Analysis

Netanyahu Promised Hundreds of Billions in Gas Revenue. Real Figure Is a Tiny Fraction

The moment of truth is getting closer, when tax revenue from Israel's natural gas is finally revealed

Netanyahu at the inauguration of the newly-arrived foundation platform for the Leviathan natural gas field in the Mediterranean Sea, about 130 kilometres west of the coast of Haifa, on January 31, 2019.
Marc Israel SELLEM / POOL / AFP

Benjamin Netanyahu didn’t need a teleprompter this time and that was no accident. When the prime minister talks about the economy, he’s in his element. His campaign staff last week prepared a presentation filled with PowerPoint slides about “A Decade of the Netanyahu Economy,” but instead of going directly to them, he decided to start with a long introduction that went back 25 years. He told of his successes and heroism. He repeated the story of the thin man and the fat man (the private sector burdened by the weight of a big public sector) and his first time as prime minister and his 1996 speech to the U.S. Congress and his stint as finance minister in the early 2000s (“60 reforms”).

“Let’s tell the story,” he said to his advisers, who were trying to coax him into using the slides they had prepared for him.

That was a week ago Sunday, which Likud officials had slated as the time when Netanyahu would unveil his economic program as well as his finance minister-designate, Nir Barkat.

After speaking for 10 minutes, Netanyahu turned to the most important issue of them all, a topic he has returned to again and again since the Leviathan natural gas field began production a month ago, and that is Israel’s gas reserves and the framework agreement on how the industry is regulated.

As usual, Netanyahu opened with the slogan, “Get the gas out of the ground,” which has only a tenuous connection to reality. The gas framework approved by the government in 2015 didn’t “get the gas out.” It had started flowing two years earlier from the Tamar field. What it did do is preserve the monopoly structure of the Israeli gas industry and enable prices for gas to remain high.

The Netanyahu government, through the Energy Ministry, actually delayed the onset of production at Leviathan, the second field, which only served the interests of the gas barons by reducing the competition for Tamar – a monopolistic money-making machine that received a stamp of approval from the framework.

But the most interesting part of Netanyahu’s remarks occurred in the 12th minute, when he returned to the theme of how Israel’s citizens will benefit from the hundreds of billions of shekels in gas royalties. Netanyahu and his current finance minister, Moshe Kahlon, have repeated this number many times over the last five years. Like anything repeated over and over again, the public comes to accept it as a fact.

Surprisingly, this time Netanyahu hesitated and then uttered the following words: “We’re going to get [from the gas] tens, tens of – excuse me – it’s going to reach 150 billion shekels [$44 billion].”

Tens? Wait! Where did the hundreds of billions that you, your energy minister and the journalists friendly to the gas monopoly promised over the last five years go? How did it become 150 billion shekels?

Netanyahu’s strange stammering piqued our curiosity. For years TheMarker has contended that the 200 billion to 450 billion shekels of revenues for the state from gas that Netanyahu & Company predicted were wildly inflated. The outsized predictions were designed to serve two purposes: To distract attention from all the benefits that the gas tycoons were getting from the framework and to give the voters the impression that very soon the government would have vast resources to shower on “education, health and welfare.”

So, why did Netanyahu suddenly talk about tens of billions? Was this the moment when he was revealing the real numbers? Maybe readers of TheMarker weren’t surprised, but most of the public used to hearing of hundreds of billions must have been sorely disappointed.

A government source knowledgable about the number confirmed last week that the newest estimates about revenues the government will get from all kinds of taxes and charges on gas production will probably be 50% less than the lowest official predictions until now and 70% less than what the financial newspapers were writing about.

The biggest revenues from gas reserves were supposed to come from “excess royalties,” that were imposed on the recommendation of the Sheshinski committee formed in the wake of the first gas discoveries. When Energy Minister Yuval Steinitz says “we raised taxes [on gas] from 12.5% to 60%,” he’s referring to these excess royalties.

Drop in the bucket

The revenues from these royalties are supposed to go into a sovereign wealth fund, whose startup date has been delayed because they have to date amounted to nothing.

And, here is some news: According to government estimates last week, within a decade the Sheshinski taxes are expected to amount to just 10 billion shekels – that is 17 years after Tamar began production. That’s the accumulated amount, in other words, 1 billion shekels a year starting in 2020.

From the perspective of the government, 10 billion shekels over a decade is nothing. The state takes in 360 billion shekels every year and GDP is 1.4 trillion shekels annually. In brief, the Sheshinski taxes will account for just 0.3% of state revenues and just 0.07% of Israeli GDP.

Those same government estimates say that by 2040 – 30 years after Tamar production has begun – the government’s take will be 35 billion shekels, a similarly symbolic amount from a national perspective.

When I asked a government economist what were the assumptions behind these forecasts, he smirked. In any case, he said the numbers were insignificant in terms of fiscal policy.

Indeed, the numbers are so small it’s kind of ridiculous to call it a wealth fund at all. Even if the forecasts prove to be overly conservative and the amounts accumulated are 50% more, it will still be small relative to the size of the economy and the state’s spending obligations.

The government is entitled to spend up to 3.5% of the wealth fund’s annual income. That won’t make a dent with a defense budget of 70 billion shekels annually and education spending of 100 billion. In another 20 years, the fund that was supposed to benefit our children and grandchildren may be able to cover 1% of the health and education budget or 2% of the government’s pension obligations.

Officially, the government hasn’t issued updated estimates for Sheshinski tax revenues. Government sources tell me that they are still working on improving their models. But logic dictates that their estimates and the means by which they arrived at them should be published annually. They would make Netanyahu and Steinitz look like clowns at best and rogues at worst.

A government official tells me that it is difficult to make estimates due to the changing price of natural gas and because the energy companies have all kinds of loopholes they can use to reduce their Sheshinski tax bill.

But the next government will have no choice but to release the estimates. In the first stage, the Finance Ministry will release figures on revenues from ordinary royalties and corporate taxes the gas companies are supposed to generate over the next three years. According to my own examination, the treasury should expect somewhere between 2.5 billion and 3 billion shekels annually, amounting to 0.7-0.8% of total government revenues.

The treasury forecast is based on the gas monopoly’s agreements to export gas to Egypt and Jordan. But these are high-risk deals. It’s worth noting that despite the Tamar and Leviathan partners’ talks of “tens of billions of dollars” in deals, in practice they have not released any numbers about minimum quantities or dollar sums that the mysterious Egyptian buyer Dolphinus is committed to taking.

Given the size of Egypt’s newly discovered gas reserves, it’s not at all clear why Dolphinus is importing Israeli gas at all. Production at Egypt’s biggest field is seven times Israel’s production in 2019 and will be expanding more over the years.

Last September, the grassroots Lobby 99 group asked Anat Guetta, the chairwoman of the Israel Securities Authority, to order the gas partners to reveal the exact assumptions they are employing in their financial reports to forecast future revenues. The ISA declined, saying it wasn’t their business to delve into forecasts.

In any event, the treasury is likely to be much more cautious and produce lower forecasts for future revenues from Tamar and Leviathan. More than that, a gas glut worldwide and in the Middle East, in particular, is likely to lead to lower gas revenues.

Gas stocks down

No matter, Netanyahu and Steinitz have an interest in ignoring the new economic reality because the gas framework they promoted set high prices for the gas sold to the biggest customer in Israel, state-owned Israel Electric Corporation.

The updated estimates for gas revenues won’t just come as a shock to the right-wing voters who bought the story of the “hundreds of billions,” but to Kahol Lavan voters, too. The party bought the same story of natural gas wealth and have said it will use it to fix Israel’s broken healthcare system.

In the stock market, the loss of faith in the gas future has already gotten underway. Shares of Tamar Petroleum, the company created by Dekel Group controlling shareholder Yitzhak Tshuva to divest his stake in the Tamar field, are down 80% since the company went public. Analysts have started to point to the gaps between the gas company’s optimistic forecasts and the actual value of the contracts it’s signed.

If a new government is formed after the March 2 election, a painful process of disillusionment is sure to follow. To begin with, it will become clear that the revenues from gas in the coming years will be low relative to the deficits being projected. The government won’t have a sovereign wealth fund to come to the aid of the healthcare system. Next, it will become clear that in the long term, when the Sheshinski taxes start being paid, their role will be marginal relative to the size of the economy, the budget and the government’s financial commitments.

So, we’ll be left with the present. The gas framework sets the price of natural gas at $6 per million BTUs, three times the level elsewhere in the world. The worst thing about the present is that Israel has a prime minister and an energy minister who, when it comes to anything related to natural gas, are at best charlatans and at worst liars.