Avner Oil - Annual Report 2011 - Delek Energy Systems

that coverage provided by the insurance policies obtained will be sufficient. The decision on thetype and scope of insurance policy is usually made separately for each drilling, taking into account,inter alia, the cost of insurance, nature and scope of the proposed insurance coverage and theanticipated risks. The operator of a specific project could decide not to take out certain policies.Dependence on contractors, equipment and professional services: There are no contractors in Israelinvolved in drillings, development or offshore seismic surveys of the type conducted by the LimitedPartnership. Therefore, the Partnership is required to contract with foreign contractors for thenecessary services. Furthermore, there are few machines capable of drilling and carrying outdevelopment operations at sea in general, and in deep water in particular, compared to the largedemand, and there is no certainty that proper vessels will be available for drilling when required.Therefore these offshore operations could involve high costs and/or significant delays in schedulesset in the work plans, or part thereof. Most of the suitable equipment and human resources forthese operations can be ordered for short periods, therefore it is often necessary to orderequipment and professional human resource services from abroad, which is expensive and causessignificant delay in operations. Contracting with foreign contractors for offshore oil exploration,development and production operations (including maintenance and repairs contractors) couldsometimes be difficult, also due to the security and geopolitical situation in Israel.Exploration risks and reliable on incomplete data and assumptions Oil and gas exploration is not an exactscience, therefore there is a high risk, since failed exploration drillings could result in a loss ofinvestment. The geological and geophysical means and techniques do not provide an accurateforecast as to the location, shape, features or size of oil or gas reservoirs. Therefore, determiningexploration prospects and estimating the size of existing reservoirs and gas reserves could bebased, to a large extent, on partial or approximate data and on unproved assumptions. It isobviously impossible to ensure that oil or gas will be found at all as a result of explorationoperations, or that it will be commercially viable for production and exploitation. Furthermore, thereis shortage of direct geological and geophysical information for some of the offshore areas of theLimited Partnership's oil assets. This is due, inter alia, to the limited number of drillings conductedin these areas and the sparse information that could be derived from them. Estimates of provedgas reserves and resources that can be produced from the reservoirs could also change from timeto time. The estimated oil and gas quantities in producing reservoirs during the reporting period iscalculated each year, inter alia, based on assessments of oil and gas reserves by external experts.The estimation of the gas reserves and gas resources according to the above principles issubjective, based on different assumptions and incomplete information, and the estimates ofexperts could vary significantly. There are numerous assumptions and data that affect the results ofthe estimated reserves and changes in these assumptions and/or data could result in significantchanges in the assessments. In view of the aforesaid, it is noted that the information in this reportregarding the gas reserves and gas resources in the different reservoirs is based on assessmentonly and should not be considered as information regarding precise quantities. Estimates of theproved and developed gas reserves in the Mari gas field are used to determine the depreciationrate of assets in financial statements of the Partnership. Depreciation of investments associatedwith discovery and production of proved and developed gas reserves is based on the depletionmethod, in other words, in each accounting period the assets are depreciated at a rate determinedby the number of units of gas actually produced, divided by the proven and developed gas reservesremaining according to estimates. Given the significant depreciation, these changes can have amaterial effect on the operating results and the financial position of the Partnership.Estimated costs and schedules and potential shortage of means Estimated costs and schedules forexploration and development are based on general forecasts only and there could be significantvariances. Exploration plans could change significantly due to the findings of these explorations,causing significant deviations in schedules and estimated costs of these operations. Malfunctionsduring exploration and production, and other factors, could extend the operations far beyondschedule and expenses for completing exploration could be significantly higher than forecasted.Proposed exploration operations could also involve financial outlay which the Limited Partnershipmay not be able to cover. According to joint operating agreements, late payment of thePartnership's share of the approved budget for the work plan is a breach which could lead toforfeiture of rights in the oil asset or assets to which the operating agreement applies. Each party tothe JOA is liable for timely payment of its proportionate share. Should other parties to theagreement fail to pay the amounts due and are in breach of the agreement, the Partnership couldbe liable for payments significantly exceeding its proportionate share in the oil asset or assetsrelative to the breach. If such payments are not made on time, the Partnership could risk forfeitureof all its rights in the assets. Particularly high costs of offshore drilling and development could resultA-190