Avner Oil - Annual Report 2011 - Delek Energy Systems

7.30 Risk factorsOil and gas exploration and the development of oil and gas discoveries involve large financialoutlays with a high financial risk, primarily for reasons set out below. This is even more significantfor offshore oil exploration and production operations.Dependence on global fuel prices: The prices paid by consumers for natural gas in reservoirs in which thePartnership is party, are derived, inter alia, from prices of alternative energy sources to gas, suchas oil and coal. A decrease in prices of alternative fuels could have an adverse effect on the pricewhich the Partnership is able to obtain for natural gas and/or may affect the economic viability ofproduction from the reservoirs discovered in the Tamar and Ratio Yam projects, Alon licenses, theproject in Cyprus and any other reservoirs that may be discovered by the Partnership. Furthermore,significant fluctuations in coal prices may lead to a change in the IEC's usage model, which couldmean preference given to power stations fueled by coal compared with power stations fueled bynatural gas and vice versa. In addition, the price of gas in some of the gas supply contracts signedby the Tamar project partners was derived from the price of electricity as defined by the PublicServices Authority - Electricity from time to time (as set out in section ‎7.11.4 above), therefore adecrease in the electricity price will result in a decrease in the Partnership's revenue from theseagreements.Competition for gas supply: To the best of the Partnership's knowledge, at the date of the report, there arethree major competitors for gas supply in Israel (for further information, see section ‎7.14 above.However, further discoveries may lead to the entry of other competitors. In view of the relativelysmall gas sector in Israel, this competition may impair the Partnership's ability to market the gasreserves that were discovered or that will be discovered in the future, impairing the Partnership'srevenue.Market size compared with size of reservoirs: The natural gas reservoirs discovered in the Tamar and RatioYam projects, Alon licenses and Cyprus project are considerably larger than the potential market inIsrael and Cyprus, which is relatively limited. Accordingly, the results of the Partnership’soperations are largely dependent on the possibility of commercializing the gas, including thepossibility of exporting gas and selling it on the international market. The possibility of gas exportand sales depend on several factors with high uncertainty, such as establishment of an export andtransportation system subject to regulatory approvals, economic feasibility of establishing thissystem, identification of potential customers in the international market, and financing investmentsin development and establishment of the export system.Uncertainty regarding the construction of the national gas pipeline: The Partnership's ability to supply gas toother potential consumers and to increase the gas volume supplied to IEC is dependent, inter alia,on the completion and expansion of the national gas pipeline and the regional distributionnetworks.Absence of insurance cover: Although the Partnership has insurance policies to cover possible damageswith regard to its operations, these policies do not cover all potential risks and therefore theinsurance payout may not cover the full scope of damages and/or all potential losses (for thirdpartydamages as well as for potential loss of income and establishment costs of the productionsystem in the case of an event that causes damage to the production system). Accordingly, in theevent of a disaster, the insurance amounts and liability limits set out in section ‎7.29 above may notcover the full amount of the damages. Furthermore, there is no certainty that appropriate policiesmay be purchased in the future under reasonable commercial terms, if at all. Moreover, for certaininsurances, the Partnership may decide not to take them out at all.Operational risks: Oil and gas exploration and production operations are exposed to all risks involved inexploration and production of oil and gas, such as uncontrolled gushing from the well, explosion,collapse and conflagration of the well, malfunctions, accidents and other events that could impairthe performance of the production and delivery system. Any of these could damage or destroy theoil or gas wells, production facilities, exploration equipment as well as cause bodily injury anddamage to property. There is also a risk that equipment could be trapped in the oil drill, preventingthe continuation of drilling operations or incurring significant expenses. Should any of these eventsoccur at sea, consequences could be extremely severe and major damage could be incurred.Furthermore, there is risk of liability for pollution damage due to gushing and/or leaking of oil and/orgas. 200 There is no certainty that all required insurance to cover these risks can be obtained, nor200 The Operator operates in drillings and development works according to recently updated American standardsfollowing the events in the Gulf of Mexico.A-189