Gas Subsidiaries Update

The following updates are based on information released by Delek Group gas subsidiaries, Delek Energy Systems Ltd., Avner Oil & Exploration L.P and Delek Drilling L.P. All financial and business information is given only for the convenience of the reader. The only official financial and business information, is that which is included in the officially published immediate reports and financial reports of Delek Group and its gas subsidiaries, to the Israeli Securities Authority and the Tel Aviv Stock Exchange, in Hebrew. In the event of any conflict between financial and business information given on this site and the Hebrew published immediate reports, the Hebrew published immediate reports shall prevail. More on Delek Group's disclaimer.

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A-1 Well ("Aphrodite") in Block 12 in Cyprus – Announcement of Natural Gas Discovery and an Updated Post-Drill Resource Report According to SPE-PRMS Guidelines

Tel Aviv, March 07, 2012. Delek Group (TASE: DLEKG, OTCQX:DGRLY) ("the Company") announced on March 06, 2012, according to the information provided to the subsidiaries Partnerships – Delek Drilling L.P. and Avner Oil & Gas Exploration L.P. ("the Partnerships") by Noble Energy International Ltd. ("Noble" or the Operator"), the operator of the A-1 exploration well ("Aphrodite") in Block 12 in Cyprus (the "Well" and "Block 12", respectively) and according to the updated resource report as of March 5, 2012, prepared by Netherland Sewell and Associates, Inc. ("NSAI"), the Company respectfully notifies as follows:

Noble posted on its website, on December 28, 2011, a press release which included data pertaining to the Well, including data on the natural gas resources found in the Well, which were not prepared according to the Petroleum Resources Management System ("SPE-PRMS") guidelines, were not in accordance with the Israeli Securities Authority's Disclosure Directive concerning Gas and Oil Exploration and Production (as amended) (the "Disclosure Directive") and did not reflect the opinion of the Partnerships, the Company, its management or its controlling shareholders.

At the Partnerships' request, Noble, in coordination with the Cypriot authorities, approached NSAI with the request to prepare an updated post-drill resource report in the format required by Section 13(a) of the Disclosure Directive (the "Updated Resource Report").

In view of the aforesaid, and based on the data that were provided to the Partnerships and to NSAI by Noble, and based on the Updated Resource Report, the Company respectfully notifies as follows:

1. Natural Gas Discovery in the "A1" Well:

a.
The Operator performed various tests at the Well (as specified below) whose results, as provided by the Operator, satisfied the Partnerships as to the existence of natural gas in the Well. The Operator has further informed the Partnerships that in its estimation, the quantity of natural gas discovered in the Well, justifies estimating and evaluating the volume of natural gas in the Well, as well as estimating and evaluating the volume of economically-recoverable natural gas.

In view of the aforesaid, the "A-1" Well ("Aphrodite") is a natural gas discovery.

According to the provisions of the Disclosure Directive, the Company clarified as follows: "A discovery is defined in the SPE-PRMS as 'one petroleum accumulation, or several petroleum accumulations collectively, for which one or several exploration wells have established through testing, sampling, and/or logging the existence of a significant quantity of potentially moveable hydrocarbons. In this context, 'significant' implies that there is evidence of a sufficient quantity of petroleum to justify estimating the in-place volume demonstrated by the well(s) and for evaluating the potential for economic recovery."

b.
Set forth below are details regarding the Well:

Name of Well: "A-1" ("Aphrodite").

Date of discovery of petroleum: December 28, 2011.

Depth of the target top: Approx. 5,137 (Top C) meters below sea level (including water depth).

Net layer thickness: The (net) thickness of the layer bearing natural gas is approx. 95 meters.

Type of petroleum: Natural gas.

Types of tests carried out to substantiate the information regarding the discovery of indications of petroleum: The tests conducted at the Well included, inter alia, Wireline Logs (including electrical, radioactive, magnetic and seismic tests), lithological tests (cuttings and core) and composition and pressure tests of gases and fluids.

The results on the basis of which the corporation gained satisfaction regarding the reliability of the indications: As aforesaid, the Operator performed various tests in the Well, whose results attest to the existence of natural gas in the target layers. This information, which was provided to the Partnerships by the Operator, as well as the Updated Resource Report as specified below, satisfied the Partnerships regarding the existence of natural gas in the Well.

2. The Updated Resource Report

According to the Updated Resource Report of March 5, 2012, which is attached hereto by way of a referral, some of the resources in the reservoir included in the Block 12 area (the "Aphrodite Reservoir") were proved-up by the Well, and therefore are classified as Contingent, while other resources, in fault blocks adjacent to that where A1 was drilled, were not proved-up and therefore remain Prospective. Accordingly, the Updated Resource Report is divided into a Contingent Resource Section ("Contingent Resources Section"), and a Prospective Resource Section ("Updated Prospective Resources Section"), as specified below.

NSAI listed in the Resource Report, pertaining to both Contingent and Prospective sections, inter alia, several assumptions and reservations, including that:

1) The evaluations were not adjusted to reflect commercial risk;

2) The Evaluator did not perform any field inspection of the discovery, and did not examine the mechanical operation or condition of the Well;

3) The Evaluator did not examine possible environmental liability related to the discovery; however, the Evaluator is not aware of any possible environmental liability that would have any material effect on the resources quantities estimated in the report or the commerciality of such resources estimates.

4) The resources shown in the report are for an undeveloped location; therefore the evaluation is based on an estimate of the reservoir volume and recovery efficiencies, while drawing an analogy to reservoirs with similar geological and reservoir characteristics.

a. Contingent Resources Section

The contingent natural gas resources (in billion cubic feet – BCF) in the Aphrodite Reservoir, as of January 31, 2012, are classified as "Development Pending", and are as specified below:

 

Target

Probability

Natural Gas

Company's total share (gross)

Sand C

Low Estimate

225.5

37.75

Best Estimate

1150.6

192.61

High Estimate

1,952.1

326.78

Sand D1

Low Estimate

19.6

3.28

Best Estimate

232.8

38.97

High Estimate

467.0

78.18

Sand D2

Low Estimate

243.2

40.71

Best Estimate

344.0

57.59

High Estimate

478.1

80.03

The basic parameters used to calculate the different scenarios are as follows:


Prospect

Area
(Acres)

Gross Thickness
(feet)

Gross Rock Volume (Acre*Feet)

 

High

Best

Low

High

Best

Low

High

Best

Low

Sand C

7,884

6,327

2,971

315

295

160

2,481,899

1,866,468

474,654

Sand D1

5,662

3,239

797

147

176

85

829,930

568,498

68,030

Sand D2

3,409

3,287

3,153

182

173

165

619,739

569,987

521,553

Prospect

Gas Saturation
(decimal)

Porosity
(decimal)

Net-to-Gross (decimal)

 

High

Best

Low

High

Best

Low

High

Best

Low

Sand C

0.69

0.68

0.64

0.22

0.21

0.21

0.46

0.40

0.36

Sand D1

0.68

0.67

0.59

0.22

0.21

0.21

0.33

0.27

0.24

Sand D2

0.69

0.68

0.64

0.22

0.22

0.21

0.44

0.38

0.34

 

Prospect

Gas Recovery Factor
(decimal)

Gas Formation Volume Factor (SCF/RCF)

 

High

Best

Low

High

Best

Low

Sands C

0.70

0.65

0.60

378

378

378

Sands D1

0.70

0.65

0.60

378

378

378

Sands D2

0.70

0.65

0.60

379

379

379

The Contingent Resources Section states that the contingent resources are contingent upon project sanctioning that includes an approved development plan and reasonable expectations for gas sales, that the report does not include economic analysis for this gas property, and that based on analogous field developments, it appears that the best estimate contingent resources have a reasonable chance of being commercial.

The Operator will explore in the future different alternatives for developing the Aphrodite Reservoir, including the possibility for integrating its development with the development programs of adjacent reservoirs within the economic waters of Israel, including the Leviathan field. For a description of the potential market for the resources as aforesaid and several possible alternatives, see Section 3.33 of the Company's Annual Financial report dated March 31, 2011 (Ref. no. 2011-01-105429) (as amended). In light of the estimated scope of the contingent and prospective natural gas resources at the Aphrodite Reservoir, and in view of the limited scope of the potential domestic gas market in Cyprus, the main potential market for such resources is the international market, subject to the consummation of a future development plan which will include, inter alia, the construction of infrastructure facilities for the export of the natural gas.

It is stated that at this stage, no estimated timetable can be determined for the formulation and/or performance of a development program for the Aphrodite Reservoir, pending the evaluation of the prospective resources and the examination and formulation of different programs for the commercializing of the natural gas in the reservoir and development thereof. It is emphasized that each development alternative has entirely different construction and operation timetables and costs and therefore, until the preferred alternative is chosen, no reasonable estimate may be made of the timetables and budget of the development of the reservoir. It is further emphasized that any development program will, naturally, require significant regulatory, commercial and financing arrangements in view of the export designation of a considerable portion of the natural gas resources in the Aphrodite Reservoir.

"Warning – there is no certainty that it will be possible to commercially produce any part of the contingent resources".

b. Updated Prospective Resources Section

The prospective natural gas resources (in billion cubic feet – BCF) in the Aphrodite Reservoir, as of January 31, 2012, are as specified below:


Company's total share (gross)1

Natural Gas

Probability

Prospect

16.96

101.3

Low Estimate

Sand A

133.02

794.6

Best Estimate

369.95

2,210.0

High Estimate

114.94

686.6

Low Estimate

Sand C

325.58

1,944.9

Best Estimate

624.7

3,731.8

High Estimate

16.57

99.0

Low Estimate

Sand D1

64.25

383.8

Best Estimate

145.59

869.7

High Estimate

4.87

29.1

Low Estimate

Sand D2

54.05

322.9

Best Estimate

77.86

465.1

High Estimate

The basic parameters used to calculate the different scenarios are as follows:


Prospect

Area
(Acres)

Gross Thickness
(feet)

Gross Rock Volume (Acre*Feet)

 

 

High

Best

Low

High

Best

Low

High

Best

Low

 

Sand A

29,252

24,168

16,250

87

69

27

2,556,533

1,657,456

435,078

 

Sand C

17,306

12,464

7,678

274

253

188

4,744,578

3,154,862

1,445,248

 

Sand D1

9,329

6,854

3,485

166

137

99

1,545,632

937,305

343,620

 

Sand D2

4,544

2,830

1,061

133

189

59

602,909

534,965

62,483

 

 

Prospect

Gas Saturation
(decimal)

Porosity
(decimal)

Net-to-Gross (decimal)

 

 

High

Best

Low

High

Best

Low

High

Best

Low

 

Sand A

0.70

0.60

0.50

0.24

0.22

0.19

0.45

0.35

0.25

 

Sand C

0.69

0.68

0.64

0.22

0.21

0.21

0.46

0.40

0.36

 

Sand D1

0.68

0.67

0.59

0.22

0.21

0.21

0.33

0.27

0.24

 

Sand D2

0.69

0.68

0.64

0.22

0.22

0.21

0.44

0.38

0.34

Prospect

Gas Recovery Factor
(decimal)

Gas Formation Volume Factor (SCF/RCF)

 

High

Best

Low

High

Best

Low

Sand A

0.70

0.65

0.60

375

375

375

Sand C

0.70

0.65

0.60

378

378

378

Sand D1

0.70

0.65

0.60

378

378

378

Sand D2

0.70

0.65

0.60

379

379

379

The estimate of the probability of success of each of the risk factors at the Well, and a statistic estimate of the geologic probability for the existence of natural gas in the fault blocks which hold the prospective resources, are as follows:


Prospect

Trap integrity

Reservoir Quality

Source Evaluation

Timing / migration

Total

Sand A

95

60

95

100

54

Sand C

98

85

95

100

79

Sand D1

98

90

97

100

86

Sand D2

98

95

98

100

91

 

The report states that based on the development of similar reservoirs, and assuming that natural gas is found in the additional fault blocks that were not proved-up at the Aphrodite Well, NSAI estimates that the best estimate prospective resources (if verified) have a reasonable chance of being commercial.

3. Glossary

Contingent Resources – Defined by the PRMS as those quantities of hydrocarbons estimated, as of a given date, to be potentially recoverable from known accumulations, by the implementation of development programs, but are not yet considered mature enough for commercial development due to one or more contingencies.

Contingent Resources at the Project Maturity Sub-Class of "Development Pending" are defined as resources in a discovered accumulation (i.e., that a well had been drilled therein and a discovery, as defined in the PRMS, been found therein), where project activities are ongoing to justify commercial development in the foreseeable future. NSAI stated that the conditions for defining such resources (in whole or in part) as "reserves" are the approval of a development program and reasonable expectations for gas sales.

Porosity –The relative volume of pores in a solid medium.

Gas Saturation – The relative volume of gas in pores.

Gross Rock Volume – The (gross) amount of rock in the trap above the gas-water contact.

Reservoir – A layer or layers of rock, characterized by relatively high porosity and permeability, enabling the storage and flow of liquids and gas. Also used to describe an oil and/or gas field.

Average Gross Thickness – The average thickness (gross) of a reservoir layer throughout the entire geological structure.

Net-to-Gross – The ratio between reservoir layers and non-reservoir layers trapped in a given geological structure.

Gas Formation Volume Factor – The volume of a standard cubic foot of natural gas at reservoir pressure and temperature conditions.

Gas Recovery Factor or Recovery Efficiencies – The ratio between the volume of recoverable gas and the volume of gas-in-place.

 4.

  1. The Company declares that all of the above data are SPE-PRMS-compliant.

  2. Resource Evaluator's Opinion

The Contingent and Prospective Resource Report for the Aphrodite Reservoir, updated as of January 31, 2012, as prepared by NSAI presented herein by way of referral to the immediate report as published by Delek Drilling L.P. dated March 6, 2012 (reference number 2012-01-060633), NSAI's agreement to include that in this immediate report is enclosed as an addendum to this report.

Warning regarding forward-looking information – NSAI's estimations regarding the contingent resources and the prospective resources in the Aphrodite Reservoir are forward-looking information. The aforesaid evaluations are based, inter alia, on geological, geophysical and other information, obtained from the Operator from the Well and from wells in adjacent fields, and constitute professional evaluations and assumptions only of NSAI, in respect of which there is no certainty. The amounts of natural gas actually produced (if any), may be different from the aforesaid evaluations and assumptions, inter alia, as a result of operational and technical conditions and/or regulatory changes and/or supply and demand conditions in the natural gas market and/or the actual performance of the reservoir. The aforesaid evaluations and assumptions may be updated insofar as additional information will accumulate and/or as a result of a gamut of factors related to projects of oil and natural gas exploration and production, including as a result of the continued analysis of the Well findings and as a result of operational conditions and/or market conditions and/or regulatory conditions.

This is a convenience translation of the recent HEBREW immediate report issued to the Tel Aviv Stock Exchange by the Company on March 06, 2012.

About The Delek Group

Delek Group is the leading energy & infrastructure group based out of Israel with investments in upstream & downstream energy, water desalination and power plants globally. In addition, Delek, through its subsidiaries, is a leading importer & distributor of vehicles in Israel and owns insurance assets in Israel and the US. Recently, Delek Group, through its subsidiaries, discovered significant quantities of high quality natural gas off the coast of Israel. Delek Group sales reached over 43 billion Israeli shekel in 2010.

Contact

Dalia Black / Dina Vince

Investor Relations
Delek Group
Tel: +972 9 863 8444
Email: investor@delek-group.com

Ehud Helft / Kenny Green

International Investor Relations
CCG Investor Relations
Tel: (US) 1 646 201 9246
E-mail: delek-group-ir@ccgisrael.com

*Before deduction of the share of the Republic of Cyprus according to the provisions of the Production Sharing Contract applicable to Block 12, and before payment of royalties by the Partnerships.

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