Oil discovery at Leviathan would be a game changer
According to 3D seismic surveys, there is a possibility that Leviathan contains a large quantity of oil. Results from exploratory drilling had been expected in May, but have now been delayed to 2H11 due to the wearing down of a key drill part. We see triple-digit upside potential for the Israeli Leviathan partners if oil is discovered. Nevertheless, the chances are not high; based on seismic scans, there is a 17% chance of success (this is the same level as Deutsche Bank's calculated global average) of finding 3bn barrels of oil at 5,800 meters, and an 8% chance of finding 1.2bn barrels of oil at 7,200 meters. With the exception of pure-play Ratio, we believe the market has not significantly priced in the likelihood of an oil discovery. That said, we believe a failure to discover oil would drive share prices lower on sentiment, creating buying opportunities.

Pricing power shifts to the Israeli providers
Egypt provided approximately 40% of the natural gas used by Israel in 2010 through EMG, a company jointly owned by Egyptian and Israeli investors. During the recent unrest in Egypt, the pipeline was sabotaged twice, halting the flow of gas for extended periods. These disruptions have materially increased the pricing power of the Israeli gas partnerships, which now have the ability to raise prices that could offset at least part of the impact from the Sheshinski tax measures. We have already witnessed the beginning of this trend, with the recent sale of gas to industrial customers at more than US$8/mmBTU. As a result, we believe the value of the Israeli natural gas assets, particularly Tamar, has increased.

Eoin Treacy's view Israel's potential to become self sufficient in natural gas has increased substantially with the discovery of the Leviathan field. (Also see Comment of the Day on April 11th). All of the shares mentioned in this report can be found in the Chart Library.

Most new discoveries globally are now either deep offshore or are employing advanced technology to onshore unconventional reserves. This is helping to make natural gas a major contender for an interim solution for the energy complex before truly competitive alternatives are developed.

This article by Clifford Krauss for the New York Times covers how horizontal drilling and hydraulic fracturing are now being employed in Texas to exploit shale oil reserves.

Unconventional oil and gas has a promising future. The location of such reserves could help to change the energy landscape in the coming decade in favour of countries such as the USA and China. However, unconventional reserves are more expensive to develop which is why we define peak oil in terms of the rising cost of production.

Brent crude oil prices hit a peak nearly two months ago, having become quite overextended relative to the 200-day MA. The subsequent sharp decline helped to unwind the majority of the overbought condition and prices have stabilised mostly above $110. A sustained move below that level would be required to question the consistency of the medium-term uptrend

US natural gas prices remain in a support building and have stabilised near $4. A sustained move below that level would be required to check current scope for some further higher to lateral ranging.