The Sheshinski Effect Hits the TASE

Oil and gas exploration shares plummet on new tax recommendations.

Oil and natural gas exploration shares plunged yesterday on the Tel Aviv Stock Exchange, the day after the Sheshinski Committee released recommendations on taxing the oil and gas sector. The biggest losers were the companies involved in the Tamar and Leviathan offshore gas fields.

Yitzhak Tshuva's Delek Energy fell the hardest, dropping 7.7%. Delek Drilling and Avner Oil Exploration lost 6.6% and 4.6% respectively. They are partners not only in Tamar and Leviathan, but also in the Tethys Sea field, which is already producing commercial gas. Its revenues would also fall under the proposed changes. Isramco, another Tamar partner, fell 5.8%.

The committee, headed by Eytan Sheshinski, was given a charter to recommend changes in fiscal policy for Israel's natural-resource sector. The proposed changes would raise the state's share of future oil and gas revenues from about 30% today to 66%. Royalties will remain unchanged at 12.5%, but the entire tax regime for the oil and gas industry will be radically revamped.

The one stock that actually moved against the trend yesterday was Ratio Oil Exploration, which rose 0.5%. Ratio holds the rights to 15% of the Leviathan field.

The release of the committee's initial recommendations caused the total value of the companies holding rights to the Tamar field to fall from NIS 6.9 billion to NIS 5.8 billion yesterday, estimated Eran Yunger, an energy analyst at Migdal Capital Markets. The value of the holdings of the Leviathan field's owners fell from NIS 5.5 billion to NIS 4.3 billion, estimated Yunger.

His calculations show a 12% to 15% drop in profitability based on the cancellation of tax breaks and the depletion allowance.

Steinitz may need opposition support

Finance Minister Yuval Steinitz will have to work hard to form a majority in the cabinet and Knesset to pass the Sheshinski Committee's recommendations. He will ask the opposition to support the bill when it is presented to the Knesset in January; the energy companies are expected to lobby fiercely.

Knesset sources say Yisrael Beiteinu may oppose the recommendations, as National Infrastructure Minister Uzi Landau objects.

"The cabinet will have to decide whether to implement the Sheshinski Committee's recommendations," said MK Fania Kirshenbaum (Yisrael Beiteinu ) yesterday. "The press conference Steinitz held on Wednesday was premature, unnecessary and improper. The recommendations should have been presented to the cabinet, and [the cabinet] needs to formulate a position."

A number of Labor Party MKs might also withhold support for the higher taxes on oil and gas revenues; coalition sources expect the cabinet to approve legislation based on the Sheshinski recommendations. It might require all coalition members to toe the line.

United Torah Judaism, Likud and Habayit Hayehudi are all expected to vote in favor. As for Shas, most MKs expect the party to vote in favor because the extra revenues will allow an increase in funding for many purposes such as social-welfare programs. According to the chairman of the Knesset Finance Committee, Moshe Gafni (United Torah Judaism ), "The state must take investors into account, but the natural resources God gave to Israel belong to the people. The recommendations are logical and common sense."