Five years later, poor policymaking, political infighting and a battle between PM Netanyahu and the antitrust commissioner over a lack of competition mean Leviathan remains undeveloped.

JERUSALEM, Oct 1 (Reuters) - When the Leviathan gas field was discovered off the coast of Israel in 2010, it was pitched as a game-changer -- a vast energy reserve that would transform the economy and bolster public finances for years to come.

Five years on, poor policymaking, political infighting and a battle between Prime Minister Benjamin Netanyahu and the antitrust commissioner over a lack of competition mean Leviathan remains undeveloped. Meanwhile, Egypt has made a larger discovery that could make it a more attractive investment.

The case sends a worrying message to investors and may make them wary of the natural resources sector in Israel, which has struggled to diversify its economy much beyond technology.

Instead of billions of dollars in exports and tax revenue from the gas deposit over the next 25 years, analysts are now concerned Israel will end up with negligible additional income and may be forced to revise down its growth projections.

"It seems like (government leaders) are making every possible mistake," said Bank Leumi Chief Economist Gil Bufman.

"The government got mixed up. They counted how much they could make from this gas but forgot what they have to do to make it come true."

Government officials declined to comment.

In 2009, against expectations, Texas-based Noble Energy and Israel's Delek discovered the offshore Tamar gas field, a deposit about half the size of Leviathan, which was set aside almost entirely for domestic consumption.

The following year they found Leviathan and prospects soared. Economists and the government's financial planners said not only would domestic energy demand be taken care of by Tamar's cheaper gas, boosting competitiveness, but Israel would export most of Leviathan's reserves, earning steady revenue to underpin a strained budget.

The finance ministry estimated Israel could earn as much as $130 billion by 2040 from taxes and royalties, with most of the money going into a sovereign wealth fund and the rest to the budget.

The public purse would be far healthier and Israel's corporate sector would benefit. Small and medium-sized companies were expected to switch away from coal-fuelled energy to gas, lowering their energy costs by 10 percent. Larger Israeli industrial firms would also become more efficient.

The combined impact would lift economic growth by up to a percentage point from an average of around three percent a year.

And if Israel could link up with Cyprus and Egypt, it could turn itself into a regional gas hub, with an offshore LNG plant allowing it to export globally, with a potential positive knock-on for Israel geopolitically.

The reality has been far different.

Unprepared

Israel was poorly prepared for a big energy discovery. Since it did not expect Noble and Delek to find much in the eastern Mediterranean, it did not put many legal restrictions on them.

So when the partners found two major deposits, policymakers started to scramble. First the rules were changed to impose higher taxes on the companies' future profits. The companies objected but the government pushed ahead all the same.

Then Israel's independent antitrust commissioner got involved, ruling earlier this year that Noble and Delek had a monopoly in Tamar and Leviathan and something needed to be done, including assets being sold off to foster competition.

Again the companies protested, but eventually they agreed to a deal struck by parliament in which they would give up smaller assets linked to the Tamar field while keeping all of Leviathan.

Antitrust chief David Gilo was convinced Noble and Delek's position was still anti-competitive and would lead to higher prices and resigned.

Uneasy about the legal ground they stand on, Delek and Noble said they are holding back on investing the $6 billion needed to develop Leviathan and bring it onstream by 2019/2020.

They companies also confirmed they are threatening to take Israel to international arbitration in Switzerland, something that could further put off investors.

For the project to go ahead, Israel's economy minister needs to sign off on a proposal circumventing Gilo's antitrust ruling.

But the minister, Aryeh Deri, a member of the ultra-Orthodox community whose party is a linchpin in Netanyahu's right-wing coalition, is wary. He doesn't want to sign off until a new antitrust chief is in place and has given a second opinion.

Netanyahu could try to override Deri, but he would need to win a vote to do so and only holds a one-seat majority in the 120-seat parliament. It is too risky given Deri's coalition position. Without Deri, Netanyahu's government could collapse.

As a result, the project is effectively frozen, a constant aggravation for Netanyahu and his supporters.

Egyptian Competition

The political pressure has only increased since Egypt discovered the vast Zohr gas field in late August. At an estimated 30 trillion cubic feet, the deposit is a third larger than Leviathan and the 20th largest worldwide.

The competition could mean that Israel would miss out on export contracts, leaving it to focus on the domestic market.

"The discovery has alerted Israel to the risk of losing access to markets both in the region and globally," wrote Michael Barron, the director of global energy and natural resources at the Eurasia Group.

Israeli politicians are concerned that companies lined up for Leviathan's contracts could look elsewhere.

Jordan had agreed to buy Leviathan's gas for 15 years in a deal that worth up to $15 billion, but it has not yet signed. A similar preliminary agreement has been signed with British oil and gas company BG Group to negotiate a deal to export gas to BG's LNG plant in Idku, Egypt.

Italian energy group ENI, which discovered Zohr, is talking up Egypt as a regional gas hub and President Abdul-Fattah al-Sisi, keen to draw investment as the economy recovers from political upheaval, has promised a unified investment law that will make life easier for international investors.

If Israel's government can clear the regulatory and antitrust hurdles quickly, Noble and Delek could still manage to bring Leviathan onstream quicker than Zohr, increasing the chances of export contracts. But the window is closing.

ENI is also offering Israel something of a lifeline. It says it would be willing to pull together the resources of Israel, Egypt and Cyprus and develop one vast gas supply hub for Europe. But Israel still needs to get Leviathan up and running first.

(Editing by Luke Baker and Anna Willard)