Bethel Finances: "Gas tax hike was too aggressive"

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A lack of understanding of the global energy market caused the Israeli government to err in its policy, and the most glaring example is its gas purchasing agreement with Egypt, global energy expert Dr. Edward Morse told "Globes" in an exclusive interview, ahead of his participation in the 19th Caesarea Economic Forum. Morse also criticized the Sheshinski committee, and the latest proposal to place price controls on natural gas.

Morse will participate today's main session of Israel Democracy Institute's Caesarea Economic Forum, "The Global Economy and Israel". Other panelists include well-known British historian Prof. Niall Ferguson, and Goldman Sachs senior investment strategist Abby Joseph Cohen.

Morse says that he is very familiar with Israel's energy market from numerous visits in the past, but that he has been never a paid consultant for any Israeli or foreign energy company operating in the country.

"Globes": Noble Energy Inc. (NYSE: NBL) waged a campaign against the Sheshinski committee and the raising of royalties on gas revenue. What is the perspective from overseas?

Morse: "Noble Energy is highly regarded as a developer as a pioneer in deep water and exploiting shale gas. It entered Israel because of the attractive fiscal regime, and then discovered to its surprise that the regime was being changed to something far less attractive for it. It is definitely possible to say that other companies were not surprised by the measures taken by the Israeli government. Its conduct was characteristic of governments. But they were surprised by the speed, the aggressiveness, and the retroactive application of the change, which applied to signed contracts."

Last week, "Globes" interviewed Leland Tate, the CEO of ATP Oil & Gas Corporation (Nasdaq: ATPG), which is the second US exploration company to enter the Israeli market. Tate said that Israel's fiscal regime was reasonable, even after the Sheshinski committee recommendations were adopted.

There are companies entering Israel despite Sheshinski.

"I don’t want to comment on the remarks of ATP's CEO, but from my experience, I've learned to look at the context. It is necessary to take into account the position he (Tate - A.B.) is in as someone who is entering the Israeli market now, and to consider his remarks from this perspective."

Minister of Finance Yuval Steinitz declared that his objective was for Israel to have a tax regime that is normal for OECD countries. Did the Sheshinksi committee achieve the right result?

"Only the market will determine whether the Sheshinski committee achieved an appropriate and wise result or not. Israel had fascinating hydrocarbon discoveries. From the perspective of a country with such small reserves, to switch to a global tax regime might not be the best way to attract foreign capital and maximize the state's revenues."

What is you opinion about the tax hike on oil and gas discoveries?

"Personally, I think that this was too aggressive. It's not good to change policies retroactively, even though it is done. This measure was based on a theoretical, not concrete, understanding of what was done in the global energy market, and it was made while ignoring question marks, such as how much oil and gas Israel has."

"Israel has a severe shortage of skills and understanding of the international market," says Morse. There are few such experts in Israel. Dr. Brenda Shaffer is one, and there is no such expert in the government. This isn't the first time that the Israeli authorities here erred in understanding the global market."

Morse cites the natural gas purchasing agreement with Egypt as a notable example of Israel's lack of understanding. In 2001, East Mediterranean Gas Company (EMG) won a tender to supply natural gas to Israel Electric Corporation (IEC) (TASE: ELEC.B22), after offering a price 40% less than its competitors, but the gas only began flowing in 2009, after the gas supply contract with IEC was reopened and the price of gas was revised 40% higher. "There was a very low price for the gas, must less than the price offered by the two other competitors. You can't expect the Egyptian company to accept such a subsidy," he says.

"The deficiencies caught up with you, because as soon as the Egyptians felt that the price was too low, and the gas didn’t flow until the price was raised. Israel went through a learning process with the Egyptians. One of the mistakes was that the government was advised by a consulting firm with limited knowledge of the global market."