State seen collecting NIS 250b from Sheshinski gas tax

Eli Tsipori

Revenue from the natural gas fields will not make a major difference in Israel's budget in the coming years, but it can be used to reduce budget deficits.

1. When Prime Minister Benjamin Netanyahu said a while ago that the natural gas plan would put hundreds of billions of shekels into the economy, his statement was greeted with contempt and ridicule. In this article, I want to show that he was not far from the truth. The calculations I use are obviously only forecasts, but they are grounded in the financial statements of the gas partnerships. The numbers are based on logical assumptions about the content of the gas reservoirs, the volume of future sales from them, etc.

In the end, of course, reality will be the best proof of the forecasts. Since the lifespan of the gas reservoirs is 20-30 years, the final calculations lie far in the future, but it will certainly be possible to state before then, say in 10 years, the amount of money that will flow to the state as a result of the discover of the Leviathan, Tamar, Karish, and Tanin reservoirs.

2. Expected levies on the gas reservoirs

State revenues from gas, what is called the government take, refer to three types of revenue received by the state: royalties, which the state is already receiving from the Tamar reservoir (regarded as small change); revenues from taxes (also being received already, although not from the reservoirs whose development has not yet been completed); and the Sheshinski tax, which has not yet been received, and which is supposed to account for the largest part of the state revenue pie.

Collection of the Sheshinski tax on the Tamar reservoir is scheduled to begin next year, after the reservoir gets quite a few benefits under the legislation and its transition provisions. These benefits include acceleration depreciation, deferring of the tax, and an increase in the proportion of expenses reimbursement until the maximum tax is applied. The practical results of the benefits will be a delay in payment of Sheshinski taxes.

Why did the Tamar reservoir receive benefits and discounts after the Sheshinski legislation? It seems to me that we should realize the business situation: a state in desperate need of gas and a seller able to take advantage of it. There was pressure to supply natural gas as quickly as possible, whether because of the collapse of the agreement for the supply of Egyptian gas, the perception (by the state, among others) that the flow of gas had already been delayed enough (as a result of opposition to the transportation of gas via the Dor coast), or public anger about the rise in consumer electricity prices because of the gas shortage.

This pressure culminated in a series of tax concessions and benefits granted to the gas companies under the Sheshinski law, which increased the profits and return from Tamar.

Did the state make a mistake? Was it too meek? Did it cave in? This is already being wise after the fact, and in any case, it is all water under the bridge. No one can turn the clock back. I do draw one conclusion, on which I insist: at Tamar, Noble Energy proved that it is capable of developing the reservoir as quickly and cheaply as possible, and thereby obtained more benefits that made Tamar a very profitable project, indeed.

3. Royalties

The small change in the state's revenues is the royalties, which are revealed each year in reports by the Ministry of National Infrastructure, Energy, and Water Resources and the government's financial statements published by the Ministry of Finance Accountant General. Under the Israeli Petroleum Law, the royalty rate in Israel is 12.5%, calculated according to the market price at the well. The effective royalty rate is lower, because expenses are deducted for systems that transport and treat the gas from the well until it reaches the coast (in the case of Tamar, this is close to 12%).

In any case, royalties from Tamar totaled NIS 860 million in the past year and NIS 4.4 billion since gas began flowing from the reservoir. The Accountant General estimates the state's future royalties from oil and gas at over NIS 20 billion.

4. The Sheshinski tax - the big money

Collection of the tax has not yet begun; it will start pouring in the state treasury next year. It will begin with a trickle of a few hundred million shekels, then increase to billions of shekels a year: first from Tamar, and later especially from Leviathan, as well as from Karish and Tanin.

All of the figures I used are from public sources - a forecast by Delek Drilling, which has shares in Tamar and Leviathan. I emphasize again that these are forecasts, and that tax collection will continue for 40 years. Starting next year, however, every year it will be possible to check through public sources the exact volume of the Sheshinski tax starting to flow into the state coffers.

According to the forecast, Sheshinski tax revenues from just Tamar will amount to NIS 8 billion in the next five years, The Sheshinski levy will apply to the other reservoirs only starting in 2024.

The Sheshinski levy applies only after the developer has made back the investment in exploration, development, and establishing a reservoir, plus a return reflecting the developer's risk and financing expenses, among other things. The levy is progressive - it is relatively low when collection begins, and rises as the developer's profit margin rises.

In any case, the picture arising from the forecast is clear - NIS 250 billion will make its way into the state treasury by 2063 just from Sheshinski levies, and possibly even more if more reservoirs are discovered.

That may sound like an enormous sum, but it should be taken in proportion. The Bank of Israel previously assessed the value of gas production and state revenues at 0.5-2% of GDP. In other words, in comparison with the size of domestic economy and the government budget, including the gas profits fund, state revenues from the gas reservoirs will have no dramatic effect. The amounts are significant, but do not change the general economic or budget picture.

5. The medium share of the state's revenue package

This consists of corporate taxes (every corporation doing business in Israel pays taxes). The public reports also provide a forecast for this, but I think that providing the exact numbers is the state's job, because it collects the taxes and there are also differences in the provision for tax in the public reports and the final tax assessments set later by the Israel Tax Authority.

The Tax Authority has to report each year the taxes it receives from Tamar, and later from other reservoirs, which it will receive from several corporations. At the same time, a conservative estimate is that these taxes will amount to at least tens of billions of shekels in the next 40 years, which brings the likely state revenues from the gas reservoirs to NIS 350-400 billion. This is consistent with what Netanyahu said.

The Sheshinski tax should start making a big difference in 2020, and it is therefore extremely important for the state to be transparent in this matter and provide the public with a clear picture of its annual revenue of all sorts from the gas reservoirs: royalties, corporate tax, and Sheshinski tax), so that it can be seen whether all of the statements about one share or another of the state in the gas revenues are correct and in accordance with the forecasts. In any case, it will be possible to examine this exactly only when the reservoirs are almost completely exhausted.

6. The Sheshinski levies are separate from the state budget

Unlike corporate tax and royalties, revenue from the Sheshinski levies is due to go into a fund for managing the state's revenue from profits on natural resources, which is provided for in legislation passed in 2015. The revenues are to be managed from a long-term economic perspective in order to enhance them and ensure the fund's continued existence for many generations. The state's revenues from the levy will be converted into foreign currency assets and deposited in a special account at the Bank of Israel. The fund's assets will include the state revenues from the levy and the returns from the revenues, which cannot be appropriated, assigned, or attached.

The fund's assets will be invested outside Israel in foreign currency. An amount listed in the law (an annual allocation) will be transferred annually from the fund to the state treasury to be used for social, economic, and educational purposes, as decided by the government and approved as part of the state budget. At the government's request, the Knesset is entitled to approve a loan to the state treasury from the fund's assets under conditions stipulated in the law.

The law will apply from the date on which state revenues from the levy exceed NIS 1 billion. As of now, money for the levy is being deposited in a fund outside the state budget managed by the Accountant General. As of the end of 2018, the balance of this fund was NIS 450 million.

The fund will begin accumulating billions and tens of billions in the coming years. It will not make a major difference, but it is significant for filling in holes. What does this mean? Either the Ministry of Finance will take a loan in order to reduce deficits, or use it for social, economic, and educational purposes, which is another way of reducing deficits.

In short, the fund will be a reserve that the Ministry of Finance can use, subject to the legal restrictions, of course, to reduce deficits. I am convinced that this would be happening now, were the fund already accumulating significant amounts.

Published by Globes, Israel business news - en.globes.co.il - on July 9, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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