Israel offers oil and gas exploration companies reasonable conditions even after the new taxes levied on the basis of the Sheshinski committee recommendations, ATP Oil & Gas Corporation (Nasdaq: ATPG) CEO Leland Tate told "Globes" in an exclusive interview. ATP recently entered the Israeli gas and oil exploration market. In his first interview with the Israeli pressmedia, Tate says that ATP wants as many exploration licenses as possible, and explains why there is no need to allocate expensive precious coastal land for the construction of land terminals for gas from Tamar and Leviathan.
For years, there has been talk in Israel for the need to bring in additional serious exploration companies, which would challenge the hegemony of Noble Energy Inc. (NYSE: NBL). Noble Energy entered Israel in 1999 and, in partnership with Delek Group Ltd. (TASE: DLEKG), owns all of Israel's proven natural gas reserves.
Many in the government officials believe that dependence on a single gas producer, however friendly and professional it may be, is unhealthy from a strategic standpoint. For the Ministry of Finance, the lack of competition between gas producers is also a macroeconomic problem. Last year, several foreign well operating companies visited Israel, but none of them are is considered a major player in the global industry, except perhaps for Caspian Drilling Company (CDC), a subsidiary of the State Oil Company of Azerbaijan Republic (SOCAR).
Against this backdrop, ATP's arrival on the scene entry to Israel is considered an achievement for Israel. While not a major big company (it has , with a a market cap of $830 million), ATP it has an excellent reputation, especially for deep water drilling, in the kind of areas where most of Israel's large gas reserves are found. ATP's primary area of operations is in the Gulf of Mexico, where it has seven drilling projects. The deepest of them, by the Canyon Express rig, is at a depth of over 2,000 meters, much deeper than Tamar. ATP is the fourth largest deep water operator in the Gulf of Mexico, after the majors Royal Dutch Shell plc (NYSE: RDS; LSE: RDSA), BP plc (NYSE; LSE: BP), and Anadarko Petroleum Corporation (NYSE: APC).
"Globes": In your opinion, why don’t the majors want to come here, despite the large gas discoveries at Tamar and Leviathan?
Tate: "The majors are worried how their entry to the Israeli market would affect their interests in other markets. We operate in the North Sea and the Gulf of Mexico, and we have no intention of entering markets in countries in conflict with Israel. Beside, I hope that we'll be so successful here that we won't have to seek other markets."
What persuaded you to come here?
"The large upside here for gas and oil discoveries. In less than three years, there were have been discoveries here with 25 trillion cubic feet of gas - this is an unprecedented figure that testifies to the great size of the potential of the Israeli market. According to estimates we know about, there is potential here for 100 trillion cubic feet of gas. I believe that such discoveries will turn Israel into a serious contender to supply gas to Europe, and of course will meeting Israel's energy needs for many years."
You delayed your entry until the Sheshinski committee completed its work, but you haven’t changed your mind following the decision on new taxes and increasing the government's take from oil and gas revenue from 36% to over 50%.
"We opened contacts to enter the Israeli market in October, when the Sheshinski committee was in the midst of its work. We think that the economic conditions here are still good, especially for small gas reserves. The new tax is due towill apply only in the fairly late stages of their lives, and for some reserves, especially small ones, it won't apply at all. What is left for the developer to pay the state is royalties at the fairly low rate of 12.5%, and the company tax is due to fall to 18%. This tax regime can definitely be called reasonable, even although I can understand that people anyone who invested a lot of money under the old tax regime and wasere very worried by the changes."
The fact that Israel changed the rules of the game in the middle of the game, as some companies allege, doesn’t deter you?
"You're a fairly new market and regulation here is still under development. There were also problems with the allocation of licenses, because for a long time you had no demand, and then all of sudden there was very strong interest. We understand this (the remark refers to the criticism on of the ease at with which licenses were allocated, which resulted in the tightening of threshold conditions to obtain them - A.B.)
"As far as we're concerned, the timing of our arrival here was excellent, because we could watch from the sidelines as the rules were formulated and calculated their effect on us in advance. Obviously, certainty and stability are important to us, and there should be no additional material changes in regulation."
How many exploration licenses do you want?
"We've joined partnerships in three exploration licenses (Shimshon, and the two Daniel licenses with Isramco Ltd. (Nasdaq: ISRL; TASE: ISRA.L) - A.B.), and we're waiting for permits for two more (Keren and Avia with Delek Group- A.B.). We're in talks for other licenses. We want to be a partner in every available license. If we can obtain 12 licenses, we'll be very pleased."
Meanwhile, ATP has already taken Petroleum Supervision Department experts to visit its Titan rig, an 80-meter high platform that can not only produce gas, but also process it and feed send it directly into the pipeline transport network.
ATP's interest in the Israeli market began two years ago, following the Tamar discovery. The interest turned practical after BP's Macondo oil spill disaster in the Gulf of Mexico. The environmental disaster from the spill caused President Barack Obama to declare a six-month moratorium on marine drilling in the gulf. ATP, whose main operations are in the Gulf, was affected by the moratorium like other companies operating there, even though most of them had no part in the oil spill.
Tate does not conceal his bitterness. "We worked in the Gulf for years and we never had a breakdown, but when the Macondo spill happened and drilling in the whole Gulf was suspended, we took the same severe blow as the companies responsible for the spill."
For Tate, this story has a lesson for Israel. "The worst thing that could happen here is a breakdown of the kind that happened in the Gulf of Mexico. That is why it is so important not to compromise on the professionalism of the companies that will manage the drilling here."
What is your opinion of Noble Energy?
Noble is an excellent company, and we'll be happy to come in after it."
ATP will invest $25-30 million in the first well to be drilled in the Shimshon license, in which it owns 40% of the rights. Drilling is planned for April 2012, and if it ends successfully, production should start in late 2014.
"Our average holding in licenses in which we are partners is 85%," says Tate. "I'd say that in Israel we won’t go below 35%. It's very important for us to retain control and professional management of the drilling, among other things because that enables us to manage the timetable of the work."
What do you think about calls in Israel for keeping the gas for the country's own needs and exporting it?
"I understand this need, but if you want exploration companies to invest $175 million in deep water wells, you have to allow them to export at some of the gas that they find."
ATP is a very professional company, but you're not a big company in terms of market size.
"Our share price, at $16-17, overprices risk. The market cap does not fully reflect our drilling and production facilities, which are worth about $1 billion, or our oil and gas reserves, which are worth another $6.7 billion. According to our books (assets less liabilities - A.B.), our share price ought to be $70-80."
"We must have more than one gas pipeline"
The most pressing current issue about Israel's oil and gas industry is gas supply security. At a time when the resumption of Egyptian gas deliveries is still uncertain, Israel faces an untenable situation: all domestic gas is due to be delivered by a single system that includes the drilling platform, and a pipeline to a terminal at Ashdod. Israel's need to build another gas pipeline network and a northern onshore terminal has been called the "number one strategic priority" by Minister of National Infrastructures Uzi Landau. But the fierce battle fought last summer by residents of Hadera, Caesarea, and other coastal communities, backed by environmental organizations, resulted in the suspension of plans to build a terminal at Dor.
The residents and environmental organizations' main demand was to examine using an offshore platform as an alternative to an onshore terminal. ATP has some very interesting proposals in this regard: it builds and operates such platforms around the world. Tate says that each platform costs $500-600 million and takes 3.5-4 years from the date of order to operation.
"We understand the sensitivity in Israel about the construction of facilities on the coastline, but it's very important to have more than one gas supply network," says Tate. "Our system can operate at a great distance from the coast. In effect it supplements Noble Energy's network."
Another no less interesting proposal by ATP is to design and build a floating gas liquefaction facility for Israel, something that Israel is considering as an alternative to an onshore facility. Gas exploration companies are moving forward to use the gas liquefaction facility under construction in Cyprus. Tate says that ATP's facility can be designed and built within 3.5-4 years, and that it would be the optimal solution for Israel's needs. It does not occupy large areas of land, it is not a fixed strategic target for hostile parties, and it is cheaper than a 1.5 trillion cubic foot reservoir.
Published by Globes [online], Israel business news - www.globes-online.com - on June 12, 2011
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