A dry hole is no disaster; failures are part and parcel of the oil and gas business. But the disappointment at the Myra 1 well pales into insignificance in comparison with the failure of the licensees to fulfill their duty by providing accurate information to investors who trusted them.
If I were an investor in Israel Land Development Company Energy Ltd. (TASE: IE), Modiin Energy LP (TASE:MDIN.L), or IPC Oil and Gas Holdings Ltd. (IPC) (TASE: IPC), I would feel cheated today. For a month, there have been two versions about what was going on at the Myra well making the rounds in Israel. The difference between them was so great that you could become confused and think that there were two different wells of the same name being drilled.
The first version, which has been current since early August among a small number of geologists, professionals, and other parties involved in the well, can be summed up in three words: "Myra is finished".
The second version, which was alive and kicking until this morning, was that of the well's owners. This version was presented to the public at a press conference on August 13. A few days earlier, "Globes" reported that there was no gas in the well's target strata. But at the press conference, the companies' executives appeared as if they did not understand what all the hullaballoo was about. The target strata are simply deeper than first believed, they explained. There was a technical breakdown, true, but breakdowns happen at all wells.
Don't be confused. The Myra partners misled investors at that press conference. This is a harsh assertion, true, but in this case they do not deserve any benefit of the doubt. When a well reaches its target strata and no gas is found, that's a bad sign. This is known to every geologist, and all the Myra partners knew it when they convened the press conference.
Nonetheless, they chose to give the public a misleading presentation, which stated that there had been no worsening of the well's risk/reward ratio. All that the partners had to say was that not only were the target strata deeper than they thought, but that the chances of success were lower. They did not say that. They did not even imply it, even with a wink.
The credibility gap between the versions closed today. Investors realized that only a miracle can save the Myra well from failure. An investor who relied on tips from knowledgeable sources had plenty of opportunities to jump from the sinking ship in the past month. But an investor who relied on the official statements by the well's owners had no reason to quit until this morning, when it became clear that it was too late.
For this reason, the Myra well failure is first of all a black day for the Israel Securities Authority, innocent investors, and anyone who had hoped to raise capital for future wells. The blow to investor confidence is more serious than the blow to their pockets.
No gas and no competition
The Myra well's failure is a painful blow. The bad news is that we have lost a major gas field that could have supplied critically needed gas to Israel by 2015. The worse news is the popping of hopes for real competition in the natural gas supply market. The total domination by the Noble Energy Inc. (NYSE: NBL) and Delek Group Ltd. (TASE: DLEKG) partnership now seems more solid than ever.
Not only is Myra out of the picture, but the worst-case scenario that Modiin Energy controlling shareholder Tzahi Sultan warned about has also materialized: the Shimshon well is stuck because of the collapse of ATP Oil & Gas Corporation (Bulletin Board: ATPAQ). It is not clear when the East and West Daniel licenses, in which it also a partner with Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L), will be opened. Shemen Oil and Gas Resources Ltd. (TASE: SMOG) is struggling to secure financing for the well in its license. Canada's Adira Energy Corporation (TSXV: ADL; Bulletin Board: ADENF; XETRA: AORLB8) has no money to drill at the Gabriella and Yitzhak licenses.
Worst of all, the capital market, the primary source of financing for wells up to now, is blocked. No one knows how long it will take until investors recover from the blow from Myra. The only hope for a new player is the well planned by Teddy Sagi, Benny Steimetz, and Israel Opportunity Energy Resources LP (TASE: ISOP.L) at the Yishai license in December. Today, the decision to raise financing for the well on the London Stock Exchange seems especially wise.
The Myra well's failure highlights the level of risk in the oil and gas exploration industry. Myra was the first dry hole after the series of strikes that began at Tamar in 2009. After we became used to counting undiscovered natural gas fields like cans at the supermarket, probability has given us a sharp reminder of what it means. It's a pity that the reminder cost us $90 million.
Published by Globes [online], Israel business news - www.globes-online.com - on September 6, 2012
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