**1. Introduction**

The past recent years have seen tremendous turmoil in regional and global energy markets, with volatile oil prices, geopolitical tensions over oil and natural gas (NG) supply, and tightened environmental regulation.

Up until recently, Israel was considered a resource-deprived country, especially with regard to fossil fuels. While traditionally relying on coal and oil imports, the last two decades have seen Israel diversifying its energy sources with the usage of NG. Israel only had its first commercially recoverable discovery of fossil fuel in 1999, with natural gas discoveries at the Noa and Mari-B fields in the Mediterranean. These fields are collectively known as Yam Tetis [1]. A major source of Israel's NG originated in Egypt, covering some 40% of Israeli demand. On the advent of civil unrest in Egypt in 2011, the el-Arish-Ashkelon pipeline, which delivered NG to Israel, was repeatedly sabotaged, effectively bringing imports to a halt [2]. This supply disruption inflicted heavy economic and environmental burden due to the need to switch to costly oil-based fuels in its electricity generation. However, by this time, significant NG discoveries (TAMAR field) gave Israel a foreseeable continuation of supply channels. In addition, the commissioning of liquefied natural gas (LNG) receiving capability in early 2013 (capable of supplying 1–3 billion cubic meters (BCM) a year) was able to negate the supply shortage from the depleted Yam Tetis and Egyptian gas to some extent. More significantly, a development rush of the Tamar field in 2013 allowed meeting the majority of current Israeli NG demand, and was set to supply between 50–80% of Israel's future consumption needs. The sharp increase in gas reserves enables Israel to pursue a new and unexpected path to energy independence [3].

In June 2010, the Leviathan structure located in deep water, 30 km west of Tamar, was found to contain the same gas-bearing Tamar Sands. The analysis indicated recoverable reserves of 500 BCM of gas in the Leviathan field. The giant Leviathan field was the largest discovery worldwide during the first decade of the 21st century. Exploration activity in the northern part of the Israeli Exclusive Economic Zone (EEZ) continued from 2011 to 2013. Additional amounts of NG were discovered in the Karish, Tanin, Dolphin, Tamar SW, and Aphrodita-Ishai fields (The Ministry of Energy).

Consequently, long a resource-poor country, Israel is now evaluated as having more natural gas than it needs for the next 30 years. As Israel's primary energy import bill before the NG discoveries was about \$10 billion—more than 5% of gross domestic product (GDP)—NG is expected to sharply improve the country's trade balance.

Debates about the nation's rights over its natural resources, as well the right of ownership by foreign entities, surround the economic dilemmas that the national revenue policy faces. The Sheshinski committee was given a charter to recommend changes in fiscal policy for Israel's natural-resource sector. The key committee recommendations [4] that were accepted by the governmen<sup>t</sup> (Government decision 2762, 2011) included retaining the enacted 12.5% governmen<sup>t</sup> royalties over oil and gas production, and the establishment of an excess profits tax of up to 50%. Hence, the maximum governmen<sup>t</sup> take (GT)—i.e., the governmen<sup>t</sup> share in the natural resources sales revenues—rose from about 30% to 62.5%.

The NG fields of Tamar, Leviathan, Karish, and Tanin were discovered and controlled by the United States (US)-based Noble Energy and Israel's Delek Group, effectively creating a cartel over the vast majority of the country's gas reserves. The issue of the gas cartel and the price of NG have become highly contentious [5]. The "Gas Framework" approved by the Knesset in 2016 called for Delek to divest itself of Tamar and for Noble to reduce its stake from 36% to 25% in six years. Following the "Gas Framework", Noble Energy and Delek sold the control of two smaller fields: Karish and Tanin. However, the two companies retain their holdings in the much bigger Leviathan field, while the governmen<sup>t</sup> assured that it would not impose price supervision or annul contracts for NG already signed. Most importantly, the governmen<sup>t</sup> committed to observing these terms for as long as 15 years.

The owners of Tamar field conditioned the investment in its development on a long-term contract with the Israeli Electric Corporation (IEC), which was a government-owned regulated monopoly at that time. This much-disputed contract served as an anchor for the entrepreneurs, assuring the demand for NG. With the discovery of Leviathan Field, it was clear that the largest fraction of domestic demand was already locked for Tamar field. The owners of Leviathan argued that the field would be developed in the nearby future only if exporting the NG would be allowed. Based on the Tzemach Committee's recommendations [6], the governmen<sup>t</sup> set out the quantity of NG that would remain for domestic consumption in order to achieve energy security over time.

During 2018, an inter-ministerial team re-examined the gas export policy. The recommendations of this team included setting the amount of NG secured for the domestic market at about 500 BCM [7] while the remaining amount, estimated at about 340 BCM, would be available for export, and were adopted by governmen<sup>t</sup> decision 4442. NG exports already underway or agreed with Jordan and Egypt total over 110 BCM (3.9 TCF).

The way the economy exploits the windfall of natural resources might adversely affect the pertained sectors, as well as the economy as a whole. One of several well-known studies on the subject of natural resources economics showed evidence to the relationship between countries' dependency on natural resources exports and their growth rates [8]. The study examined a sample of 97 developing economies and compared their natural resources exports to gross domestic product (GDP) ratio with growth per capita over the span of 20 years (1970–1989). The results showed that economies with a high ratio of natural resource exports to GDP tended to have low growth rate, even when controlling for other determinants of economic growth such as initial GDP, inequality, trade policy, governmen<sup>t</sup> efficiency, and investment rates, which when combined form a phenomenon called the "Resource Curse". Such findings raise a debate regarding whether or not resource-abundant countries should be encouraged to exploit their resource bases.

The Dutch Disease is arguably the hallmark of the natural "Resource Curse" phenomenon. The Dutch disease is a scenario that can occur in small countries with an important resource extraction sector. The large-scale expansion of this sector generates large export revenues that are exchanged in domestic currency [9]. This demand appreciates the domestic currency, causing domestic goods to become expensive compared to foreign goods. Consequently, the country's international competitiveness su ffers, hampering its exports of other goods and services [10]. Nevertheless, it is di fficult to separate Dutch disease e ffects from the domestic and international macroeconomic conditions prevailing at the time of the shock. This is all the more so in the case of price-led energy booms, which might be accompanied by cross-economies recessions.

The question arises of whether this is actually a problem. [11] noted that some economists have claimed that the "disease" is merely an adaptation process that the economy goes through in light of its newfound wealth, all the more so when the source of increased inflows is permanent. At the same time, she noted that other economists argue that the damage caused by the transition of capital and labor between sectors is by itself a risk to economies' growth potential, requiring adequate policy measures to deal with such implications. When the booming sector is NG, oil, or minerals, the declining tradable sectors, according to the theory, would include manufacturing and agriculture [12]. In principle, such changes in the structure of production should be welfare improving, reflecting changes in demand associated with an improvement in national income [12]. However, they may be a matter of concern for policy makers if the declining sectors are thought to have some special characteristics that would stimulate growth and welfare in the long-term, such as increasing returns to scale, learning by doing, or positive technological externalities. This might be the source of concern for the Israeli economy, in which export comprises about 30% of the GDP, and is mainly composed of technology and labor-intensive goods and services (high-tech, medicine).

Recent empirical evidence and theoretical work provide strong support to a negative link between resource abundance and long-term growth [13,14]. The methodology for empirically assessing "Dutch Disease" usually involves the econometric analysis of time-series or panel data [15] for researching the correlation between resource abundance and the share of tradable sectors in the overall economy [16]. As Israel has only recently started the low-scale export of NG, this approach cannot be applied yet. However, expectations for major NG exports have been accumulating since 2010 with the discovery of the major o ffshore field "Leviathan".

The framework of this research aimed at investigating the much debated ye<sup>t</sup> little explored effects of the newly introduced NG resources over the Israeli economy. Specifically, we estimated the implications of expected NG exports, as expressed through the media announcements, on the foreign exchange rate.

The aim of this paper was to analyze whether the Israeli economy showed symptoms of "Dutch Disease": an appreciation of local currency caused by massive natural resource exports. The export of NG started on a small scale only in 2017, but the expectations for large export potential have been escalating since 2010. Therefore, we employed the Event Study methodology instead of the commonly used econometric analysis of actual data, as it is not available yet. We investigated NG industry-related announcements and the fluctuations in the real exchange rate. Although this paper focused on the NG industry in Israel, both the methodology and the empirical results are of general interest. Technology advances allow discovering and developing natural reservoirs that previously were unknown or considered unprofitable. Moreover, shale oil and gas technologies revert the energy markets. Countries that were considered resource-deprived energy importers become net exporters. The implications of these transformations in terms of trade and economic growth are still ambiguous.

The rest of the paper is organized as follows. Section 2 presents the data and estimation strategy. Section 3 illustrated main empirical results. Section 4 generates the discussion.

### **2. Materials and Methods**
