IDT Corporation: Genie Energy Makes It Worth a Look

Apr.18.11 | About: IDT Corporation (IDT)

Previously unknown to me, likely you, and most everyone else, Israel is sitting on the second largest shale oil resource in the world. A company called Israel Energy Initiatives is working on methods to try and extract oil and natural gas from oil shale in a 238 square kilometer area of the Shfela Basin, which is located to the southwest of Jerusalem. Here is a link (.pdf) to a presentation outlining their plans.

In the past couple of years, it had already been revealed that Israel has - just offshore - a massive amount of natural gas reserves. In 2009, Noble Energy (NYSE:NBL) found 8 trillion cubic feet of natural gas in the Tamar field off Israel’s Mediterranean coast. In 2010, Noble had success again with the Leviathan discovery, which is twice the size of Tamar and the largest global discovery in a decade.

The size of the prize in the Shfela Basin is also massive at an estimated 250 billion barrels of oil. To put that in perspective, Saudi Arabia has 260 billion barrels of proved and probable reserves. Of course, the key will be trying to extract as much of that 250 billion barrels as possible in an economical manner.

The company working on “cracking the code” to this shale play is Israel Energy Initiatives, which owns the license to explore and produce from the play. Israel Energy Initiatives (IEI) is 89% owned by Genie Energy. Genie Energy is a subsidiary of a company you might be familiar with, IDT Corporation (NYSE:IDT).

And it gets more interesting. Lord Jacob Rothschild and Rupert Murdoch recently acquired 11% ownership of Genie Energy. And Genie Energy’s advisory board includes hedge fund legend Michael Steinhardt and former United States Vice President Dick Cheney.

IEI is developing a technology that they believe can produce oil from this shale resource at a cost between $US 35 and $US 40. This would be cheaper than most oil sands and some deepwater production. Without some sort of step up in technology, this shale resource is currently not recoverable.

The IEI technology involves heating rock deep underground to a temperature of 325C which will cause the carbon bonds to crack. The oil produced would be a light, easy to refine product. The project is currently at the appraisal stage which will be followed by a pilot phase.

If successful, IEI would make Israel a very significant exporter of oil. Combined with the natural gas production that will be coming in the medium term from offshore, this would be a radical shift for Israel, which is completely energy dependent.

Israel isn’t the only place Genie Energy is looking to unlock currently useless oil trapped in shale. They are also working on a shale oil project in Colorado through another subsidiary called American Shale Oil. Again, they are looking for a way to take oil that is currently not recoverable and to do so in an economic and environmentally responsible manner.

Getting exposure to Genie Energy is pretty straight forward as you can get it by owning IDT directly. I would suggest that at this point, what Genie is doing likely has a very small chance of success, although a potentially very valuable reward. A smart investor would have a look at IDT and if it is priced reasonably in relation to its assets other than Genie, then Genie and these huge oil resources could be an attractive free option.

I believe that if you pick up enough high impact options in your portfolio without paying anything for them, eventually, something very good is going to happen. I’d never bet on one of these step change technologies directly, but if I can get exposure for free I’ll gladly accept the gift.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.