The mention of investing in Israeli stocks will typically either conjure thoughts of communications, pharmaceuticals or defense-based industries. Israel is best known for such corporations as TEVA (Nasdaq:TEVA), the world's largest manufacturer of generic drugs, Check Point (Nasdaq:CHKP), a leading supplier of online security services and Elbit Systems (Nasdaq:ESLT) a Haifa based integrated developer of defense systems. However, a recent discovery in the Mediterranean has placed the country in the middle of what the Wall Street Journal calls a "gas bonanza" as this find has the potential to be the world's largest deepwater gas find in ten years.

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The Find

The Leviathan field currently holds an estimated 16 trillion cubic feet of gas - enough to accommodate Israeli demand for the next century. Depending on future energy prices and factors such as drilling costs, this discovery may be worth $90 billion. In a country where energy potential has primarily been focused on technological innovation in such areas as solar power, this finding may actually alter Israel's status into a net exporter. Noble Energy (NYSE:NBL) has 39.66% of the working interest in the region, while Delek Drilling and Avner Oiler exploration both have 22.67% and Ratio Oil Exploration has the remaining 15%.

According to Noble Energy, because of the large size of the field, approximately 125 square miles, two more appraisal wells will be required in order to determine the total gas reserves. The Levantine Basin has thus far produced three significant natural gas discoveries for Noble Energy, with the latest being the largest in corporate history. After closing at a level of 124.32 in 2008, the Tel-Aviv Oil and Gas Exploration index surged 1030% to a level of 1,409.82 to close off 2010 after a series of additional smaller finds in the Levant Basin.

Raising Taxes

Despite opposition from the United States, the Israeli government is likely to increase the tax rate on natural gas discoveries. In previous attempts to attract the expertise of large oil companies, Israel offered a low royalty/tax system. However, with the recent findings and the potential for future operations in the Mediterranean, taxes might be raised by over 50% as officials claim that as the current energy tax system is out of date.

The Sheshinski Committee suggested on Monday that taxes on profits be raised from 30%, as mandated by the Gas Law of 1952 to between 52% and 62%. Although this increase is naturally criticized by oil and gas firms, it is an improvement from the 66% tax suggested two months ago. The suggested tax burden falls in line with the average level in utilized by OECD member countries. Prime Minister Binyamin Netanyahu will preside on the issue next week.

The Bottom Line

The Leviathan, which originally referred to a seven-headed sea monster, has become a hot source of speculation in recent months, and has attracted other nations such as Lebanon to consider exploring their energy potential. As the economic engine of Israel undergoes transformations, hopefully the nation will continue to promote a culture that fosters technological innovation and supports such groundbreaking companies as Nice-Systems (Nasdaq:NICE) and Cellcom Israel (NYSE:CEL). Otherwise, the country may fall victim to Dutch Disease. (Remittances are an important factor in the global economy, and help drive growth both at home and abroad. To learn more, read Introduction To Remittances.)

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