Prime Minister Benjamin Netanyahu has been throwing his weight behind the energy companies in their fight to prevent an increase of royalties they must pay the state, claim finance and justice ministry officials.

They claim that Netanyahu is trying to block any increase in royalties payable to the state by energy barons from applying retroactively. But neither the prime minister nor his officials have the right to intervene in the working of a government committee, they argue.

The Prime Minister's Office rebuts that Netanyahu had consented to an urgent request by National Infrastructures Minister Uzi Landau to hold a discussion on the issue, with the participation of the finance minister.

The outcome is of acute interest to the oil and gas tycoons - and to the taxpayer as well. The higher the royalties the state would collect, the lower the profit of the companies drilling for oil and gas.

Most immediately, the committee's recommendations could affect the future profitability of the companies developing "Tamar-1" and "Dalit," two giant fields of gas found in Israeli territorial waters in the Mediterranean. Whether the recommendations would indeed affect these companies depends on whether they would apply retroactively, a point that has yet to be finalized.

The companies that would be affected are mainly Yitzhak Tshuva's Delek Group, Kobi Maimon's Isramco group, Dudi Wiessman's Dor-Alon, and also the American company Noble Energy.

The committee was formed a month ago by Finance Minister Yuval Steinitz. Its mandate is to make recommendations on fiscal policy regarding fossil fuels found in Israeli territory. Landau feels that the whole issue isn't the Finance Ministry's fief.

Based on policy set in 1952, and never revisited, the state is entitled to 12.5% of the energy companies' gross income, and the energy companies get tax breaks to boot. Yet the industry of oil exploration has vastly changed in 60 years. For one thing, the risks are lesser.

Also, huge amounts of gas have been found in Israeli territory. Out of estimated revenues of $40 billion for the companies developing the Tamar-1 field alone, the state stands to get just $6 billion to $8 billion in revenues.

If the state increases its bite, the Tamar companies will earn much less. The uncertainty has delayed the closure of loan agreements from foreign banks to the Tamar partnership members. That, and the potential for loss of profit, first led the companies to try to stop Steinitz from setting up the committee.

Ignoring the pressures, Steinitz did form the committee. It is headed by Prof. Eytan Sheshinski of the Hebrew University of Jerusalem, the man who headed the tax reform committee in 1980. It includes officials from the Finance Ministry, the Tax Authority, the National Infrastructures Ministry and the National Economics Committee.

Retroactive, or not?

The committee's writ of appointment does not state the period of time to which its recommendations would apply. The uncertainty impelled the infrastructures ministry to issue a clarification that the recommendations would only apply to future permit recipients. But the Finance Ministry has not ratified that position.

Now the prime minister is, insofar as is known, demanding a clarification that indeed, the committee may not discuss raising royalties or tax to existing permit holders, or at least that its recommendations not apply to companies that already invested considerable money in exploration (for instance, if they have already conducted three-dimensional geological surveys ). But most of the exploration companies in Israel have already conducted such tests at potential sites, and most of Israel's territorial waters have been carved out into approved permit areas.

Following intervention by the prime minister, the committee's first meeting scheduled for two weeks ago was canceled, on the grounds that the boundaries of its mandate remain unclear. The Prime Minister's Office's rejects allegations that intervention in the committee's functioning was due to pressure from business barons. Its intervention followed pressure from the National Infrastructures Ministry, which is very concerned that the committee could delay the development of the Tamar and Dalit fields.

It would be unprecedented to raise royalties in retrospect, says the Prime Minister's Office, whether here or elsewhere in the world. It also notes that it telecommunications, the state only reduced royalties, never increasing them, so therefore it is unthinkable for the Sheshinski committee to recommend raising rates for existing permit-holders.

It is equally unthinkable to introduce such uncertainty into the sector, the PMO adds, and since the committee is almost certainly not going to recommend an increase in royalties for existing permit-holders, the sensible thing is to take the issue off the table entirely.