Extract from an article in Issue 24, March 16, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. For years, Israel seemed to be one of the unlucky countries in the Middle East deprived of oil and petrochemicals. But that is about to change with the discovery of a major offshore natural gas well. Moses wandered in the desert with the Israelites for 40 years, misread God's directions or took a wrong turn, and instead of leading them to the oil-rich shores of Arabia ended up in a place utterly devoid of petro-chemical resources. Moses' reputation based on that old chestnut may be salvaged, however, with the recent discovery of enough natural gas under Israeli territorial waters to supply the country's needs for at least a decade and a half and perhaps even make it a net energy exporter. Moreover, this could be just the beginning. The seabed off Israel's coast may contain much more gas than has already been found, and maybe even oil, a possibility that already has several energy companies preparing plans for expanding exploration all along the coast. The preliminary announcement in mid-January that the Tamar 1 field, located 90 kilometers from Haifa, might contain 87 billion cubic meters (BCM) of gas was heralded as historic by Israelis, whose country has been nearly totally dependent on imported gas, oil and coal since its inception, and was met with jubilation on the Tel Aviv Stock Exchange. The rejoicing knew no bounds when further tests conducted in early February showed the Tamar 1 site contains as much as 142 BCM, according to the U.S.-Israel consortium that is conducting the drilling. (This is immense by Israeli standards, but it should be kept in mind that in Russia or Iran, which have some reservoirs measuring thousands of BCM, a field this size would be considered relatively small.) The consortium, which carried out the prospecting under 1,676 meters of water and has drilled to a total depth of about 4,900 meters, includes the Houston-based oil operator Noble Energy Inc. (36 percent) and the Israeli Delek Group (31.25 percent) controlled by Israeli real estate tycoon Yitzhak Tshuva, Isramco (28.75 percent) and Dor Gas Exploration (4 percent). The group has already completed preliminary tests at the Dalit drilling site, not far from Tamar 1. "We estimate a 40 percent probability that Dalit contains resources of a further 20 BCM of gas," says Zvi Greenfeld, president and CEO of Delek. Although Greenfeld is careful to distinguish between "known reserves" - a term relating to gas that has been proven to be accessible - and "gross resources," which still require further testing, he cannot hide a note of excitement at the possibilities opened up by the Tamar 1 discovery. "When we found a well containing six to seven BCM in 1999, we rejoiced," he tells The Report. "When we located a well with three times that capacity a couple of years later, we called it historic. So what do you expect me to say about 142 billion cubic meters?" Although the general rejoicing and optimism are understandable and justified, there's a long way to go and many technical and financial difficulties to overcome before extraction of gas can begin and the profits start rolling in. Yuval Zehira, head of research at I.B.I. Investment, a Tel Aviv-based investment firm that has been analyzing the Israeli energy sector for years, warns that financial feasibility studies have yet to be conducted, and that there are daunting technical problems to be overcome. Moreover, he points out, natural gas prices are now close to their lowest historical level. Much of the credit for the discovery belongs to geologist Yossi Langotsky, who, in some respects, has been a modern day Moses, singlehandedly trying to convince his people that Israel is indeed a Promised Land of hydro-carbon resources. In the face of the persistent skepticism of most other geologists, Langotsky had for 20 years maintained a dogged insistence that there were significant energy resources waiting to be discovered off the Israeli Mediterranean coast. One might expect that Langotsky, whose stubbornness has now been vindicated beyond anyone's wildest dreams, is now sitting on a fortune, but in fact he has been left with no shares at all in the Tamar 1 project, which is named for his grand-daughter. In October 2008, only two months prior to the first indications of a major finding at the drilling site, Langotsky's main financial backer, billionaire Israeli businessman Benny Steinmetz, was scheduled to contribute a further $7 million investment in order to maintain his and Langotsky's joint 5 percent stake in the consortium's project. Steinmetz, however, decided to pull out of the project entirely, and Langotsky could not locate alternative investors in time to keep his shares, which according to one estimate could have been worth at least $100 million. "I began advocating searching for hydro-carbons beyond the continental shelf in the eastern Mediterranean as far back as 1989," Langotsky, 75, tells The Jerusalem Report. "At the time it was virgin territory, and the unexplored regions there stretched over 20,000 square kilometers. I approached over 100 different companies with the idea, which was repeatedly rejected." It was only in 1999 that he finally managed to persuade a major international corporation, British Gas (BG Group Plc), to conduct explorations, which kick-started the process with cutting-edge technology. BG later pulled out when initial results appeared disappointing, but Delek and Noble Energy stepped in to continue the project, at sites named after members of Langotsky's family, including Dalit, his daughter. (BG did discover a gas field, only about a third as large as Tamar 1, 30 km off the shores of the Gaza Strip in 2000.) Langotsky is aged 75 but has the energy and fast-paced speaking style of a man at least 30 years younger. He has mineral exploration in his genes - his father Moshe Langotsky came to British Mandatory Palestine in the 1920s and was hired by Mikhail Novomeysky, who would later found the Dead Sea Works Company, to conduct research into the feasibility of extracting potash from the Dead Sea. The elder Langotsky spent two consecutive years singlehandedly surveying the Dead Sea, his efforts forming the basis of the Dead Sea Works' initial business plans. Langotsky grew up in Jerusalem, became an officer in the Israel Defense Forces, graduated from the Hebrew University and began working for the government's Israel Geological Survey. In the 1967 Six Day War, as a reservist, he was commander of the reconnaissance unit of the Jerusalem Brigade, which fought the Jordanians in the battle for southeastern Jerusalem, including Government House and the area now known as East Talpiot. He returned to the army and retired in 1977 with the rank of colonel, along the way twice receiving the Israel Defense Prize for actions that are still classified as top secret. Langotsky went back into geology and became increasingly obsessed with the idea that the eastern Mediterranean contained hydro-carbon (a term encompassing both oil and gas) deposits that had been overlooked because exploration had not been conducted sufficiently far from the coast. "People had been searching for oil and gas in the eastern Mediterranean since the early 1970s," says Langotsky, "but up until about 1999, the exploration was concentrated on the continental shelf, which has depths of up to 200 meters. I advocated going beyond the continental shelf, to depths of 700 meters and more." "In searching for hydro-carbons one does not 'guess' where the hydrocarbons are; one evaluates, based on a great deal of geological knowledge that has been accumulated over centuries," explains Langotsky. "This includes looking for geological, physical and chemical markers indicating that a particular site has a high likelihood of containing hydro-carbons. Oil and gas explorers nowadays have almost a 'check list' they tick off when studying a site. They look for 'source rocks' where hydro-carbons were created. But spotting source rocks is hardly sufficient. Even if there was enough pressure and time to create the gas, did it migrate away from the original source? Are there reservoir rocks, which contain the possibly migrated gas? Are there cap rocks in place to keep the gas from escaping its reservoir? Clearly, the exact geometric configuration that is conducive to the existence of a large hydro-carbon well is rare - but we managed to find it at Tamar 1." Although clearly deeply disappointed at having come so close to a vast financial prize only to have it snatched away, Langotsky puts on a brave face. "How do I feel? I feel like Moses, who saw the promised land but did not have the pleasure of entering it," he tells The Report. "But I am still very proud of my role in this historic find. I am also convinced there is a lot more gas - and even oil - out there in the Mediterranean and perhaps even in the vicinity of the Dead Sea. We have got to continue explorations at full speed." With the initial physical tests completed, the next step in the Tamar 1 gas drilling project is conducting commercial feasibility tests that may take up to a year. Once the project is found to be feasible, "Investment is likely to run into $1 billion to $1.5 billion dollars over four years before gas can be extracted from the site," says I.B.I. Investment's Yuval Zehira. "If the commercial feasibility tests turn out as positive as the physical tests, the owners of the project should be able to put together a business plan and readily seek financing." The business outlook is complicated by the fact that natural gas prices are near their lowest historical levels - after climbing over the past year to their highest levels ever at over $13 per 1,000 cubic feet, and then dropping precipitously to $4. That volatility makes getting an accurate estimation of the net worth of the Tamar 1 well very difficult. Greenfeld refuses to answer questions relating to the potential investment costs or the possible valuation of the project. Zehira estimates a net valuation, after taking into account investment and other costs, of $2 billion, noting that this is based on current low gas prices. Drilling so far out at sea is challenging, and is further complicated by the fact that the Tamar 1 well is buried under more than a mile of salt. "There are very few examples of similar efforts anywhere in the world," notes Zehira. "Even Noble Energy, the most experienced partner in the project, has never had to deal with such a large and technically demanding gas well. This will require very specialized expertise, which is not readily found in Israel, and expert teams from abroad will need to be brought here." Despite the challenges and uncertainties, the potential upside of the project is so huge that some of Israel's neighbors have been casting a jealous eye. Muhammad Kabbani, chairman of the Energy, Infrastructure and Public Works Committee in the Lebanese Parliament, has stated that Lebanon will ask Noble Energy for confirmation that drilling does not reach Lebanese territory. Greenfeld dismisses any foreign claims to the site. "The site's location is within Israel's maritime economic zone and that has been confirmed by the most authoritative sources," he flatly tells The Report. Langotsky regards the Lebanese claims as ludicrous. Pointing out that Tamar 1 is 90 kms [60 miles] west of Haifa, he says that "international treaties grant each sovereign nation ownership over sea-based resources [up to 200 nautical miles] off its coast," adding, "Beyond that general principle, exact maps detailing which area of the oceans belong territorially to each nation have existed for a long time, and the boundaries between the territories of Israel, Cyprus, Lebanon and Egypt are long established. The Lebanese claims are patent nonsense." It is easy to see why any country would be pleased to be in Israel's position: The government stands to reap a windfall in billions of dollars in direct royalties alone, in addition to extra tax revenue from any increased economic activity sparked by the project. In principle, all natural resources located within Israeli territory are the property of the state, but licenses granted to oil and gas explorers typically give the explorers ownership over resources they discover. In return, the license signed with the Tamar 1 drilling consortium gives the state 12.5 percent of the income generated by the sale of those resources, which analysts expect will translate into at least $4 billion in state income over the lifetime of the well. Exploration licenses also grant explorers an exemption from standard corporate taxes, but Zehira notes that this does not extend to individual shareholders who receive dividends or sell their shares: They will be taxed on the profits they make as shareholders. Extract from an article in Issue 24, March 16, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.