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The Natural Gas Royalties: Political Ethics and Economic Sense

What are the considerations behind the demand to allow the public to share in the profits of the natural resources discovered in the Mediterranean Sea? Is it possible to force the investors to accept an increase in the state’s share of the profits, after the former took a substantial financial risk? And is there justification for changing the agreement retroactively? Hartman Institute researchers Professor Noam Zohar and Dr. Dani Attas delve into the moral and political dilemmas behind the heated debate

What are the considerations behind the demand to allow the public to share in the profits of the natural resources discovered in the Mediterranean Sea? Is it possible to force the investors to accept an increase in the state’s share of the profits, after the former took a substantial financial risk? And is there justification for changing the agreement retroactively? Hartman Institute researchers Professor Noam Zohar and Dr. Dani Attas delve into the moral and political dilemmas behind the heated debate.
The discovery of massive natural gas reserves off the northern coast of the state of Israel has sparked a heated political argument: members of Knesset and public figures claim that it is not appropriate that only a small portion of the gas discoveries – about 12.5 percent – will come to the state, while private bodies and individuals, led by businessman Yitzhak Tshuva and his company Noble Energy, receive the bulk of the revenue. Natural resources belong to the entire Israeli public, it is claimed, and the public should benefit from their discovery. On the opposing side are the investors’ representatives, who claim that the royalty rate was established at the outset, and the agreement should not be violated retroactively – even if the reserves that were discovered have exceeded the initial estimation.
We chose to deal with two basic questions that arise from the discussion about the gas royalties: the right of the public to the state’s natural resources, and in opposition, the value of the contract executed between the state and the licensees. We seek to clarify what the ethical reasons are behind the collection of taxes from a company on the use it makes of reserves that it located on its own (while assuming substantial economic risk), and whether it is appropriate for the state to violate a contract retroactively if the reserves discovered are enormous and the compensation to the public seems small.

Residents of Tel Aviv waiting in line for kerosene on a wintry morning, 1948.
Photographer: Hans Pinn. Government Press Office
Dr. Dani Attas: Before we delve into this dilemma, we have to understand the underlying principle of the entire discussion: No corporation has inherent rights to natural resources. Many believe that the right of ownership is a natural right, so that one who works acquires the fruits of his labors for himself, even all the fruits of his labors; but natural resources themselves at some basic level always remain under public ownership, or even under the ownership of mankind.
“When I say ‘mankind’, I do not mean only in this country, nor do I refer only to this generation, but really to all of mankind. Since the natural resources belong to everyone, when we use them or take advantage of them, we have a responsibility to all human beings – not just to the entire Israeli public, but at some level also to other countries and to future generations. Unfortunately, there is no legal-institutional apparatus at present that embodies this dimension of ownership over the limited resources of the planet, but I believe that we must certainly strive to reach such an arrangement, which would acknowledge that air, water, land, fossil fuels and all other resources do in fact belong to all of us.
“By the way, there are places in which this belief is put into practice, even if only partially: the Norwegians, for example, take the future generations into account when they make use of the North Sea reserves, and invest a large part of the profits in funds for future generations.
“For the purpose of discussing the current problem, for the moment let’s ignore the international aspect, and assume that the state does in fact have complete and absolute ownership of the resources. Thus the natural gas in the Mediterranean Sea does belong to the state, but the state is not prepared to invest the funds required to locate it. It therefore offers limited rights that serve as an incentive for someone to search for the gas, and everyone will profit.
“The incentive is meant to cover not only the costs of the search, but also the costs of all of the failed searches, and it has to grant some kind of reward that will render the whole business worthwhile from the standpoint of the searchers. However, an incentive does not guarantee a profit – only the possibility of a profit. There remains a risk for the searcher, so the reward has to be high enough that at least one party will want to take this risk.
“Now the state is saying: ‘In retrospect, in light of the findings, the incentive we offered was too high.’ This is the most difficult point of the current problem. There is real difficulty in reneging on a contract that was signed in advance, and that on the basis of the expectations therein the companies executed their searches. The difficulty is at two levels: the obligation of the state to honor contracts with corporations and individuals – citizens and foreigners alike – as well as damage to the future incentive. Once the integrity of the state has been compromised, in future other companies will shy away from taking similar risks.
“I am not a jurist and I am not acquainted with all of the details of the agreement between the state and Noble Energy, so I am unable to arrive at a concrete conclusion on this issue. However, I feel that the government’s obligation to preserve its credibility constitutes a very strong argument. Even if there was a degree of carelessness in the execution of the contract, that is not the fault of the company. Rather that is an issue between the public, its elected leaders, and the professional bureaucracy that prepared the contract. Just as the public can call its leaders to task on unnecessary wars, it must also deal with economic blunders of this sort.
“My position is that we should try to reach an arrangement that expresses the public’s fundamental ownership of the natural resources, but does not violate the contract between the state and the licensee. For example, you can establish a future levy on income over a certain level, above which and only in the future, will the licensee pay an additional tax to the state. The public would thereby be partner to the revenue, while at the same time, damage to the state’s credibility would be minimal.”
Professor Noam Zohar: “True, the basic question is, whose gas is it? John Locke is considered to be the father of the doctrine that views private property as a natural right, and even he said that the world is given to mankind by God, and every man can take as much as he wishes from it provided that he leaves ‘enough and as good’ for others. In other words, he who invested the effort, worked and even took risks, enjoys the fruits of his labors, but even he must understand that natural resources belong originally to the collective.
“In Talmudic discourse as well, the basic assumption is that primary ownership of natural resources is public, and private ownership follows upon that. The Talmud expresses the limitations on private ownership in terms of ‘conditions imposed by Joshua’ when he distributed the land to the tribes. So, for example, one who finds himself lost in the midst of a cultivated area may extract himself even if he damages plants along the way, the reason being ‘that upon this condition did Joshua distribute the land.’ The good of the public overrides private ownership, as the land was originally owned collectively prior to its division into private estates.
“So whose gas is it? If the world is divided into defined territories, then the gas in the territory of a particular state should belong to the public of that state. As an example, here is another item from the same Talmudic section: when the land was distributed among the tribes, it was established that all could fish in the Kinneret [sea of Galilee]. The tribe of Naphtali could not claim ownership of the fish just because they lived on the shores of the sea. In the same manner it can be claimed that the Mediterranean Sea is open to any Israeli entrepreneur. But such a rule is not practical: if everyone were entitled to free access to the gas, it could lead to conflicts and confrontations, especially in light of the investment and risk entailed in searching for the gas. Therefore national ownership is translated into a mechanism of licenses and permits managed by the state.
From the DVD of the film, “There Will Be Blood”
“Here another element of the issue enters the picture – the contract signed between the state and the company that found the gas. The company did not contest the state’s right to the gas. It came to an agreement with the state which established in advance – as the state saw fit at the time – what shares the company and the state would have in future discoveries. Therefore the company has a legitimate argument that at stake here is a violation of the contract.
“Violation of a contract is a significant problem, as the state must protect not only its credibility but also the possibility of secure economic investments. This consideration also has a clear basis in the halakhic tradition. For example, the laws of Jubilee and Shmita (the Sabbatical year in which the land lies fallow) described in Leviticus 25 are based on the ideal that the land belongs to God: “For the land is mine.” Once every seven years, during shmita, ownership of the land is suspended for an entire year and the public can eat whatever grows on the land or on the trees in a free and equal manner. However, when we spent a year on this subject in the Hartman Institute’s Beit Midrash, we found that the oral Torah, in giving form to the laws of shmita, gave expression to reservations regarding such a radical application of the ideal. The Sages permitted the owner of the field to fence and gate his property even during the shmita year, and to allow the public into his field in a controlled manner. The explanation for this, according to Rabad (Rabbi Abraham ben David) is that completely free access would destroy the infrastructure built by the owner of the field: others have no interest in protecting the trees, the terraces, the irrigation ditches, etc. In other words, even the collective ownership during the shmita year was applied while protecting the entrepreneur’s investment.
“According to the Sages, without recognition of private property, there is no economic life. As stated in the Sayings of the Fathers, one who maintains ‘what is mine is mine and what is yours is mine’ is a wicked person, but one who maintains ‘what is mine is yours and what is yours is mine’ (i.e., rejects private ownership) is an ‘ignoramus.’ In the absence of regulated and recognized ownership, there is no motivation for economic life.”
So how do we resolve the tension between protecting the investment while maintaining the credibility of the contract, and public ownership?
“If the percentage that the state demanded were reasonable based on what was known at the time, then the fact that a reserve larger than expected was found is not, in my opinion, reason enough to change the agreement. Another possibility is that the original agreement was irresponsible, and was biased in favor of the investors. It is either a case of government foolishness or of government corruption. In either case it is hard to find justification for violating the contract – unless the licensee itself were involved in the corruption.
“The public has a long-term interest in facilitating trust in contracts with the state, and this interest in itself might even override the value of any good deeds that can be accomplished with the funds that would be received by raising the state’s percentage. And apart from all that, there is also the moral issue of fairness in interactions between the state and its citizens.
“Beyond that, state officials should be held accountable, both as individuals and when acting in their official capacity. If the original agreement was formulated irresponsibly, the public must politically punish those who sold their assets cheaply, and if there was an element of corruption, it should be investigated and prosecuted and the criminals should be punished. But as long as the licensee was acting in good faith, it should not be dispossessed. The state has primary ownership over the resources, but unless its commitment was obtained by illegitimate means, it must keep its word.”  
Professor Noam Zohar, one of the founders of the Shalom Hartman Institute, is Professor of philosophy at Bar Ilan University and a senior research fellow at the Hartman Institute. 
Dr. Dani Attas is a lecturer in philosophy, head of the PEP (Philosophy, Economics, Political Science) program at the Hebrew University in Jerusalem, and a research fellow at the Hartman Institute.

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