Managing Israeli Natural Gas Revenues to Protect Domestic Energy Security, Innovation, and Future Generations
Large natural gas finds off the coast of Israel create significant financial and energy challenges for a State long focused on high technology exports and alternative energy development. To address these concerns, Israel has already implemented study commissions and proposed a Sovereign Wealth Fund (the "Citizens of Israel Fund"). This paper reviews the proposed structure of the Fund and a number of other core issues related to the gas finds such as how much to export, how to deploy revenues, and how the development will affect energy security. It makes the following recommendations:
1) Market pricing of all gas. Use market-based pricing of natural gas sold in domestic or international markets in order to avoid politically-distorted decisions on export versus domestic consumption levels and to optimize revenues to the government. This pricing neutrality should extend to associated royalties, excess profit fees, and recovery of field-related security charges.
2) No subsidized conversion. Allow natural gas prices to determine the pace and location of infrastructure conversion to gas. Don't subsidize either conversion-related capital or natural gas flows to particular industrial or commercial enterprises.
3) Energy vulnerability tax on choke-points. Institute an energy vulnerability tax or surcharge on energy flows through key chokepoints within Israel in order to protect and expand energy diversification efforts. This would apply to all chokepoints, not just the new ones created by the Tamar and Leviathan fields. Shifting some existing taxes on fuel end-users to a differentiated vulnerability tax on flows going through chokepoints can greatly improve price signals to invest in supply diversification and resiliency without adding additional energy taxes on a gross collections basis.
4) Full royalty capture. Review allowable exclusions and deductions from royalties to identify and correct areas of potential gaming and likely friction as fuel and revenue flows grow in future years.
5) Fund principal invested in global, non-NIS securities. Retain investment restrictions now in the Fund for Israel proposal that targets investment into global, non-NIS assets.
6) Payout rules that allow fund appreciation over time. Review and likely reduce payout rates from Fund to allow some investment earnings to compound within the Fund to grow principal over time.
7) Annual distributions direct to long-term capital projects. Look to more closely align spending of income distributed from the Fund to Treasury with long-term investments into human and physical capital.
8) Tighter rules on borrowing from Fund principal. Tighten rules on what counts as an emergency under Fund rules to ensure that resultant borrowing of Fund principal (and potential subsequent debt forgiveness) occurs only in the most extreme of circumstances.
9) Review appointment procedures of key Fund oversight functions. This would ensure that the direct and indirect influence of political figures over the structure and management of the Fund is appropriately checked in order to protect its independence.