While Israel’s offshore natural gas fields were once expected to provide significant financial benefit for the country, the actual income derived from the gas has fallen far short of expectations, according to the State Comptroller report issued on Tuesday.
To date, less than 6% of the income expected by the end of 2022 has been deposited into the country’s sovereign wealth fund that was created for the purpose of managing the expected influx of funds.
Between 1999 and 2013, eight different offshore natural gas wells were found in the Mediterranean Sea in Israeli territory in what looked like an unexpected windfall for the country.
Private gas exploration companies were brought in to extract the gas from the sea and bring it to the market. In order to regulate the state’s share of gas profits, a gas taxation law was enacted in April 2011, laying out how the gas companies would pay royalties and taxes to the state from the sale of the gas. Plans were drawn up as to how the funds would be used to improve social programs and elevate the state’s overall financial situation.
The comptroller investigated how those plans have played out, and found it to fall far short of expectations.
The Bank of Israel governor said at the time he expected that by the end of 2022, NIS 12.8 billion would be deposited into the country’s sovereign wealth fund. However, expectations have fallen far short. By June 2021, only NIS 741 million had been deposited into the fund, less than 6% of the forecast.
The shortfall was attributed, in part, to miscommunication between the Energy Ministry and the Israel Tax Authority about the cost of producing the gas. Complicated cross-ownership issues between the private gas companies also affected tax collections. Incorrect classification of certain operating expenses also cut into the state’s tax receipts.
In addition, the Energy Ministry was out of touch with recent developments in gas field taxation that were taking place around the world, and was unaware of how Israel’s policy compared to those elsewhere. Furthermore, the Israel Competition Authority didn’t sufficiently address the issue of whether gas contracts signed with Israel Electric Company, the largest supplier of electrical power in Israel, were in line with the government’s gas outline.
State Comptroller Matanyahu Englman recommended that the Energy Ministry and the Tax Authority work together to reduce bureaucracy and improve their systems for monitoring that the state receives its share of the profits. Specifically, they must ensure that the money reaches the sovereign wealth fund so that it can be used to improve the nation’s economy, education and health as it was intended.
In addition, there are still cross-holdings between the gas companies which could breach competition law exemptions, Englman said.