ICL to Pay Most of Cost for Dredging Southern Dead Sea

Israel Chemicals willing to spend NIS 3 billion to stop flooding.

The state and Israel Chemicals are nearing an agreement on funding the removal of salt from the southern basin of the Dead Sea, in an attempt to keep the lagoon from flooding the hotels on its shores. Prime Minister Benjamin Netanyahu is facing growing pressure to bring the issue to a cabinet vote soon. On Thursday, Tourism Minister Stas Misezhnikov and Environmental Protection Minister Gilad Erdan asked Netanyahu to bring two issues concerning the Dead Sea to the cabinet: Requiring ICL to provide almost all the financing for the salt removal and funding the preservation and protection of the environment of Dead Sea region.

There are three proposals for dealing with the excess salt overflowing the evaporation pools in the southern half of the Dead Sea. The proposals, to be presented to the cabinet at its regular meeting on Sunday, would establish a fund to "protect the Dead Sea and its environment," as part of an effort to preserve both the northern and southern parts of the sea.

Dead Sea - Gil Cohen-Magen - 18112011
Gil Cohen-Magen

One proposal is for the state to put up NIS 150 million, alongside funds to be raised from higher royalties on Israel Chemicals for its exploitation of the region's natural resources, as part of a fund for protecting the Dead Sea and developing tourism in the area.

ICL seems ready to pay about NIS 3 billion of the cost of harvesting the salt and minerals from the southern basin, said sources close to the negotiations. This would leave the Finance Ministry, Tamar Regional Council and the hotels to bear the remainder of the costs.

The treasury is willing to accept ICL's estimate that the removal of the salt will cost about NIS 3.8 billion by 2030, and not the NIS 6.7 billion estimated by the Dead Sea Preservation Government Company, which operates under the auspices of the Tourism Ministry, said the sources. The state established Dead Sea Preservation in 2008 to come up with solutions to the problem of the flooding at the Dead Sea. But the two sides have yet to reach an agreement on who will pay for the additional costs, above the NIS 3 billion. The Finance Ministry refuses to pay the additional amounts.

Israel Chemicals belongs to The Israel Corporation, which in turns belongs to the Ofer family. Dead Sea Works operates under a concession granting it broad freedom of action in and around the Dead Sea until 2030. It is the world's fourth-largest producer and supplier of potash and other minerals, which it sells in over 60 countries.

The agreement under discussion will probably not include a solution to the ongoing arbitration between the state and ICL, in which the state is demanding an additional $265 million in royalties, plus interest and linkage to inflation, for the extraction of minerals and chemicals from the Dead Sea area, which the state claims ICL underpaid between 2000 and 2009. All told the state is demanding $291 million. In the arbitration process, the government also is demanding the royalty rate on potash and magnesium sales be raised from 5% to 10% for quantities exceeding 3 million tons a year, starting from 2010. ICL denies owing the government royalties, stating that all royalty calculations throughout the years were performed as required by law.

The entire southern portion of the Dead Sea is essentially a gigantic evaporation pool operated by the Dead Sea Works, which is a subsidiary of Israel Chemicals. It brings in water from the north part of the sea by canal, evaporates it and harvests the water's rich mineral contents. But the salty water leaves a salty precipitate, which is raising the level of the evaporation pool's seabed - and, of the water. The snag is that a host of highly popular hotels sit on the pool's "beach," and will be engulfed by the rising water level unless something is done. The question is what to do and who should pay for it.

There have been a number of proposals to solve the problem of the inundation around the hotels. The Finance Ministry preferred tearing them down and rebuilding farther from the shore, which it said would be cheaper. But the proposal backed by Erdan and Misezhnikov, dredging the evaporation ponds, was chosen - against treasury objections. Dredging the salt from the seabed is considered the most expensive, but also the most environmentally sustainable solution. For years, the hotels have been saved from flooding only by the construction of giant earth berms around the pond.

A third alternative to dredging or moving the hotels is to build an artificial lake around the hotels, and then harvest the salt from that lake but nowhere else. The harvested salt dredged from the evaporation pool would be moved by conveyors to the northern Dead Sea, where the water level is falling.

Costs already factored into share price

ICL will do everything in its power to prevent legislation such as that introduced by the Sheshinski Committee, which examined oil and gas profits, said Roni Biram, an analyst at UBS. The Sheshinski Committee proposed higher royalties and higher taxes on profits from the exploitation of Israel's natural resources, and the Knesset passed most of the recommendations into law.

As to reports that ICL will be required to pay 90% of the costs of dredging the Dead Sea and will face higher royalties, that would place ICL in the ranks of the companies paying the highest percentage of revenues in the world from the exploitation of natural resources in the potash or mining industry, said Biran. Such an agreement would cost ICL an additional $150-200 million a year, but investors have already taken these costs into account in pricing ICL shares, he added.

Dead Sea Works said: "The negotiations are important to us and we will not do anything to endanger them."

The Finance Ministry declined to comment on the figures involved, but said negotiations are continuing.