Israeli Gas Exploration Set Back
By a Second Round of Dry Holes

“You don’t invite the mohel [circumciser] to your son’s brith [circumcision] if you are not sure that you have a son, especially when that son costs 160 million dollars. I hope that the activities we conduct will transform some of the investors here to gas tycoons. In my dreams, I see a stream of gas fly out from the sea.” These words were uttered in June 2011 by Ofer Nimrodi, controller of Israel Land Development Co. Energy Ltd. This was close to the announcement of the potential existence of billions of cubic meters of natural gas under the Sarah and Myra licenses, of which Nimrodi holds 42%. A year and a half have passed, and it seems that the initial “mohel” announcement has, instead, [Oct. 21] morphed into an immediate call for the Chevra Kadisha [Jewish burial society]. The task: the burial of hopes and declarations to the tune of 600 million shekels [around $156 million].

About This Article

Summary : After failing to find natural gas in the Myra offshore exploration area, the Israeli energy sector has to cope with the news that drilling at the offshore Sarah site has failed as well, Lior Gutman reports. Publisher: Calcalist (Israel) Original Title: Financing ability is gone with the wind Author: Lior Gutman First Published: October 21, 2012 Posted on: October 23 2012 Translated by: Sandy Bloom Categories : Israel

But apart from the irony involved in the abyss between the announcements and results, this second failure to find gas reserves is expected to have harsh repercussions for the entire world of gas and oil drilling. The main victims are the Israel Land Development Energy shareholders who will have to break their heads to obtain more money to finance their other gas-related activities. Just in case anyone has forgotten, let us be reminded that in addition to making announcements about gas reserves, the owners of Land Development Energy signed a memorandum of understanding with the South Korean Daewoo concern, to export gas. As of this morning [Oct. 21], the Land Development’s diluted portfolio on the one hand, and their failures to find gas on the other, transform their capital-raising mission to well-nigh impossible.

Modiin Energy, controlled by IDB [Development Corp. Ltd] and Tzahi Sultan, has had a narrow escape from its adventures with Sarah and Myra. Luckily for them, petroleum reserves were found in other licenses held by Modiin, such as Gabriella or Yam Hadera, thus minimizing Modiin’s losses. However, both [Modiin Energy CEO] Ron Maor and Tzahi Sultan will have to rack their brains to find more money to finance the rest of their exploratory wells.

That brings us to our next issue: Modiin and Land Energy are not the only ones facing the problem of financing exploratory gas wells. Except for the American Nobel Energy Co. that never seems to run out of money, the rest of the players in the field will have to scrape up about $2 billion in the next year-and-a-half in order to finance no less than 18 gas drillings that are planned for the Mediterranean Sea. Where will the money come from? The patron investors. The [poor] circumstances of the world markets and anticipated cut-backs in the coming year’s budget, do not encourage investments in exploratory gas drillings.

So where will the money come from? The Tzemach Committee [tasked with establishing official policy on natural gas] that publicized its final report only a few weeks ago [in September 2012], came up with a logical compromise. They recommended that part of the gas be earmarked for the local market, and the rest — up to 500 billion cubic feet — be directed to the overseas market. The reason: The guarantee of exports will attract foreign investors here, some of whom will bring “fat checks” to finance gas production. The recommendations were severely criticized and countered by the argument that exports cannot be guaranteed without well-founded, up-to-date information.

Now, with the failed drillings in Sarah and Myra, the ministries of Energy and Finance will find it hard to guarantee that the gas industry will not be halted due to lack of funding. The reason: With every failed drilling attempt, the gas-export undertaking becomes many times more difficult. The investors’ hopes are currently resting on the gas-production test results of the five Pelagic and Daniel licenses. If those also turn up dry holes then the undertakers will be brought back, this time — to bury the entire industry of exploratory gas drillings.

In addition to the problems of funding and exporting gas, one of the main victims of the dry-hole failures is the businessman Yitzhak Tshuva and his friends from Noble Energy. Due to the dearth of competitors for the supply of gas, the chances are likely that they will be declared a monopoly by the Antitrust Commissioner. The danger: After the declaration, the government can set ceiling prices or fixed prices for all the gas transactions. This, in turn, will necessarily limit the potential for revenue from the gas sales.

Second of all, the gas-quota allotted by the Tzemach Committee to the local economy will not change and may even increase — and the failure of more and more gas drillings will significantly reduce the designated export quota.