Dry as a Bone, Sara Casts Doubt About the Israeli Energy Shares

Together with a similar disappointment at the Myra well, investors may now shy away from financing future explorations.

Nearly all the public investment with the major partners in the offshore Sara and Myra exploratory gas licenses - some $150 million to $170 million in initial share and rights issues - has evaporated following the weekend announcement that the Sara well came up dry and subsequent blowout of the partners' shares.

The Myra license met the same fate just last month.

ILDC Energy, controlled by Ofer Nimrodi and worth NIS 1.5 billion at its peak, closed yesterday at a value of just over NIS 82 million. Modiin Energy, controlled by Tzachi Sultan, has fallen from a peak value of NIS 1.3 billion to NIS 203 million. The two companies own 27% and 20%, respectively, in the Sara license. On Sunday alone, ILDC Energy shares plunged 61% while Modiin Energy shed 44%. They both continued lower yesterday.

Other than its shares in the Sara and Myra licenses, ILDC Energy is extremely thin in assets. It has a 7% stake in the Shmuel license, an option for part of the Binyamin license, and several additional licenses in Albania.

Modiin has a somewhat more diverse portfolio, with stakes in the Gabriella and Hadera Sea oil exploration licenses and an option for 15% of the Yitzhak license, as well as a share in the Shimshon gas license. Gabriella has been shown to have 110 million barrels of proven oil reserves, with potential for as much as 250 million barrels.

One thing investors undoubtedly want to know is how much cash the companies have retained.

Drilling and capping costs at the two licenses total $160 million, about the same amount raised from the public. Meanwhile it is estimated that Sultan has put in NIS 11 million of his own money into the venture over the years, with Nimrodi contributing NIS 20 million out of his own pocket and ILDC itself investing another NIS 60 million.

All in all, Modiin is expected to report it had between $20 million and $30 million on itys balance sheet at the end of the third quarter. ILDC Energy will probably report a much lower figure.

Cold water on whole sector

Analysts suggest the failures at Myra and now Sara casts a pall on the entire industry and may compl;icate its ability to raise funds in the capital market.

"It's not just bad news for the partners involved in the drilling, but for the entire local energy economy - which seems to have had its potential exaggerated beyond proportion amid the euphoria of discoveries," said Yaniv Pagot, chief strategist at the investment firm Ayalon Group.

"The probabilities of oil and gas exploration were widely known, but the exceptional successes with the Leviathan and Tamar drillings paved the way for developing the energy exploration industry. These successes created a widespread feeling that every hole's a gusher and that gas, oil, or both will be discovered wherever a drill is sunk."

Pagot claimed this could actually pose an opportunity for new investors to take the plunge.

"We believe the industry, at this inherent level of risk, could over time generate plenty of good news as well as bad, and the manic-depressive tendency can be exploited to create long-term diversified stakes in the local energy sector, with an emphasis on companies holding proven reserves on which the Israeli economy is now dependent more than ever," he said.

Elad Kraus, energy analyst at Harel Finance, took a different view. "The failure at Sara will have a marginal effect on the oil and gas sector," he said, adding that it could, however, lead to changes in the Tzemach Committee recommendations for how much gas should be exported in light of the now smaller anticipated production quantities.

Guil Bashan , IBI Investment House's oil and gas analyst, pointed out that potential competition to gas from the Tamar field has all but dried up with Sara out of the way, and in several years the Tamar partners will enjoy a monopoly.

"Sara and Myra were supposed to provide competition for Tamar as the economy's second major source of gas," he said. "For Isramco in particular this is positive news, but it will put the Tamar partners in a dicey position opposite the regulators."

Strum: Reopen talks on Tzemach

"The only obvious and necessary conclusion following the sweeping failures of the Myra and Sara drillings is to revisit the Tzemach Committee recommendations before we witness regulatory bankruptcy," railed former antitrust commissioner Dror Strum.

The committee, which was headed by the director-general of the Energy and Water Resources Ministry, determined that 50% to 60% of Israel's natural gas should be permitted based on the assumption that the country possesses 950 billion cubic meters in gas reserves. The latest developments, however, are likely to shatter this assumption.

"We warned that this is a shaky and negligent basis for establishing public economic policy, especially since every professional in the field knows you can't rely on estimated reserves, but rather on proven reserves," Strum said

"To this day no competent answer has been provided as to how anyone responsible could make such a stunning decision as allowing the export of more than 50% of the country's most vital energy resource to foreigners, based on the 'everything will turn out alright' principle that managed to make its way into energy regulation."

Ofer Vaknin