Potential Duster Offshore May Dampen Bullish Run


BMI View: AGR, operator of an exploration well offshore Israel , reported a gas discovery in the highly prospective Ishai licen c e . However, the find could prove to be non-commercial, with a relatively shallow gas pay zone. While any resources determined to be recoverable could be developed jointly as part of a pending Israeli-Cypriot treaty, more disappointing exploration results could increas ingly place downward pressure on proposed export options announced by Israel authorities.

Norwegian independent AGR , operator of the Aphrodite-2 exploration well , reported ' significant signs of natural gas ' at a well in the Ishai licence offshore Israel. The well was drilled to a depth of 5 , 187 meters (m) and encountered a gas pay zone of just 15m in initial drilling. Partners include Israel Opportunity (10%), Nammax Oil and Gas (42.5%) and Frendum Investments , which holds a combined 42.5% stake with Daden Investment .

Although indications of gas at the Aphrodite-2 well were initially greeted as positive, the relative thickness of the gas pay zone is disappointing when compared to discoveries in the region . Initial gains in the company ' s share prices have pared back as more details emerged regarding the nature of the find. Indeed, comparisons were made to the Shimshon reservoir, where a 19m thick gas pay zone was revealed. The absence of a larger pay zone contributed to a decrease in estimates for the size o f the reservoir , which was ultimately determined to be 75% less than initial forecasts with only 16.8bn cubic metres (bcm) of resources identified.

Discovery May Be Only Temporary Boost For AGR
AGR Share Performance (NOK)

Drilling in the Ishai licence was equally highly anticipated, with proximity to Noble Energy's significant Aphrodite discovery in neighbouring Cyprus seen as de-risking exploration. Indeed, a June 2012 report from Ryder Scott estimated gas resources at Ishai could be in the range of 103bcm.

Notably, production testing will not be carried out at Aphrodite-2, with local media reports citing suggestions by anonymous sources that the reservoir encountered may be uneconomic to develop. In AGR's statement to announce the discovery on January 3 2013, the company declared its intention to plug and abandon the well within two weeks and to further evaluate initial drilling and logging data to determine well viability. Preliminary resource estimates of the reservoir produced by an outside assessor will be released in two months, according to Israel Opportunity CEO Eyal Shuker.

Yet, despite what may well be disappointing results in the forthcoming resource estimates, Ishai could potentially see commercial production. Development of gas resources could be made alongside discoveries on the corresponding Cypriot Block 12. Indeed, a joint development agreement is under negotiation between Israel and Cyprus, with the latter eager to quickly develop Noble Energy's Aphrodite discoveries as part of a liquefied natural gas (LNG) export project (see our online service, November 1 2012, ' Fast-Tracked Decision Supports LNG Ambition ' ) . While industry sources have suggested the development of Ishai is in jeopardy, the commercial partners who spent some US$103mn in drilling costs for Aphordite-2 may well seek a tie-in with commercial players in Cyprus, pending an agreement between governments.

Although further exploration could yield more discoveries that boost the reservoir's prospects, AGR's potential duster will not impact our current forecast for continued growth in natural gas production in Israel. We continue to expect the country to become a net LNG exporter from 2017 onward; however, further exploration challenges could pose downside risk to reserves growth.

Moreover, concerns have been raised that an absence of significant discoveries could increase political pressure to reduce initial recommendations from regulators that up to 50% of gas reservoirs be made available for exports. The proposal, issued by the Tzemach Committee, has yet to be approved and results from Ishai could provide leverage for those who seek to limit Israeli gas exports as part of the debate regarding how best to commercialise Israel's gas resources.

Offshore Gas Still On Track To Make Israel Net Exporter

Israel Natural Gas Production & Exports (bcm)

Offshore Gas Still On Track To Make Israel Net Exporter

e/f = estimate/ forecast . Source: EIA/BMI

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This article is tagged to:
Sector: Oil & Gas
Geography: Israel, Israel, Israel, Israel