Israel is reported to be drilling for oil close to the occupied West Bank after a government-commissioned report recommended legalizing Jewish settlements in the Palestinian territory on the bizarre premise that the occupation does not exist.

At the same time, Israeli newspaper Yedioth Ahronoth reports the hard-line energy and water resources minister, Uzi Landau, has decided to issue permits for oil and gas exploration in the occupied Golan Heights.

Like the West Bank, the volcanic plateau that dominates Israel's northern border was captured by Israeli forces during the 1967 Middle East war.

The occupied southern half of the Golan, an area of 500 square miles that provides Israel with one third of its water, was annexed by the Jewish state in 1981.

These moves by the right wing-dominated coalition government of Prime Minister Binyamin Netanyahu could have immense political repercussions and add a new and disruptive dimension to the floundering peace process between Israel and the Palestinians.

It could also go some way to explaining the politically explosive conclusions reached by the commission, with pronounced pro-settler sympathies, set up under former Supreme Court Vice President Judge Edmund Levy to explore the legal status of Jewish settlements in the West Bank.

The commission declared since there was no such entity as a Palestinian state before 1967 and since the West Bank was never a legitimate part of Jordan, Israel cannot therefore be considered an occupying power.

Netanyahu's Cabinet has yet to decide whether it will endorse the Levy report and treat the West Bank as part of Israel, a move that would almost certainly ignite Palestinian wrath as well as international condemnation.

Indeed, the U.S. State Department has already declared "we do not accept the legitimacy of continued Israeli settlement activity and we oppose any effort to legalize settlement outposts."

The British Broadcasting Corp. reported Tuesday the drilling near the West Bank is under way some 100 yards from the so-called Green Line, the border between Israel and the Palestinian territory.

The Meged-5 oil well is owned and operated by an Israeli company called Givot Olam Oil, which the BBC said is "the sole player in Israel's tiny onshore oil and gas sector."

The company has estimated Meged-5 reserves at more than 1.5 billion barrels and the geological strata suggest it runs eastward into Palestinian territory around the village of Rantis.

That's not a colossal field by any means, but it would have an immense impact on the West Bank's largely agricultural, and increasingly shaky, economy.

Givot Olam says it extracted 800 barrels a day during a production test in 2011.

The proximity of Meged-5 to the Green Line "raises ethical questions," the BBC said.

It quoted Samer Naboulsi, a petroleum engineer with a leading oil company in the Persian Gulf, as saying: "Geology doesn't follow geography. Looking at the shape of the overall field, it's clear this extends into the West Bank."

Israel is in the process of becoming a major natural gas producer after the Texas-based Noble Energy Co. discovered several large fields under the eastern Mediterranean with combined reserves of some 30 trillion cubic feet in 2009-10. Israel currently has to import its oil.

Gas has also been found off the coast of the Palestinian-ruled Gaza Strip, but Israel has blocked efforts to exploit these reserves as part of its economic campaign against the Palestinians.

The Golan remains largely an unknown quantity geologically, but if Israel finds oil or gas in commercial quantities it would drastically alter the political equation with Syria, even if the Damascus regime is being battered by a 17-month-old uprising.

After Israel annexed the southern Golan in 1981, it was ruled the Jewish state's Petroleum Law, which governs exploration and production, automatically extended to the occupied territory.

However, it was decided, for political reasons, not to carry out any exploratory drilling for oil or gas at that time.

Then, a few weeks ago, Landau, a leading figure in the ultra-right Yisrael Beiteinu Party of hard-line Foreign Minister Avigdor Lieberman, decided to reopen the Golan for energy exploration.

It's not clear whether the prospect of the collapse of the Damascus regime was involved in the Israeli decision, but if oil or gas is discovered in the Golan it would seriously jeopardize the territory's return to Syria.