Fair Distribution of Royalties

Since last week, Israelis have been talking about what has been termed a discovery of large reserves of natural gas off the country's shores, valued at about $100 billion or more.

The reports led to euphoria by the owners of the company that's exploring the field, and some politicians saw the discovery as heralding a change in Israel's global status that would make the country stronger and more influential.

But before the chickens can be counted, they need to hatch. Therefore, it must be said that there's only a 50 percent chance of finding gas, and that pumping it from the depths of the seabed is hugely expensive.

It should also be recalled that not every gift serves those who receive it. For example, in the 1960s, the Netherlands discovered huge gas reserves in the North Sea, but the happy find generated a major economic crisis because growth in foreign-currency income caused an abrupt revaluation of the Dutch guilder, as well as severe damage to local industry and exports, unemployment and inflation.

We must be careful, then, about how we use any income from the gas field. But though the gas has yet to be discovered, a major argument is already underway over the royalties and taxes that the developers would have to pay to the state.

The owners of companies exploring gas fields oppose any change in the royalties and taxes set when the exploration license was granted. They say they have a contract with the state and that until reports of the discovery, they were the only ones prepared to risk their money to do deep offshore drilling. In contrast, Finance Minister Yuval Steinitz says that the royalties on finding gas and oil should be raised even on existing contracts because "royalties in Israel are significantly lower than in other countries."

The problem is indeed complex and involves honoring contracts, encouraging development and maintaining business certainty and fair distribution of natural resources between developers and the public. There is room to clarify the policy on future royalties and taxes because now the level of risk in the search declines. But the state cannot change agreements it has already signed, except under the most extraordinary circumstances.

That is the dilemma that is now before the Sheshinsky committee, which is studying the subject. The government committee must show moderation and wisdom so as not to cause harm to signed agreements or foreign investments, and to fairly divide profits from the new natural resource.