Small well operators not taken seriously

Amiram Barkat

The Israeli regulator has turned the well operator into a party with almost no interest in the success of a well.

Monday's notice to the Tel Aviv Stock Exchange (TASE) by Shemen Oil and Gas Resources Ltd. (TASE: SOG) seems promising, even dramatic. After waiting tensely for months, it announced provisional findings from the Yam 3 well, offshore from Palmachim, which is seeking a huge reservoir that could have 120 million barrels of oil, worth billions of dollars. The findings are unquestionably favorable: significant signs of hydrocarbons (condensate, natural gas, and light oil in the upper target strata.

Such an announcement would have led the financial news, had it been published, say, in 2009-10. Even a year or two ago, Shemen Oil would have caused a storm. Analysts would have rushed to celebrate the pending era of oil, estimate how many billions might be buried beneath the sea, and write about the far-reaching consequences on adjacent licenses.

That was then. Instead, Monday's announcement was greeted coolly, even indifferently, by the market. Shemen Oil's battered share initially jumped 15% on the announcement, but then fell back, and ended the day with a gain of 3%. Instead of focusing on the potential and the encouraging signs, this time the capital market opted to focus on the question marks that remain.

The figure about the thickness of the oil and gas-bearing strata sounds impressive, but it a gross figure. "Gross means nothing to me; the question is what is the net thickness of the oil and gas-bearing strata," said a top analyst. Others noted that the Yam 3 well, operated by Caspian Drilling Company Ltd., an unknown Azeri company, is already 50% over budget.

Once bitten, twice shy; investors have learned to treat with great skepticism the oil and gas wells being drilled by in Israel by small and unknown companies. The lesson was learned the hard way, after a slew of dry holes that sank into the Mediterranean's depths hundreds of millions of dollars - mostly from small investors. True, wells are a risky business and even the best companies sometimes fail, nonetheless, it is impossible to ignore the fact that behind all the dry holes to date were small drilling companies by international standards and which lacked the proper experience and reputation.

The same claim has been repeatedly made in conversations with drilling experts: the Ministry of Energy and Water Resources is to blame for the current situation, by allowing tiny drilling companies to operate in Israel's waters.

The irony is that the Ministry of Energy actually tightened the threshold conditions for well operators, putting them under considerable pressure. There was a bonanza on the TASE at the time, and sharks and financiers were buying up licenses and rushing off to the capital market to raise money from thousands of small investors. Worry about the attack of the speculators caused then-Oil Commissioner Dr. Yaakov Mimran to set new threshold conditions for awarding oil and gas exploration licenses, including the requirement that the applicant consortium include a well operator with proven experience. But Mimran did not go all the way, and set a minimum of just 5% of a license's rights to be held by the well operator.

The well operator is the expert responsible for drilling a well and for any fault occurring the work. The prevailing practice in the world is for the well operator to own most of the rights to a license. For example, in one of the world's most crowded sites, the well operator's average holding is 78% of a license. But in Israel, the financiers were quick to exploit the Ministry of Energy's toothless threshold, with the result that the well operators became the smallest rights owners in the licenses, in many cases owning only the minimum token 5%.

The problem of such a small stake for the operator is two-fold: on one hand, the operator has almost no exposure to the risk of complications during the drilling or to the consequent huge financial damage that is liable to result of a breakdown; on the other hand, the operator's expected profit in the event of a discover is negligible.

In this way, the Israeli regulator has turned the well operator into a party with almost no interest in the success of a well. It has no fear of failure, and its sole interest is to keep the drilling going as long as possible to maximize its revenue from operator fees.

When recently asked about this, Mimran said that no foreign well operator would come to Israel had stricter threshold conditions been set. "As it is, the oil majors won't come to Israel because of the Arab boycott," he has said more than once. To his credit, it should be said that the TASE sharks fought the regulation, saying that they were finding it very difficult to find well operators which could meet the threshold conditions. Nonetheless, when looking at the collection of companies that agreed to come to Israel, it might have been better had they never come at all.

"No foreign company that respects itself would become a partner in a well with just 5% of the rights," said an industry expert. "At such stakes, only services companies come in, which mediate between the partners and the contractors. This reality is mainly convenient for the Israeli partners which acquired in the licenses as short-term financial investments, and have an interest in holding onto the full rights in order to the maximum payoff for them."

The result is quite ironic. The guidelines intended to fight speculation served the speculators, but not even they could save the companies and those who invested in them from their adventurousness.

The small well operators in Israel: GeoGlobal Resources Inc. (AMEX: GGR), owns 5% of the Myra and Sarah licenses. Its partner are Modiin Energy LP (TASE:MDIN.L) and Israel Land Development Company Energy Ltd. (TASE: IE). Both wells were dry holes. The prospects were estimated to have 6.5 TCF of gas. The wells cost $165 million.

  • AGR Petroleum Services Holdings AS of Norway owns 5% of the Ishai license. It partners are Israel Opportunity Energy Resources LP (TASE: ISOP.L), Benny Steinmetz's Nammax Oil and Gas Ltd. and Teddy Sagi's, Frendum Investments Ltd. and Daden Investment Ltd. Ishai, one of the Pelagic licenses, which was estimated to have 2.4 TCF of gas, was a dry hole. The well cost $103 million
  • ATP Oil & Gas Corporation (Bulletin Board: ATPAQ) owns 40% of the Shimshon license. Its partner is Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), a partner in the Tamar gas field. ATP has filed for bankruptcy protection in the US. Shimshon was a disappointment, with just 0.6 TCF of gas compared with the estimate of 2.4 TCF. The wells cost $80 million
  • Caspian Drilling Company of Azerbaijan owns 5% of the Yam 3 license. Its partners are Shemen Oil, Zerah Oil And Gas Explorations LP (TASE: ZRAH) and Zmiha Investment House Ltd. (TASE: TZMI). The Yam 3 reservoir is estimated to have 120 million barrels of oil. The well cost $160 million

    Published by Globes [online], Israel business news - www.globes-online.com - on August 27, 2013

    © Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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