Avner Oil - Annual Report 2011 - Delek Energy Systems

Law), which sets out provisions for oil and gas exploration and production in Israel and stipulates,inter alia, that oil and gas exploration in Israel may only be in geographical areas where theexploration company holds oil and gas rights under the Petroleum Law. In addition, the Natural GasSector Law regulates the transmission, distribution and marketing of natural gas in Israel.6.2 The economic viability of natural gas production from reservoirs discovered and yet to bediscovered by the Limited Partnership is heavily dependent on the demand for natural gas in localand international markets and on the export potential of natural gas (through pipelines, compressedor liquefied), which also requires significant gas reserves and long-term agreements for the sale ofsignificant quantities of natural gas, which would justify the heavy investment required to establishsuitable infrastructure. Conversely, oil, if and wherever it is discovered, can be sold to differentconsumers in Israel and around the world, based on the global prices for oil at that time.6.3 Development of Israel's natural gas sector started in 2004, with gas supply from the Mari reservoirto the Eshkol power station in Ashdod, belonging to Israel Electric Corporation Ltd. (“IEC”). Totalconsumption of natural gas in Israel has increased alongside the progress of the pipeline installedby Israel Natural Gas Lines Ltd. ("INGL") and the connection of other consumers and powerstations to the pipeline.6.4 In recent years, there have been significant changes in Israel’s the fuel sector. Within a few years,natural gas has become the main source of fuel for electricity production and a material source ofenergy for large industries. According to the Ministry of Energy and Water ("the Ministry of Energy")natural gas consumption in 2011 amounted to 4.95 BCM. It is noted that the Ministry of Energyestimates that natural gas consumption is expected to increase to 50% by 2015 and gas productionfrom other reservoirs will increase, in addition to the Yam Tethys and Noa reservoirs, andtransmission and delivery systems will be upgraded. According to the assessment of the Ministry ofEnergy, growth in the use of natural gas in Israel is expected to continue in the coming years,reaching 13.4 BCM by 2020 and 19.5 BCM by 2030, of which 85% will be for electricity generationand industry. According to the assessment of the Ministry of Energy, the total forecast demand for2011-2040 is 493 BCM (or 455 BCM, if transportation and methanol are excluded). The forecastdemand for natural gas is based on a continued increase in electricity consumption at a multiannualaverage of 3.1%; minimum use of heavy fuel oil; reliance on coal power stations to thesame extent as at the present time; gradual adoption of renewable energy sources to reach a levelof 10% in 2030; and a transition to natural gas as the primary fuel for electricity generation since2014, reaching 60% in 2027 and 68% in 2040 of all fuels used to generate energy. 86.5 Cyprus: For a description of the economic environment and competition in the Cypriot market, seesection ‎7.14.2 below.6.6 Main external factors affecting this field6.6.1 Fluctuations in prices of alternative fuels, generation in the price of electricity and oil pricesFluctuations in prices of alternative fuels 9 could affect the Partnership's selling prices of natural gasto its customers, and/or affect the economic viability of developing and production from reservoirsthat have been discovered and/or will be discovered (if discovered) by the Partnership, and thePartnership's decisions in this respect.6.6.2 Regulation(A)Oil and gas exploration and production are subject to regulation of the relevant countries. Oiland gas exploration, development and production in Israel is subject to extensive regulationfor the Partnership's exploration and production rights, conditions for production and supply,royalties, taxation, construction of transmission infrastructure, connection to oil- and naturalgas-fired power plants, regulations for granting, transferring and pledging oil rights,environmental arrangements and restrictive trade practices. In view of the numerous entitiesinvolved in oil and gas exploration and production in Israel and the numerous discoveriesand transactions for the sale of oil rights in recent years in Israel, various governmentdepartments decided to increase supervision in this area. Accordingly,, the Commissioner of789See footnote 2 above.The information is taken from the website of the Ministry of Energy and Water:http://energy.gov.il/Subjects/NG/Pages/GxmsMniNGEconomy.aspxThe electricity generation price is published from time to time by the Public Services Authority - Electricity.A-8