All that glitters / What are the chances of drilling for money?

Oil and gas exploration industry securities have without a doubt been the big story on the Israeli stock exchange over the past two years. The share price of the king of Israeli oil exploration, Isramco, has risen almost 1,900% since the beginning of 2009, thanks to the major gas find at the Tamar drilling site.

Other oil and gas industry players joined the festivities, including those that haven't found a thing: Ratio Oil and Modiin Energy, which haven't started drilling, as well as Givot Olam and Zerach Oil Exploration, which completed drilling but have so far found only "signs of oil."

Investment in oil drilling is not a one-way street, however. Securities in the industry bounce up and down, and their declines are especially painful. On Sunday, for example, the share price of the Zerach partnership dropped 23% in one day, in reaction to the firm's disappointing results from production tests at the Tamrur 4 drilling site near the Dead Sea.

Investors in oil exploration securities aren't stupid or naive. They know well that they are investing in something risky and volatile, with a prospect of hitting jackpot as well as being bitterly disappointed. They make the investment with their eyes open.

Investors' awareness and responsibility for their actions are not enough, however. It turns out that people who invest in this type of stock or security are the same people who "invest" substantial sums in lottery tickets and casinos abroad. It also turns out that such folk tend to lose much more on the stock market than members of the public who choose more "boring" securities that go up just a few percent every year.

An American study on the topic, based on data supplied by investment firms, shows investors who choose to put their money in stocks that are like lottery tickets come from a particular socioeconomic background.

They are poorer, less educated, male rather than female, black rather than white, more religious, and Catholic. In addition, their investments underperform compared to the investments of the population as a whole.

The bottom line: It's actually investors with limited means, who cannot afford to lose money in the market, who buy riskier shares like oil stocks.

No similar studies have been carried out in Israel, but the crowd that shows up at the shareholder meetings of oil exploration companies is a lot more colorful than the buttoned-down investment firm managers from Tel Aviv's financial district.

So the interesting question really is, what are the real chances of making a killing on oil stocks?

There is no definitive answer, of course, but a rough assessment is possible. As a practical matter, there are three separate playing fields in Israel in the oil and gas exploration industry: exploration in the Mediterranean; exploration on land in general; and exploration in the Jordan Valley-Dead Sea region. The probability of economically viable finds in the Mediterranean is high. Experts peg the chances there at 1 in 3 based on advanced exploration techniques and the reserves discovered. The problem is a lot of gas has already been found and the price of drilling licenses already reflects that prospect. Investing in such drilling operations is not like buying a lottery ticket. It's a real investment.

On land, the picture is different. Up to this point, no less than 400 drilling operations have been undertaken in Israel if you add up exploration in every region of the country, at every depth and using every method, and in each case, they came up dry, except one. The Heletz field has produced 20 million barrels of oil, which is nice, but still not Saudi Arabia. Current drilling on land at Tamrur and Givot Olam is based on the same research and the same ideas. The bottom line is the chances of finding something substantial on land in Israel have dropped to a fraction of a percent, and maybe even that is optimistic.

A lottery ticket remains a lottery ticket, and when it comes to oil drilling, there is no sure thing. Some day, maybe someone will make a major commercial find on land in Israel, but chances are small and investors in drilling have to know that they are in casino territory, with slimmer chances than in many card games. Someone who buys oil exploration stocks is buying an investment, but he is knowingly also buying something else: a dream, excitement and the adrenaline that comes with the rumors and the announcements of signs of oil, drilling, licenses and test production.

In the United States they say it's best to get rich, but the next best thing is the chance of getting rich. The investor in oil exploration shares has to remember that this added value is costing him a lot of money, and in many cases, he can't really afford the pleasure.