Celebration is premature for Shemen Oil

Amiram Barkat

The size of the oil discovery at Yam 3 will depend on the net thickness of the strata and the kind of rock.

The announcement on Sunday by Shemen Oil and Gas Resources Ltd. (TASE: SOG) included two important details that were missing from the previous announcement in late August: the net thickness of the field's strata; and that the field contains oil, and not just natural gas. The announcement brings the Yam 3 licensees one step closer to realize the great hope of the 128 million-barrel of oil field predicted in the resources report.

Shemen Oil chairman Gabi Ashkenazi and controlling shareholder Jackie Ben-Zaken have already succeeded where all the other Israeli new oil gas and exploration companies that emerged following the Tamar discovery have failed. Apropos of the other exploration companies, the discovery of oil is not only good news for Shemen Oil, but for the licensees of adjacent prospects, beginning with Gabriella licensee, battered Modiin Energy LP (TASE:MDIN.L).

The chances of finding oil at other licenses has increased in the wake of the Yam 3 well, but geological surveys and chances of success are not something you can buy at the grocery store. Shemen Oil has only passed one of many hurdles in a race that will only be decided in a few months.

The resources report by Netherland Sewell & Associates Ltd. (NSAI) that is the basis for the Yam 3 well estimated that the field held 128 million barrels of recoverable oil (or 110 million barrels of oil and 18 million barrels of oil equivalent of natural gas). The problem is that the thickness of the strata on which the reports is based is not known, which means that no comparisons are possible. Nonetheless, investors rushed to take the net strata thickness reported today - 68 meters - and multiply by the license area - 25 square kilometers - to try and estimate how much oil the field offshore from Palmachim contains. Other people compared Yam 3 with the natural gas fields discovered by Delek Group Ltd. (TASE: DLEKG) and Noble Energy Inc. (NYSE: NBL): Tamar, Leviathan, and Karish. Such a comparison will show that the Yam 3 field is similar in size to Karish, the smallest of the three fields, which has 1.8 trillion cubic feet (TCF) of gas and 13 million barrels of condensate (a liquid similar to light oil).

Yam 3 actually has oil, and the numbers tossed around the capital market today mentioned a field worth $2-3 billion. But the data published by Shemen Oil to date are only a small part of the puzzle, so any number is a winner. Israel's last gas discoveries caused investors to rely almost exclusively on the figure for the net thickness of the hydrocarbon-bearing strata. This figure is important, because almost all the wells have been drilled in the well-known Tamar Sands strata.

In the case of Shemen Oil, as Clal Finance's analyst Yaron Zar points out, the strata has not been characterized, so the question of producible oil is critical, and the answer will only be known in full after the logs and production tests.

Information as important as the strata thickness is the kind of rock containing the oil. At Tamar, Leviathan, and Karish, the rock is highly porous sandstone. But the strata rock at Yam 3 may be chalk, with a far lower porosity. The licensees presumably already know what kind of rock they drilled, which they know from the rate of the drilling in the strata. The softer the rock, the better.

Published by Globes [online], Israel business news - www.globes-online.com - on September 8, 2013

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

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