A Fertile New Deepwater Play

It's not like 2010 was an uneventful year for the energy sector. There was, of course, the horrendous rig explosion and oil spill in the Gulf of Mexico involving BP (NYSE: BP  ) , Transocean (NYSE: RIG  ) , and Halliburton (NYSE: HAL  ) , among others. And a movement of major oil companies, led by ExxonMobil (NYSE: XOM  ) , toward increased attention to natural gas was also noteworthy.

But the early days of 2011 have involved a wild and wooly extension of events that received little attention last year in a country not typically thought of as an energy hotspot: Israel. Beyond that, it's a somewhat complex story, so I'll limit my recap to a tiptoe across its main events.

Central to it is a massive new natural gas discovery in 5,400 feet of the Mediterranean in the so-called Levant basin, about 80 miles from Israel's northern coast. Between them, Delek Group Ltd. of Israel and Houston-based Noble Energy (NYSE: NBL  ) own 85% of the well, which is called Leviathan, for a Biblical sea monster. The remaining 15% interest is held by Ratio Oil Exploration of Tel Aviv.

Fill 'er up -- for a century
Fine, oil and gas discoveries occur almost daily in an expanding number of the world's venues. But Leviathan might contain 16 trillion cubic feet of gas, which would make it the world's biggest deepwater gas discovery of the past decade. In fact, this single find just might contain enough natural gas to fulfill Israel's needs for a full century.

As Noble CEO Charles D. (Chuck) Davidson said, "Leviathan is the latest major discovery for Noble Energy and is easily the largest exploration discovery in our history. In the past two years, we and our partners have made three significant natural gas discoveries in the Levantine basin." He also noted that the big find has validated the company's geographic models of the basin and confirms "that it contains significant natural gas resources."

From a geopolitical perspective, it could alter Israel's role in the Middle East dramatically. Unlike many countries in its region, Israel has never had cause to raise its flag as a major factor in oil and gas. For that reason alone, the country hasn't drawn attention from the likes of Royal Dutch Shell (NYSE: RDS-A  ) , Chevron (NYSE: CVX  ) , or their peers, who were concerned about raising the ire of the region's major producing nations. Now, however, Israel may be transformed from a mere user of hydrocarbons produced by others to a new role as a net exporter.

Already a troublemaker
But the scarcity of oil and gas in Israel almost certainly will be the cause of Leviathan's discovery being a less than blissful experience for those involved. Indeed, it already has precipitated a minor skirmish between Israel and the U.S. It seems that in 1952, in an attempt to attract attention from the world's energy companies, the country set rates for corporate taxes on exploration and royalties that were lower than typically was the case with other countries.

Early last year, however, a pair of promising offshore gas discoveries were made by Noble et al in what were called the Tamar and Dalit fields. While far smaller than Leviathan, the initial discoveries yielded high-quality gas and demonstrated the potential of the area. Once the initial discoveries and the potential for additional positive results had been established, Israel's Finance Minister Yuval Steinitz raised the possibility of retroactively altering the country's tax and royalty policies in favor of a larger cut for the government.

The possibility of the energy financing picture being altered -- especially after the fact -- obviously didn't sit well with the participating companies. According to The Wall Street Journal, Noble's CEO Charles Davidson communicated to Mr. Steinitz that changing the rules of the game long after play had started "would quickly move Israel to the lowest tier of countries for investment by the energy industry."

However, a committee that was convened to study the desirability of altering the country's tax and royalty structure, has suggested that the government's share of revenue from oil and gas production be nearly doubled. And while the committee's recommendation would exclude wells that begin producing by 2014, I'm betting that the nation's parliament, the Knesset, will give a thumbs up to the proposed alterations. I'd also wager that such a new scheme will injure Israel's efforts to further expand its significance in the energy world.

They must be kidding
Another complication has been unleashed by Leviathan: As you know, Iran and Israel are hardly chums. At the same time, Hezbollah, the Shiite military organization that is largely supported by Tehran, operates mostly from Lebanon, which sits immediately north of Israel. Based on what I find to be a lack of logic, an Iranian official in Lebanon maintained in November that Leviathan should be primarily a Lebanese possession. Israel has responded -- appropriately, it would seem -- that it would use force to reject such a notion.

Stay on the sidelines
As to the potential for Fools to profit from investments tied to the Leviathan discovery and possibly Israel's changing role in energy, the most appropriate approach obviously would be through shares in Noble. I'm inclined, however, to watch the emerging situation carefully, and only pull out my shekels once the Israeli tax and royalty situation ceases to be a moving target.

Chevron is a Motley Fool Income Investor choice. The Fool owns shares of ExxonMobil.Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named in this article. The Motley Fool has a disclosure policy.


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