Looking for an Oil Boom in Israel's Napa Valley

In a golden wheat field set among the green hills of Israel's Adullam region, Harold Vinegar gestures to a drilling rig as it pulls up core samples of oil shale from some 400 meters (1,312 feet) down. "Israel has one of the largest deposits of oil shale rock in the world, enough to produce 250 billion barrels," says the 62-year-old geologist, who spent three decades at Royal Dutch Shell (RDS.A), eventually becoming Shell's chief physicist. "Saudi Arabia has reserves of 260 billion barrels. Most people don't realize yet that Israel has the potential to be one of the world's major oil producers."

They sure don't. An old joke has Moses making a wrong turn after leaving Egypt and leading the Israelites to the only land in the Middle East without oil. Over 400 wells have been dug in Israel over the past six decades with little success, some by wildcatters claiming divine guidance from scripture and rabbinical advisers.

Vinegar, who moved to Israel from the U.S. almost three years ago to become chief scientist for a company called Israel Energy Initiative, is leading an effort to find—and extract—the oil Israelis have long sought. Israel's sedimentary rock contains solidified hydrocarbons called kerogen. If heated to 600F the kerogen release their oil, as well as gas. IEI, a branch of the U.S. telecom company IDT (IDT), may have found a cost-effective way to heat the kerogen enough to bring the oil to the surface. This vision has entranced Israeli officials and investors including News Corp. (NWS) Chairman Rupert Murdoch, British financier Lord Jacob Rothschild, and hedge fund manager Michael Steinhardt.

The dream of an energy-independent Israel has taken a giant leap forward since the 2009 discovery of substantial natural gas fields off its coast. The strategic value of those finds was confirmed when the uprising in Egypt disrupted its gas exports to Israel. Since Israel must import all its oil and coal and 70 percent of its gas, tapping the oil shale successfully could be a game-changer for the Jewish state.

First, though, Vinegar has to prove the oil can flow easily. The traditional way to extract shale oil is through open-pit mining, with production costs ranging from $70 to $100 a barrel. Vinegar says a more economical alternative with less damage to the landscape involves slowly and uniformly heating rods made of molten salt that are sunk into the shale deposits. Heat from the rods, which are kept at up to 600F, spreads through the shale slowly, over three to five years. The resulting oil and gas are then pumped to the surface. Vinegar is a pioneer in developing this technology, which he says could produce oil for as low as $35 a barrel.

Israel's shale oil deposits have remained untapped largely for geopolitical reasons. "None of the major oil companies are willing to do business in Israel because they don't want to be cut off from the Mideast supply of oil," says Howard Jonas, chief executive officer of IEI's corporate parent, IDT, in Newark, N.J. Investor excitement over the shale ventures has helped push IDT's stock, which fell to 66¢ a share in late 2008 on its struggling prepaid calling card business, to about $30.

By yearend, IEI plans to start a small pilot project in Adullam to show how the conversion from kerogen to oil works on-site. That prospect has alarmed environmentalists, who argue that IEI risks contaminating Israel's main aquifer. Adam Teva V'Din, head of the Israel Union for Environmental Defense, has petitioned the High Court of Justice to halt the pilot, arguing the government wrongly granted IEI a permit under a 1952 petroleum law that does not apply to unconventional extraction methods.

Concerns about aquifer contamination have dogged other shale oil efforts, including an IDT project in Colorado. Vinegar says contamination is not an issue in Israel because an impermeable, 200-meter-thick rock layer separates the Adullam oil shale deposits from the aquifer. Israel's National Infrastructures Ministry says IEI has a license solely for the pilot project, and commercial development will proceed only after the environmental impact has been evaluated.

These reassurances don't satisfy all the residents of the Adullam region's grape-growing Elah Valley, which is marketed as Israel's answer to California's Napa Valley. On Apr. 22 a protest took place in an archeological park amid 2,000-year-old ruins. It featured children playing in a pool of "oil" simulated by black plastic tarpaulins. "They are planning an experimental, hazardous, and dirty oil industry," says Orit Skutelsky, an ecologist with the Society for the Protection of Nature in Israel. "Israel is not the place for this kind of industry, especially this part of it."

If the pilot project is allowed to proceed this year, says IDT's Jonas, oil could be produced as early as 2017. Shale oil expert Jeremy Boak at the Colorado School of Mines believes the project "is something they can achieve and make profitable at the kind of oil prices we have right now." Boak also says that since the technique releases natural gas as a byproduct, the gas can be used to heat the rods and keep costs down.

For investors such as Steinhardt, a leading philanthropist for Jewish causes, the possibility of an energy-independent Israel is as much of an attraction as any possible profit. The hope, says Steinhardt, also IEI's chairman, is "that this will turn into something very important for the state."

The bottom line: New technology could heat Israel's shale deposits into 250 billion barrels of oil. Environmental concerns linger.

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