Avner Oil - Annual Report 2011 - Delek Energy Systems

have not been brought before the courts in Israel. The levy was calculated accordingto the transitional provisions in the law for a project that started commercial productionbefore the Law came into effect, based on the following assumptions: The developerwill report in US dollars according to section 13(B) of the Law, the rate of inflation inthe United States in the coming years will be 2%, all of the developer's payments(production costs and investments) will be recognized by the tax authorities forcalculation of the levy and calculation of the developers revenues will take intoaccount actual selling prices of the gas.It is emphasized that the discounted cash flow is based on the updated assessment ofthe operation for actual production capacity, which could change in the future, andwhich does not allow production of the full quantity of the reserves until gas supplystarts from the Tamar project.In recent months, there has been a significant decrease in the production capacity ofnatural gas from the Mari B reservoir, which led to reduced supply of natural gas fromthe reservoir to customers in the Yam Tethys project. From information provided to thePartnership by the operator, based on an assessment and analysis carried out by theoperator by itself and through third parties, production of natural gas from the Mari Breservoir, which resulted in a steady decline in the pressure in the reservoir, causedlarge-scale sinking of the layers above the reservoir and below the productionplatform. Sinking of the soil layers also resulted in damage and loss of productioncapacity in some of the production wells, so that today, natural gas is only producedfrom Mari B 5, 9, and 10 wells (in one of these wells, increased penetration of waterinto the production wells was detected, in a way that impairs production capacity). It isnoted that the production platform at the Yam Tethys project is planned from anengineering and technical aspect to allow for sinking, mainly due to sinking of the soillayers above the reservoir and below the production platform, and at this stage,sinking of the production platform is within permitted levels according to theengineering plan.The operator intends to produce natural gas from the reservoir at the production rate,which will retain steady production capacity from the reservoir and will not causedamage to the platform.In addition, the project partners are taking steps to develop the Noa reservoir, drill thesatellite reservoirs of the Mari B reservoir (Pinnacles) and develop them (if natural gasis discovered), with the aim of timely production, thereby reducing the steady declinein supply capacity and moderating its implications, while maintaining the serviceabilityof the production system of the Yam Tethys project.According to the reserves report, attached as Appendix A to this report, there is nochange in the estimate of the reserves in the reservoirs (other than a decrease inamounts actually produced), therefore this development is mainly reflected in asignificant decrease in the production capacity of the Mari B reservoir and productionfacilities.The discounted cash flow in the reserves report is based on the operator's estimate ofthe expected reduction in production capacity from the Mari B reservoir.The project operator informed the Partnership that the estimated average dailyamount of gas that the Yam Tethys project will supply in the period up to the expecteddate of gas supply from the Tamar project is expected as set out in the discountedcash flow of the Mari B reservoir (for further information see section ‎7.3.10(A)(3)above). If the Noa reservoir is developed and connected to the Yam Tethys productionsystem, an average daily amount of gas will be added as set out in the discountedcash flow of the Noa reservoir (see section ‎7.3.10(B)(3) above). If and when Pinnaclesis developed and connected to this production system, an average amount of gas ofMMcfd 60 will be added.The decline in production capacity of natural gas is expected to have an adverseeffect on the financial results of the Partnership, however, at this stage, thePartnership is unable to estimate at high level of certainty the full commercialimplications and the extent of the effect, partly due to the frequent developments in theproject.A-26