Givot Olam's Meged #4

In 2004 Givot Olam announced an oil discovery in their Meged #4 well, the newly discovered ‘Meged oil field’ was estimated to contain 980 million barrels of crude; about 200 million barrels of that actually recoverable. Israel’s Ministry of National Infrastructures looked t the data,  confirmed the discovery and issued a production license to the company … that was six years ago. Givot Olam hasn’t actually produced any appreciable amount of the oil they discovered in 2004 and the Meged #4 was shut down due to ‘engineering problems’ after attempting a horizontal drilling process in 2005.

Last year Givot Olam tried to resurrect hopes of producing oil by drilling the Meged #5, south of it’s previous wells. The Meged #5, still under 13,000 feet deep (according to Givot’s drilling agreement with Lapidoth, the original planned depth was over 16,000 feet) and the drilling project is $4.9 million over budget; add to that an additional $6 – 7.5 million for production testing. Givot Olam only has $3.7 million in the bank, so they’ll need to raise more capital before anyone knows if the Meged #5 will be a commercial well.

Givot representatives stated last week (see below) that the “quantities of gas measured in the mud of the Meged 5 well is ten times the amount in all other wells in the Meged field.” But since no actual quantity was disclosed, there’s no way of telling whether the well is capable of producing commercial gas until testing is complete.

An oil ‘discovery’ of 980,000 million barrels in 2004 (the Givot Olam website states 2,000 million [2 billion] barrels) and still no oil?

First of all, I believe Givot Olam discovered oil 13,000 feet below the surface in 2004.  Secondly, while the oil is still 13,000 feet down, I don’t believe there’s any ironclad way of determining exactly how much was discovered or, more importantly, how much of the oil in the ground is producible to the surface.  And (this is an important part of the oil business) you can only send oil to the refinery that’s that’s actually on the surface.

What’s the moral of this story?

Discovering oil and producing oil are two separate and distinct events. Sometimes they happen back to back … but sometimes they don’t. And how much time and capital an oil company thinks exploration and completion will cost, reality may have a higher figure in mind. In a recent interview, Zion Oil & Gas Exploration Manager Stephen Pierce stated that the odds of finding oil in the exploration process are “one in nine.” That means, on average, nine wells are drilled for every one that produces. But not one of the oil explorers I’ve interviewed or researched in the history of Israel’s hunt for oil expected to drill nine holes before discovering oil. Every well was expected to be the well. That, unfortunately, isn’t the way it is.

Here’s the good news.

Israel possesses a massive amount of natural gas – more than they’ll need into the foreseeable future. Israel’s natural gas was discovered just last year. And Israel possesses oil – that’s been proven by exploration and, I believe, it will be confirmed by discoveries outside the Meged field in the near future. The gap between ‘discovery’ and ‘production’ may be time consuming and expensive (as it has been in Givot Olam’s case), but once fields begin producing they generally continue. Israel will be energy independent; she will produce and consume domestic oil and gas, all Givot Olam and the other oil exploration companies in Israel need to do is stay in business. Givot Olam will raise the capital to finish the Meged #5. Will the well produce oil or gas? I don’t know, but I do know they’re a lot closer to the finish line than when they started.

Below is the February 28 Globes article on Givot Olam:

“The quantities of gas measured in the mud of the Meged 5 well is ten times the amount in all other wells in the Meged field,” Givot Olam Oil Exploration LP (TASE:GIVO.L) announced today in a presentation ahead of Tuesday’s partners meeting. At the meeting, the general partner will try to get the investors’ approval to issue NIS 25 million worth of partnership units and options.

Givot did not disclose the actual quantity of gas measured in the well, or its significance for the quantity of oil at the site, which will only be known when the production tests are completed.

Givot’s general partner added that the drilling cost of the Meged 5 well is $12.6 million, more than the $7.7 million originally planned. The general partner attributed the higher cost to “two serious breakdowns during the drilling and adjustments to the drilling plan”.

The presentation added that the Meged 5 has reached the Upper Mohila strata at a depth of 3,879 meters, and that the well is due to reach a depth of 3,950 meters. The partnership estimates the cost of the production tests at $6 – 7.5 million and they will last for two more months. The partnership has just $3.7 million in cash left, hence the need to raise more capital.

Published by Globes [online], Israel business news – – on February 28, 2010

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