05.07.2009

According to the Petroleum Law-1952, oil and gas exploration activities in Israel can be carried out in those geographic areas in which an exploratory entity has been given an oil and gas right according to the Petroleum Law. In addition, the Natural Gas Sector law mainly deals with the transmission, distribution and marketing of natural gas in Israel. Exploration and production in Israel is controlled by the Petroleum Law 1952 and the regulations dated 1953 and 2006 which defines three rights: (1) Preliminary Permit – the owner of which may request a priority right which gives exclusive exploration rights on the area. A permit may be granted for a period not exceeding 18 months; (2) License – after that the licensee selects a block or a number of blocks on his licensed area (drilling prospect) where he will ask to focus his drilling activities and needs to release 40% of the area back to the state. The license is granted based on the presentation of a work program and proof of financial capacity, namely the ability to finance half of drilling costs which is about $70 million for an offshore drilling; if oil has been discovered in commercial quantities and commerciality has been proven a license must be obtained prior to drilling. The license is granted initially for a period of 3 years and can be extended for up to 4 more years (thus a total of 7 years); (3) Lease – at the end of the license period, the licensee is obliged to start drilling or failing this his license will be revoked. A Lease is granted to the license holder. If this is the case the license holder is granted a development lease for 30 years that can be extended by an additional 20 years, during which time the leaseholder is obliged to develop the field with all due diligence as a prudent operator. The lease maximum period is 50 years. The royalty paid for oil and gas is 12.5%.

A request for a drilling license must be done according to clause 15 of the Petroleum Law 1952 and clause 1 of the Petroleum Regulations and the 2006 Petroleum Drilling Regulations. The entity requesting the right must include a list of the coordinates on the new Israeli grid and provide a map of the requested area, provide a description of the geophysical/geological backward of the request, provide a workplan with a detailed timetable of the operations to be carried out in stages, provide an estimate of the cost of the operations, details of the professional background of the scientific consulting team and proof of the financial capacity available. In any case it is necessary to show the availability of at least one million dollars. Documents attesting to proof of the availability of funds are to be submitted in the original. The following are the general requirements needed for the different rights: (1) preliminary permit onshore – full financial capacity for the entire work program to be proved; (2) onshore license – 50% of the cost of carrying out the work program (including one drilling); (3) offshore preliminary permit – full financial capacity for the entire work program plus 50% of the cost of drilling; (4) offshore license – 50% of the cost of drilling.

Geological and geophysical costs, delay rentals, amortization of unproved leasehold costs, and costs to drill exploratory wells that do not find proved reserves are expensed as oil and gas exploration. the costs of an exploratory well are usually carried as an asset if the well finds a sufficient quantity of reserves to justify its capitalization as a producing well and as long as sufficient progress is made assessing the reserves and the economic and operating viability of the project. For certain capital-intensive projects, it may take considerable time to evaluate the future potential of the exploration well and make a determination of its economic viability. The ability to move forward on a project may be dependent on gaining access to transportation or processing facilities or obtaining permits and government or partner approval, the timing of which is beyond the operator’s control. In such cases, exploratory well costs remain suspended as long as the operator is actively pursuing access to necessary facilities and access to such permits and approvals and believe they will be obtained.

The different phases of the oil and gas exploration process are along the following lines: A country publishes a competitive licensing round process where licensing blocks are offered to competing bidders; Individual companies or groups of joint ventures may apply for an E&P license. Usually, the licensing authority will assess the applicants based on the scope and quality of their proposed work program as well as on their financial capacity to undertake the activities required; The company that wins a licensing block then undertakes within a certain time frame to carry out a 2-D seismic survey to assess new leads in the relatively large area of the awarded block; The 2D seismic data is then processed and interpreted. At this stage, relinquishment is often required by the O&G Company back to the licensing authority of part of the less interesting area whilst the most prospective areas are identified and maintained for further focus; The shooting of 3D is carried out to further define and de-risk the lead into a prospect for drilling. Companies will most likely however only carry out 3D surveys if at this stage they have an exclusive license; A prospect has been identified and fully evaluated and if the geological proposal meets the company’s business criteria for development, an analysis is carried out which will include such issues as the cost of development, minimum reserves necessary to ensure a successful well development at that depth, the price of oil/gas that can be fetched in the specific market place, the tax regime, the legislative environment, etc.; After the business case has been completed, equity funds will be obtained from management or financing from a special finance vehicle and an exploration drilling will take place to determine whether hydrocarbons are present; Usually a well is drilled which may last 30-40 days and electric logs are run immediately down the drill hole a process that takes about 3 days. The electric logs provide an 85% certainty as to whether there is potential for oil and gas and potential for the existence of a reservoir. This phase, however, needs to be followed by a fuller examination of the data, including especially of the fluid in the reservoir. This is carried out by a drill string test in the open hole to take a mud sampling out from the contents of the reservoir to the surface and examine the sample for the presence of oil and/or gas. This process takes another 7-15 days to complete. The drill stem test would be carried out by a reservoir engineer and the electric logs would be carried out by a petro-physicist. Once the exploration drilling has been done, appraisal needs to be carried out in a number of wells to determine their true potential. Following this, a plan of development is put forward by the O&G Company which needs to be accepted by the authorities. Then, detailed design and construction is undertaken by specialized development companies on behalf of the E&P Company and production is then finally carried out if a market has been determined for the hydrocarbons. This latter point is not an issue in so far as oil is concerned since oil is easily traded on the global market and in fact there is more trade internationally in oil than in anything else. In so far as natural gas is concerned, availability of a market place needs to be determined a priori. In addition, field development has to be carried out in such a manner as to balance the long term desire to maximize reserves with the necessity to derive a reasonable rate of return for the investment.

An offtake agreement for natural gas is a long term sales agreement of the project products with one or more off-takers which usually includes long term sales, a fixed or agreed price, and a take-or-pay

Natural gas that is transported to the end user by the company making final delivery of the gas to the end user. The end user purchases the gas from another company, such as a producer or marketer, not from the delivering company (typically a local distribution company or a pipeline company).

There are 6 basic types of offshore oil rigs: fixed platforms, mobile offshore drilling rigs, submersibles, semi-submersibles, jackups, drillships