Gas find in Israel sparks trade spat with US By Aron Heller | Associated Press, Thursday, 07 Oct 2010

JERUSALEM (AP) _ The discovery of huge natural gas reserves off Israel’s Mediterranean Coast _ long dreamed of and searched for, yet strangely unexpected _ has delivered a windfall that could solve Israel’s energy needs for generations. But in the short term, it has instead yielded a bizarre trade battle with the United States, putting Israel at odds with its most important ally.

Israel wants to raise royalties from the fields’ U.S. developers, but they are crying foul.

In a special session of the Israeli parliament this week, lawmakers seeking a larger chunk of the profits for the state faced off with American gas executives who threatened to sue Israel in an international tribunal.

“I don’t need to tell you what a disaster it would be to have two great allies, Israel and the United States, disputing with one another in the European court,” said the representative of Texas-based Noble Energy, Abraham Sofaer.

Any retroactive change, Sofaer said, “would violate the treaty of friendship, commerce and navigation between Israel and the United States.”

The U.S. embassy in Tel Aviv has intervened on Noble’s behalf, according to a letter from the mission quoted in an Israeli financial newspaper.

Embassy spokesman Kurt Hoyer would not confirm that, saying only, “It is in our interest to promote American industries overseas.”

While a lawsuit appears unlikely, the trade dispute with Israel’s strongest patron comes at a delicate time, as the U.S. is trying to keep the newly restarted Israeli-Palestinian peace talks alive and pressuring a reluctant Israel to extend its West Bank settlement slowdown.

A royalty hike from the current 12.5 percent to the proposed 20 percent could also drive away future investors, but an Israeli lawmaker leading the charge has other concerns.

“The resources of the state of Israel belong to the citizens of Israel,” legislator Shelly Yachimovitch told parliament. She noted that other countries charge much higher royalties and said Israel’s 1952 energy royalties law is woefully out of date.

According to analysts, the Israeli government’s take from gas is on the low side in global terms, part of an effort to draw investors who would otherwise prefer the vast markets of the Arab and Muslim worlds.

And while other nations have raised royalties as well, Israel has more to lose.

“Israel’s situation is different because it is an energy island, in that, with the exception of the pipeline to Egypt, it is not connected to other countries with pipelines and energy grids,” said Gina Cohen, an Israel-based natural gas expert.

“This means that it has no backup when there are shortages and for Israel the most important thing is to have security of supply,” she said. “Security of supply is more important than the price tag you have to pay to get it.”

A Finance Ministry committee is studying the matter and is set to issue its recommendations within a month. A compromise is expected.

With their country located in the midst of some of the world’s biggest oil producers, generations of Israelis have famously lamented the country’s lack of natural resources. The late Prime Minister Golda Meir once quipped that Moses could have picked a place for a Jewish homeland other than “the one spot in the Middle East that has no oil.”

A long line of exploration projects have come up empty over the decades. That began to change in 1999, when the Yam Thetis field was found off Israel’s southern coast. It is expected to run dry within a few years.

That discovery was dwarfed by the fields uncovered off Israel’s northern coast by Noble and its Israeli partner, Delek Group, announced nearly two years ago. They say those fields could turn Israel into a major gas producer.

Israel relies on imports to meet most of its energy needs, spending billions to bring natural gas from Egypt and coal from a variety of countries. The sudden prospect of a gas glut sent energy shares on the Tel Aviv Stock Exchange soaring.

Two of the newly discovered fields, Tamar and Dalit, are due to start producing in 2012, and experts say their estimated combined reserves of 8.5 trillion cubic feet of natural gas can cover Israel’s energy needs for the next two decades. Noble Energy says the larger Leviathan natural gas field may hold up to 16 trillion cubic feet of natural gas, which would potentially turn Israel into an exporter.

Tamar is the largest confirmed natural gas field discovered in the world in the last two years, but even so Israel is still far from being a global energy supplier.

“Israel is going to enhance its energy security by utilizing domestic natural gas and lowering its dependency on imports,” said Amit Mor, CEO of Eco Energy Ltd., an Israel-based energy and investment consulting firm. “Having a major source of gas is of huge strategic value.”

Mor said the gas will go primarily to power electrical plants, but some will be used directly by consumers.

He cautioned the government to avoid antagonizing investors who operate in a highly risky sector.

“The taxation scheme should also take into account Israel’s sensitive geopolitical condition in attracting international oil and gas companies for exploration and production in the country,” he said.

The gas finds off Israel’s northern coast haven’t created friction only with the U.S.

The militant Hezbollah group, which is part of the Lebanese government, has accused Israel of stealing gas from Lebanon and vowed to defend Lebanese resources with an arsenal of thousands of rockets like the ones it rained on Israel during a 2006 summer war. Hezbollah provided no evidence that Israel’s gas finds extend into Lebanese territory.

Noble Energy maps show the fields to be entirely within Israel’s territorial waters.

This week, Hezbollah’s patron, Iran, a major energy producer, announced that it would join Lebanon in its oil exploration efforts, according to Arab media reports.