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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Pinnacles 1 - Reserves and Contingent Resources
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Tel Aviv, September 20, 2012. Delek Group (TASE: DLEKG, OTCQX: DGRLY) ("the Company") reported further to:

  • Section 1.11.4 (J) (4) of the Periodic Report for 2011 of the Company (ref. 2012-01-088431) (The "Annual Report");
  • Section C (1) of chapter A in the quarterly report for the first quarter of 2012 (Reference No. 2012-01- 141 003); and
  • Section 4 in Chapter A of the quarterly report for the second quarter of 2012 (Reference No. 2012-01-223317);

With regard to the development of the satellite reservoirs adjacent to the Mari B reservoir ("the reservoir" or "the Pinnacles reservoir");

Updated Reserves and Resources Report

A report was received by the Company from Netherland Sewell and Associates Inc. (the "assessor" or "NSAI"), prepared in accordance with the guidelines detailed in the Petroleum Resources Management System which was approved by the Society of Petroleum Engineers (SPE-PRMS) and dated 12.09.2012 ("the new report"). The new report is included below. According to the new report, some of the prospective resources in the Pinnacles reservoir were classified as reserves, while some were classified as contingent resources. The above-mentioned classification was conducted according to the rules of the SPE-PRMS and with respect to a drill depth and structure of the reservoir. Therefore, the new report consists of two parts, the first includes the reserves and the second report includes contingent resources, as below.

1. Reserves in the Pinnacles reservoir

A. As per the new report, the natural gas reserves in the Pinnacles reservoir are classified as "on production reserves" and are as of July 31, 2011, as follows:

Company's Net[1] Working Interest
BCF

Gross (100 Percent)
BCF

Category

1.58

5.4

P 1 (Proved reserves)

4.10

14.0

Probable Reserves

5.68

19.4

Total P 2 (Proved+Probable Reserves)

5.59

19.1

Possible Reserves

11.28

38.5

Total P3 (Proved+Probable+Possible Reserves)

Warning: Possible reserves are additional reserves which are not expected to be produced to the same extent as probable reserves. There is a 10% probability that actual quantities produced will be equivalent to or higher than the proved reserves, with the addition of the quantity of the probable and possible reserves.

The NSAI report noted a number of assumptions and qualifications, including: (1) The appraisals do not reflect the risk[2]; (2) NSAI did not visit the drilling site or check the mechanical operational state of the facilities and the wells; (3) NSAI did not examine the possible exposure arising from environmental matters. However, according to NSAI, as of the date of the reserves report, it is unaware of any possible environmental liability that could have a material effect on the amount of reserves estimated in the reserves report, or on whether they are commercial, therefore the reserves report does not include the costs that could arise from such liabilities.

Forward-looking statement: The estimates of NSAI in respect of the natural gas reserves in the Pinnacles reservoir are forward-looking information as defined in the Israeli Securities Law. These estimates are, inter alia, based on geological, geophysical and other information received from the drilling and from Noble Energy Mediterranean Ltd. (the operator), and are the professional estimates and are the assumptions only of NSAI and there can be no certainty in respect of them. Actual quantities of natural gas produced may be different from these estimates and assumptions, inter alia, due to technical and operational conditions and/or regulatory changes and/or the supply and demand conditions in the natural gas market and/or actual performance of the reservoir. The estimates and assumptions may be updated if additional information becomes available and/or as the result of a range of factors related to oil and natural gas exploration and production projects, including due to production from the reservoir and due to operational and/or market and/or regulatory conditions.

B. Please refer to tables I, II and IV in the new report for the discounted cash flows.

Sensitivity analysis for the main parameters of the discounted cash flow (gas price sold) at July 31, 2012 (in USD thousands):


Sensitivity/Category

Total

Present
value discounted at 10%

Present
value
discounted
at 15%

Present
value
discounted
at 20%

Sensitivity/Category

Total

Present value discounted at 10%

Present value
discounted at 15%

Present
value
discounted
at 20%

10% increase in the price of gas sales

 

 

10% decrease in the price of gas sales  

 

 

P1 proved reserves

(544)

1,446

1,561

1,588

P1 proved reserves

(1,919)

98

226

264

P2 Probable reserves

15,729

17,254

17,158

16,987

P2 Probable reserves

10,970

12,624

12,587

12,470

P3 Possible reserves

28,263

28,970

28,512

28,003

P3 Possible reserves

19,943

21,011

20,714

20,356

15% increase in the price of gas sales

 

 

15% decrease in the price of gas sales

 

 

P1 proved reserves

(200)

1,784

1,896

1,919

P1 proved reserves

(2,262)

(238)

(107)

(66)

P2 Probable reserves

16,918

18,411

18,301

18,116

P2 Probable reserves

9 , 780

11,466

11,444

11,341

P3 Possible reserves

30,343

30,960

30,461

29,915

P3 Possible reserves

17,863

19,021

18,765

18,444

20% increase in the price of gas sales

 

 

20% decrease in the price of gas sales

 

 

P1 proved reserves

145

2,121

2,230

2,250

P1 proved reserves

(2,604)

(574)

(440)

(396)

P2 Probable reserves

18,108

19,569

19,444

19,245

P2 Probable reserves

8,590

10,309

10,301

10,211

P3 Possible reserves

32,424

32,950

32,410

31,826

P3 Possible reserves

15,783

17,032

16,815

16,533

C. NSAI noted that since the production in Pinnacles began in July 2012, the new report did not include table of historical data about the costs or receipts, historical data on productivity, operating costs, royalties or net income per unit of production.

2. Contingent resources in the Pinnacles reservoir

As per the new report, the natural gas contingent resources in the Pinnacles reservoir are classified "as development pending" and are as of July 31, 2011, as follows:

Company's Gross[3] Working Interest

Gas
(BCF)

Probability

24.86

78.6

Low Estimate

26.47

83.7

Best Estimate

28.08

88.8

High Estimate

Please refer to table VII in the new report for basic parameters used to calculate various scenarios.

The contingent resources report was prepared based on a 3D seismic survey ('seismic survey") that was conducted and analyzed between 2000-2001, and based on data collected during drilling as well as other drillings conducted in the area and similar reservoirs around the world.

It is noted in the contingent resources report that the estimates of the contingent resources are based on various assumptions. These include that the development of the reservoir will be based on the assumptions in place covering the existing development plans; the reservoir will be developed in a careful way, in which government regulations, if any, do not affect the utilization of contingent resources; and assessor plans for future production will be consistent with their actual implementation. It is also noted that contingent resources are subject to approval of the Pinnacles reservoir development plan that includes reasonable expectation of sales of natural gas. Contingent resources report does not include an economic analysis of the reservoir. In addition, the evaluator determines that based on the development of similar reservoirs; there is a reasonable chance that the contingent resources category's best estimate would be economic.

The above contingent resources currently classified "as development pending", and subject to additional development action.

Warning - there is no certainty that it will be commercially feasible to produce any rate of the contingent resources.

Forward-looking information: The estimates of NSAI in respect of the contingent resources in the Pinnacles natural gas reservoir are forward-looking information as defined in the Securities Law. These estimates are, inter alia, based on geological, geophysical and other information received from the drilling and from the operator, and are the professional estimates and assumptions only of NSAI and there can be no certainty in respect of them. Actual quantities of natural gas produced (if any) may differ from these estimates and assumptions, inter alia, due to technical and operational conditions and/or regulatory changes and/or the supply and demand conditions in the natural gas market and/or actual performance of the reservoir. The estimates and assumptions may be updated if additional information becomes available and/or as the result of a range of factors related to oil and natural gas exploration and production projects, including due to production from the reservoir and due to operational and/or market and/or regulatory conditions.

Pinnacles 1 Drilling Rights Are Held As Follows:

Delek Drilling - Limited Partnership

25.5%

Avner Oil Explorations - Limited Partnership

23%

Noble Energy Mediterranean

47.059%

Delek Group Ltd.

4.441%

This is a convenience translation and summary of the recent HEBREW immediate report issued to the Tel Aviv Stock Exchange by the Company on September 19, 2012.


About The Delek Group

The Delek Group, Israel's dominant integrated energy company, is the pioneering leader of the natural gas exploration and production activities that are transforming the Eastern MediterraneanFs Levant Basin into one of the energy industry's most promising emerging regions. Having discovered Tamar and Leviathan, two of the world's largest natural gas finds since 2000, Delek and its partners are now developing a balanced, world-class portfolio of exploration, development and production assets with total gross natural gas resources discovered since 2009 of approximately 33 TCF .

In addition, Delek has built an extensive network of global downstream assets, including 1,900 gas stations and convenience stores in the U.S., Europe and Israel, and petroleum refineries in the U.S. Delek also holds significant interests in leading water desalination, power generation, insurance and automotive companies .

In 2011, the Company's revenues were NIS 59 billion. Delek Group's shares are traded on the Tel Aviv Stock Exchange (TASE: DKLG) as part of the TA25 Index.


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

[1] The Company's calculation is not included in the reserves report and is calculated according to the part attributable to the Company's equity rights in the oil asset, after royalties payment.

[2] The estimates in the report, as is standard in estimating reserves, is based on the guidelines set out in the Petroleum Resources Management System approved by the Society of Petroleum Engineers (SPE-PRMS), and are not adjusted to reflect external risks that are not directly related to the scope of the reservoir and its production capacity (such as security and commercial risks).

[3] The Company's calculation is not included in the new report and is before the payment of royalties, and before receiving royalties.

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