Israel's energy sector is set to undergo significant changes that could transform the country into an exporter of natural gas. Development of three recently discovered natural gas fields—Tamar, Dalit, and Leviathan (see Figure 1 )—is projected to begin at the end of 2012 and be completed by the end of the decade. The estimated supplies from these fields (see Table 1 ) would enable Israel to decrease its natural gas and coal imports and possibly its oil imports. Coal imports would likely be most affected as coal is currently the primary fuel for electric generation, and can be displaced by natural gas. Israel's trade balance would likely improve and its carbon dioxide emissions would likely decline as a result. The discovery of natural gas resources has also led Israel to reevaluate the nation's energy tax policy. Israel's Ministry of Finance has recommended tax policy changes that would increase tax revenues, but decrease potential after-tax profits for developers. Regionally, Israel's success thus far has sparked interest from its neighbors to explore their boundaries for energy resources and has raised concerns from Lebanon about sovereignty over the discoveries. Israel is poised to became an energy producer and perhaps even a natural gas exporter provided its recent discoveries come to fruition. At the end of last year, Noble Energy, a U.S. independent energy company, reconfirmed its estimates for its third and largest natural gas discovery off the northern coast of Israel. The Leviathan field has an estimated resource base of 16 trillion cubic feet (tcf) of natural gas, but will require at least two more appraisal wells to be drilled before the size of the resource base is better defined. Noble Energy's other natural gas discoveries (Tamar and Dalit) coupled with the success of other companies puts Israel in a position to be self sufficient in natural gas and possibly become a natural gas exporter, thus improving the country's energy and economic security. Since January 2009, Noble Energy has made three natural gas discoveries—Tamar, Dalit, and Leviathan—with an estimated 25 tcf of resources. Israel's natural gas reserves—natural gas that has been discovered and can be expected to be economically produced—prior to the Noble Energy discoveries were estimated at 1.5 tcf or about 16 years worth at current production levels. If only half the natural gas from the new discoveries is produced at today's production levels, Israel would have well over a 100-year supply of natural gas. It is too early to know the rate of natural gas recovery from the three new fields or if other discoveries will arise, but it is highly likely that Israel's energy mix will move towards natural gas by the end of the decade. Tamar's first production is expected at the end of 2012, with Dalit one or two years after that, and Leviathan between 2016 and 2018. According to Noble Energy, Tamar alone is expected to reach a maximum capacity of one billion cubic feet per day (bcf/d) by 2013 or 2014, or over three times the rate of Israeli consumption in 2009 of 0.31 bcf/d. Until 2008, Israel's demand for natural gas was met by domestic production. An import pipeline from Egypt began deliveries in 2008 and despite public discontent against the sales in Egypt, the pipeline remains operational today ( Figure 2 illustrates Israel's natural gas consumption and highlights the effect of Egyptian imports). Natural gas from the new fields could displace the Egyptian imports, which has benefits and disadvantages for both countries. Israel pays below market prices for the natural gas it imports from Egypt. Continuing the imports and using additional production to begin exports, most likely to Europe or Jordan, could further improve Israel's energy and economic security. Eliminating the imports could improve Israel's trade balance and provide greater supply security. For Egypt, stopping the exports to Israel would have political advantages as the natural gas sales to Israel were unpopular with Egyptians and were taken into court. The impact of the current unrest in Egypt on its natural gas exports to Israel is unclear. Maintaining the exports to Israel could help Egypt's trade balance. At the end of April, the natural gas terminal near El-Arish in Egypt (see Figure 1 above) was attacked for the second time since protests erupted in that country in January. Natural gas from the terminal supplies the Arab Gas Pipeline to Jordan, Syria, and Lebanon, and a separate pipeline to Israel. There is no estimate for how long natural gas will not be exported. The pipeline was also attacked and disabled in February causing natural gas supplies to be stopped for about a month. The terminal has been a target for Bedouins who feel neglected and oppressed by Cairo. Israel's consumption of natural gas has been growing since 2003, but remains a relatively small portion of its current energy mix at 11%. Oil accounts for almost half of Israel's primary energy consumption, while coal is 35%. (See Figure 3 .) However, the recent natural gas discoveries have the potential to substantially change the share of natural gas use in Israel. Industry forecasts project that by 2015, Israel could be consuming 1 bcf of natural gas per day, an almost threefold increase from today's consumption. The three new natural gas fields represent potentially 26 times the total amount of energy currently consumed annually by Israel from all fuel sources. Israel's electricity generation sector will most likely utilize the new resources more than other sectors (see section below) and could even facilitate Israel moving towards electrification of its car fleet, a goal the government has set. Current energy infrastructure is equipped primarily for oil and coal; substituting natural gas would require major changes and investment to the electricity and transportation sectors. Israel's electricity generation sector will most likely undergo the greatest change because of the development of Israel's natural gas resources. Currently, natural gas fuels about 26% of Israel's electric generation. (See Figure 4 .) Coal supplies almost two-thirds of the generation capacity. If Israel were to convert all of its existing electric power generation to natural gas, it would require approximately an additional 0.8 bcf/d of natural gas, the estimated maximum output from the Tamar natural gas field alone. Replacing only its coal units would require approximately 0.67 bcf/d of natural gas. If these conversions were to occur, carbon dioxide emissions from the electricity generation sector would decrease 52% and 50%, respectively. However, this would be a major investment and likely require many years to achieve. Switching to a natural gas-based electrical sector would allow Israel to increase the domestic share of energy production. Currently, Israel imports all of its coal and most of its oil. In April 2010, Israel's Minister of Finance appointed a committee to examine fiscal policy related to oil and gas resources in Israel, prompted by the recent natural gas discoveries. The committee was directed by Israel's Minister of Finance to (1) evaluate Israel's fiscal system as it relates to oil and gas reserves and compare Israel's system to countries in similar economic circumstances; (2) propose an updated fiscal system; and (3) examine the potential effects current and future natural gas discoveries would have on the Israeli economy. The committee's draft conclusions were released by Finance Ministry on November 10, 2010. The committee found that "the current system does not properly reflect the public's ownership of its natural resources." The committee's draft conclusions recommended two major changes to Israel's tax treatment of the oil and gas industry. First, the draft conclusions suggested eliminating the existing depletion deduction. Second, a progressive tax on oil and gas profits was proposed. In the proposal, profits were determined using the ratio of total revenues to total exploration and development costs. The committee's draft conclusions did not recommend a change in Israel's royalty rate, which is set at 12.5%. The committee's final report was released on January 3, 2011, and fully accepted by Prime Minister Netanyahu and the cabinet. Overall, the committee's recommendations would increase the government's share on oil and gas revenues to between 52% and 62%, up from the current 30%. Like the draft conclusions, the committee's final recommendations suggest eliminating the depletion allowances and imposing a tax on oil and gas profits. The tax on profits would start after the project had earned cumulative net income equal to 150% of its exploration and development costs. The rate of tax would start at 20%, increasing to maximum rate of 50%. This tax increase would be phased in over time. Fields that start production prior to 2014—which would likely include Tamar and possibly Dalit, but not Leviathan—would be partially exempt from the tax increase. For reserves in which extraction begins by January 1, 2014, the profits tax will not apply until cumulative net income reaches 200% of exploration and development costs and will not be fully phased in until reaching 280%. The tax increase recommended in the final report was less than was initially presented in the draft proposal. The proposed tax increases will be enacted only if approved by the Israeli government. Israeli and U.S. companies oppose any tax increase, and argue that changing the tax regime will deter future energy resource development. Oil and gas producers in the United States pay the U.S. corporate income tax. The corporate tax is levied on taxable income, which is calculated as gross income less deductions. The statutory corporate income tax rate is generally 35%. There are a number of deductions specific to the oil and gas industry, such as the ability to expense intangible drilling costs (IDCs) and to claim percentage depletion instead of cost depletion. Oil and gas producers are also eligible for the Section 199 production activity deduction. The United States has generally not imposed a specific profits tax above and beyond the corporate income tax on the oil and gas industry. However, from 1980 through 1988, the United States levied a windfall profits tax (WPT) on the U.S. oil industry. In practice, the WPT was an excise tax. The tax was determined according to the price of oil rather than on profits. The WPT was enacted to address increased oil industry profits following the decontrolling of oil prices.