to 28.75% of the field. It company’s exploratory drilling stocks responded to the committee’s recom- on the cheap. mendations by threatening to with- The gas companies issued their draw its funding of Isramco. Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 37

This argument intimidated the from the project (Portugali, 2010b). Sheshinski Committee into softening In fact, Bank Leumi has already tried their recommendations by suggest- to get a piece of the financing of the ing a lower tax-rate (Bar-Eli, 2010f ), Tamar drill, alongside Deutsche Bank, widening the tax brackets, and reduc- HSCB and Barclays, but, so far, have ing the government take to 55%-60% not been able to convince the compa- compared to the original suggestion nies to take loans from them (Barkat of 65%-70% (Bar-Eli, 2011a), thus & Stein, 2010). increasing the return on the invest- The committee’s final recom- ment from 50% to 100%. These mendations included implementing a profit-based tax on oil and gas extraction, Pressure on the Sheshinski Committee but also included a se- “softened” the recommendations, saving ries of loopholes and the companies NIS 30 billion. tax-breaks to allow the investors a high profit on their investment, changes would increase the profits such as cancelling the exhaustion tax, of the exploratory drilling companies inflating what can count as explora- by an estimated NIS 9 billion (Bar- tion costs, accelerated depreciation Eli, 2011b). The committee did not of investments in equipment, and a explain why it decided to change its gradual implementation of the taxa- original recommendations (TheMark- tion which will allow investors a grace er Online, 2011b). period in which they will pay reduced Yet bankers and financial experts taxes (Sheshinski, 2011). found no reason to believe that ex- Even after the Sheshinski Com- ploratory drilling companies should mittee softened its recommendations have difficulties in raising money to considerably and caved to pressure finance the gas development, since the from exploratory drilling companies, required investment in capital is esti- the companies attacked the commit- mated at 10% of the expected income tee, accusing it of damaging Israel’s 38 | Economy of the Occupation energy market, enabling Egyptian gas 23.6 million worth of his own gas to take over the Israeli market, and companies, suggesting that he did not blaming it for retroactively changing expect the recommendations to make the tax conditions on previous gas the companies unprofitable. While reserves (Zano & Zarchia, 2011). the rhetoric used by the exploratory Tshuva had a series of meetings with drilling companies scared some of Israel’s ministers; Noble Energy en- the investors into believing that the gaged the Gilad lobbying agency; and taxes are truly too high, thus driving Ratio hired the Tikshoret Plus lobby- down the stock value, Tshuva assessed ing agency. Threeother PR agencies that the companies are still likely to represented the exploratory drilling reap high profits, and he bought the companies (Zarchia, 2011a). All the stocks himself, thus benefiting directly companies also sent representatives from the scare campaign which he led who spoke with Prime Minister Ne- (Zano, 2011a; Zano, 2011d). tanyahu (Bar-Eli & Bassok, 2011). Netanyahu gave another boost On the other hand, the Forum for to exploratory drilling companies by Civil Action, members of Knesset, promising that the state will fund and the Adam Teva Vedin organiza- the costs of security for the gas fields tion all criticized the committee for and drilling platforms (Peretz, 2011a) caving in to the demands of the capi- This proposal was mitigated by Fi- tal owners, and changing their origi- nance Minister Steinitz, who offered nal recommendations even though no that the state will fund up to 50% of new information was revealed (Zano the security costs (Bassok, 2011b). & Zarchia, 2011). Aside from a few Right before the recommendations scattered demonstrations (TheMarker were sent to the Knesset for the fi- Online, 2011a), the softened commit- nal vote (turning them into law), the tee’s recommendations passed with Knesset members added 14 changes very little protest in the Israeli public. softening the decisions further, and Shortly after the publication of further reducing the taxes of the gas Sheshinski’s softened recommenda- companies. These changes were inten- tions, Yitzhak Tshuva purchased NIS sifications of the reductions already Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 39 proposed in the second version of the exploratory drilling companies them- Sheshinski recommendations, and selves. The minister argued that the are estimated to save the gas compa- law would appropriate responsibili- ties from the Ministry Last-minute changes to the Sheshinski of National Infrastruc- law allowed the Ministry of National ture to the Ministry of Infrastructure to withhold information Finance. But cancelling the clause creates a gap- from the tax authorities. ing loophole, which makes tax fraud much nies an additional amount of NIS 30 easier for the companies (Zarchia & billion. Another last-minute change Bar-Eli, 2011). to the law also included limiting the Also, Isramco investors appealed to maximum wage in the gas companies the High Court, demanding to cancel to 50 times the minimum wage (Zar- the Sheshinski law (Rot, 2011). At chia, Ezran & Bar-Eli, 2011). the time of writing, the High Court Just one day before the law was had not yet given its decision. submitted for the final vote, National Infrastructure Minister Landau demanded one final last-minute change, which the Knesset Finance Commit- tee approved after a hasty discussion. The committee cancelled a clause that forces the Ministry of National Infra- structure to provide data about the quantities from the drills to the tax authorities to help with tax calcula- tions. Without this clause, the minister may withhold information from the tax authorities, forcing them to rely solely on the reports given by the 40 | Economy of the Occupation

Egyptian Gas



rom the Israeli perspective, one rael such a great deal? It’s yet another of the biggest benefits of the indication of the support Mubarak’s FIsraeli-Egyptian peace treaty regime gave to US and Israeli inter- is trade agreements, namely those ests in the Middle East. In addition revolving around natural gas and oil to sending Egyptian soldiers to deploy along the Gaza Mubarak’s Egypt subsidized Israel’s Border in accordance natural gas, saving the Israeli market to Israel’s wishes (USA Today, 2005; Sharp, approximately US$ 10 billion. 2008)—soldiers who opened fire at fleeing supplies. Natural gas has been sup- Palestinians during the Israeli inva- plied to Israel from Egypt at very low sion of “Cast Lead” (Ha’aretz Services prices—approximately half the gas & News Agencies, 2008)—Egypt also prices paid in Europe—an effective gave Israel an economic subsidy by subsidy that saved the Israeli energy selling the gas under the market price. market billions of dollars. Merav Ar- An odd turn of events considering lozorov from TheMarker estimated that Israel’s per-capita gross national that it saved the Israeli market US$ income is approximately fourteen 10 billion (Arlozorov, 2011b; Arlozo- times Egypt’s. rov, 2011c). The issue of the Egyptian-Israeli Why did Egypt agree to give Is- gas deal surfaced in the early stages of Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 41 the revolt against Mubarak’s regime. tion. Still, the tax break demonstrates The January 25th Coalition demanded Israel’s pro-corporate attitude, which that the flow of gas to Israel come to goes more or less unchallenged in the an end (Ha’aretz, 2011). public debate (Baum, 2011). On February 5, 2011, on April One of the owners of EMG, Hus- 27, and again on July 4, the pipe car- sein Salem, who the Egyptians accuse rying gas from Egypt to Israel was of corruption and the embezzlement sabotaged. In March, Egypt’s new pe- of public funds, was arrested in Spain troleum minister Abdullah Ghorab by Interpol (Ahram Online, 2011). criticized the low gas prices to Israel, The Spanish police found evidence Jordan, and six European countries, that Salem was trying to smuggle and called for amending the deal and large amounts of money into Spain— demanding a fair price. Gas deliver- including, perhaps, profits from sell- ies to Israel have not been regular ing natural gas to Israel (Agencies, and predictable ever since (Agencies, 2011b). 2011a; Reuters, 2011; World Tri- It is not surprising that the gas bune, 2011). deal with Israel was a point of protest The gas is exported from Egypt by during the Egyptian revolution. The EMG, a company whose value is esti- low price Israel pays for Egyptian gas mated at US$ 18.3 billion. Although was cited by Egyptians as one indica- in Israel the company is depicted as tor of corruption in Mubarak’s regime “Egyptian,” 25% of it is owned by Is- (Shechter, 2011). raeli investors (Globes Correspondent, Sheshinski said that Israel’s ability 2011). EMG has enjoyed a tax-break to purchase natural gas from Egypt from the Israeli government since prevents the gas companies from hav- 2004—a tax break that was kept from ing a monopoly (Zano, 2010b). the public until 2005. EMG is taxed After natural gas was discovered mainly in Egypt, and would only have in Tamar and Leviathan, off Haifa’s to pay taxes to Israel for transporta- shore, EMG entered frantic negotiation and distribution activities inside tions with Israel Corp, which owns the the country, a small part of its opera- refineries in Haifa, to sign a long-term 42 | Economy of the Occupation supply agreement with Egypt. EMG as another means to seek lower royal- offered a very low price, but demanded ties. MK Zion Finian from the Knes- a long-term contract in order to safe- set Finance Committee responded guard from competition with the new to the revolution in Egypt by calling Israeli gas. Israel Corp agreed to sign, to exempt the Tamar field from the in part to prevent Israeli gas provid- Sheshinski recommendations, in or- ers from creating a monopoly (Peretz, der to give gas companies an incentive to develop the gas soon- The exploratory drilling companies er (Zarchia, 2011f ). profited from the revolution in Egypt and Indeed, the Egyptian revolution caused an used it to demand further concessions. immediate increase in the stock value of the 2010). According to the agreement, exploratory drilling companies, and EMG will provide between 53% and attracted recommendations from ana- 60% of the projected demand for lysts, because the protest was seen as natural gas between 2013 and 2015. weakening the competitive power of Landau commented that it is “a shame the Egyptian gas (Zano, 2011b). that there is some committee with a professor at its head, and during its time an agreement was signed with a non-Israeli provider, causing damage of 1.5 billion NIS to the Israeli market” (Bar-Eli, 2011c). Compared to Israel’s very low government take, Egypt collects 75% of the gas revenue as tax—but the low price on the gas means low income for the Egyptian public (Zano, 2010d). The Egyptian gas was actually used by the exploratory drilling companies Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 43

The Economic Signiﬁcance of the Gas Find



espite the hype, the actual and ammunition for Israeli soldiers, value of the gas find is de- which are commonly used against Pal- Dbatable. From the point of estinians and other neighbors of Is- view of added income to the Israeli rael. Natural gas sales are expected to government, the high-end estimates provide 4.8 billion US dollars to the are two to three billion NIS annu- Israeli army, equivalent to about 1.5 ally (Shtrasler, 2010). The estimated years of US military support (ICBS, profit of the gas companies was to be 2010). NIS 233 billion before the Sheshinski As gas has been discovered in recommendations, or NIS 125 billion commercial quantities throughout under the new tax system. The differ- the eastern Mediterranean Sea, prices ence—NIS 108 billion or approxi- have become fiercely competitive. Prof- mately US$ 31 billion—will reach the its come from controlling the pipes Israeli government over the course of and refineries, limiting the potential a few decades (Arlozorov, 2011a). of the Israeli companies to increase As Israel spends approximately their profits (Gilai, 2010a). However, 15.5% of its budget on the military— Germany’s decision to close its nuclear not counting its expenditure on po- reactors in response to the nuclear di- lice, prisons and other forms of secu- saster in Japan has increased the pro- rity—one cannot ignore the fact that jected demand for natural gas. The any financial boost to the Israeli gov- expected jump in natural gas prices ernment could mean more weapons caused an immediate 4%-8% increase 44 | Economy of the Occupation in the value of the exploratory drilling prom, the Russian natural gas mega- companies (Ezran, 2011). corporation which has near-monopo- New technologies for drilling and listic status in east and central Europe extracting gas have resulted in more (Gilai, 2010b). discoveries of gas fields around the The gas companies working in Is- world. Foremost among them is the rael will also have to compete with new ability to extract cheap gas from Qatar, which is already exporting gas shale gas (Arlozorov, 2011d). The gas from a field that has approximately 56 times the amount The economic prosperity initially promised of gas in the Levia- by the natural gas find is unlikely in light of than field offshore of Haifa. Qatar na- fierce regional competition. tionalized the gas from the company price peaked at 12 US dollars for one Royal Dutch and used the profits million BTU* in 2008, but dropped to improve its public services (Tsur, to 4 US dollars for a million BTU by 2011). the end of 2010. In fact, the rate of gas In March, the Leviathan companies finds is so fast that the cost of energy announced that they have discovered produced from natural gas compared the potential for more gas reserves un- to the cost of energy produced from der the Leviathan field, possibly dou- oil has dropped steadily in the past bling the amount in that field. This three years (Tzur, 2011). could extend the lifespan of the field Because Israel has poor relations significantly, but is not expected to with most of its neighbors, the only change the interim profitability of the viable export option for the gas is field (Zano, 2011c). Greece. But Israeli gas companies However, in light of the Israeli would have to compete with Gas- Electricity Authority’s June 2011 an-

* BTU: British Thermal Unit, is the amount of energy required to heat one pound of water by one Fahrenheit degree. Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 45 nouncement that it plans to increase Ltd. (ICL) company, which mines electricity prices in Israel by 20%, potash in the Dead Sea without pay- the importance of natural gas to Is- ing royalties to the state. This discov- rael must be re-examined. The main ery created a media uproar, which led cause for the sharp increase in elec- to a reconsideration of the agreements tricity prices is the sudden shortage between the state and ICL (Khoval, of cheap gas from Egypt, and no al- 2010). ternative sources for natural gas are The ecological ramifications of the available. Such an increase in electric- gas find are still unclear. While natu- ity prices affects every aspect of the ral gas is considered a cleaner form of Israeli economy, industrial production energy than oil and coal, the drilling itself puts the Israel may have to compensate the Palestinians maritime en- vironment at for encroaching on the gas market while keeping risk. The Knes- the Gaza fields undeveloped. set, however, decided not to discuss the costs, and, of course, the cost of liv- environmental risks involved in the ing—it is nothing short than a blow extraction of gas. The World Wild- to the Israeli economy as a whole. The life Fund (WWF) issued a warning natural gas from the recent discoveries that the gas drills ignore international will probably not be available for use agreements to preserve wildlife, and before 2013, but even then it is not that delicate eco-systems would be likely to make electricity cheaper, but put at risk as a result of the drilling merely to slow down the rate of rising (Rinat, 2011). prices (Bar-Eli, 2011g). One positive effect of the public struggle over the gas royalties is that it led to the exposure of the vast tax relief enjoyed by the Israel Chemicals 46 | Economy of the Occupation

Conclusion



fter a heated debate, the Is- compete with Egyptian gas, thus offer- raeli government adopted ing the consumer lower-cost energy. Athe softened Sheshinski rec- But they are now unlikely to keep the ommendations. Prime Minister Ne- promise, in the absence of competition tanyahu promised to use the income from Egypt. Israel can hope for very lit- from the gas royalties for education tle from the natural gas beyond meet- and security. He added that he ex- ing its own energy demands. pects “Israel’s enemies” to try to harm Also, the natural gas development the gas fields, and said that Israel’s has a negative impact on the Pales- security forces will be charged with tinians' potential for developing their guarding the fields (Bassok & Zar- natural gas reserves offshore of the chia, 2011a). Gaza Strip. Because the Palestinian The capital owners made signifi- gas was discovered before the Israeli cant achievements through intimida- gas, but is not scheduled to be devel- tion, threats, and lobbying, worth bil- oped before the Israeli gas, a Palestin- lions of dollars. ian state—if one should be created— Furthermore, the Egyptian revolu- will have a strong case for demanding tion and the disruption in Egyptian gas compensation from Israel for prevent- imports have made it far less likely that ing them from developing their natu- Israel would be able to export its natural resources, and for using force to ral gas reserves. Israeli capital owners tap the natural gas market before the promised that they would be able to Palestinians could enter it. Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find | 47

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 Zarchia, Zvi; Ezran, Eran; Bar- Eli, Avi, 2011, “The Gas Com- panies Applied Pressure—and the KMs Added 14 Changes to About the AIC

The Alternative Information Center (AIC) is an internationally oriented, progressive, joint Palestinian-Israeli activist organization. It is engaged in dissemination of information, political advocacy, grassroots activ- ism, and critical analysis of Palestinian and Israeli societies as well as the Palestinian- Israeli conflict. The AIC strives to promote full individ- ual and collective social, economic, political and gender equality, freedom, and democracy and a rejection of the philosophy (ideol- ogy and praxis) of separation. The most urgent regional task is to find a just solution to the century-old colonial conflict in Palestine and confront the ongo- ing Israeli occupation-regime within its international framework. The AIC method of action develops from the awareness that local struggle must be practically and analyti- cally situated within the framework of the global justice struggle. The internal AIC structure and working relationship aims to reflect the above mentioned values.

Shir Hever Economy of the Occupation

The Economy of the Occupation series, published by the Alternative Information Center, offers a new approach to the economic situation in the Occupied Palestinian Territories (OPT) and Israel. The series provides accessible and unique analyses of the socioeconomic interests behind the Israeli occupation of Palestine. Most Palestinians and Israelis possess a limited understanding of their own socioeconomic situation and its deep connection to the conflict. On the rare occasion that the local media addresses the issue, it usually does so in a cursory manner, failing to make the necessary links between society, politics, and the economy in the OPT and Israel—leaving Palestin- ians and Israelis uninformed and disempowered. For this reason, it is crucial to offer alternative readings of the economic reality created by the occupation. Flammable Politics: Political-Economic Implications of Israel’s Natural Gas Find shows how the seemingly innocuous discovery of a natural gas reserve revealed deep divides in Israeli society and contradictions within the Israeli government. The heated debate that surrounded the natural gas also mirrored Israel’s existential anxiety and the fear that the state will be held accountable for its actions.

Publications of the AIC are also available at: www.alternativenews.org