FINANCIAL STATEMENTS. Avner Oil Exploration AS OF UNAUDITED

Transcription

1 ± FINANCIAL STATEMENTS Avner Oil Exploration AS OF UNAUDITED

2 2016 Table Of Contents Partnership Description Board of Directors Report on the State of the Partnership s Affairs Financial Statements Report on the Effectiveness of Internal Controls for Financial Reporting and Disclosure

3 Avner Oil Exploration ± Partnership Description

4 This report is a translation of Avner Oil Exploration - Limited Partnership's Hebrew-language Update to Chapter A (Description of the Partnership s Business) of the Periodic Report for 2015 of Avner Oil Exploration. It is prepared solely for convenience purposes. Please note that the Hebrew version constitutes the binding version, and in the event of any discrepancy, the Hebrew version shall prevail. Update to Chapter A (Description of the Partnership s Business) of the Periodic Report for 2015 of Avner Oil Exploration Limited Partnership (the Partnership ) 1 1. Section 4 of the Periodic Report distribution of profits With respect to the publication of certificates for the purpose of calculation of the tax for an entitled holder due to the holding of a unit for the tax years 2012 and 2013, see the immediate report of June 7, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference. 2. Section of the Periodic Report the planned and actual work plan in the Tamar project With respect to the making of a decision by the Tamar partners regarding the drilling of the Tamar-8 development and production well and construction of related infrastructures in the Tamar field, see the immediate report of July 3, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference. 3. Sections 7.4.4(b) and (a)(4) of the Periodic Report the development plan in the Tamar project and the gas supply agreement between the Tamar partners and the Israel Electric Corporation Ltd. (the IEC ) The operational running-in period of the compressor system in the Tamar project ended during Q2/2016. In addition, it was agreed between the Tamar partners and the IEC that the exact date for increasing the gas quantities will be determined in coordination between them during Q3/2016 or in proximity to this date. As of the report release date, no such date has yet been determined. 4. Section of the Periodic Report the Leviathan reservoir 4.1. With respect to the approval of the Petroleum Commissioner at the Ministry of National Infrastructures, Energy and Water Resources (the Commissioner and the Ministry of Energy, respectively) of the updated development plan for the Leviathan reservoir, at a maximum supply scope of approx. 21 BCM per year (the Development Plan ), see the immediate report of June 2, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference. 1 The update includes material changes or innovations which occurred in the Partnership s business in the course of Q2/2016 until shortly before the date of this report on any matter that must be described in the periodic report. The update relates to the section numbers in Chapter A (Description of the Partnership s Business) in the periodic report for 2015 that was released on March 28, 2016 (ref. no ) (the Periodic Report ).

5 With respect to the Partnership s clarification following reports in the media that no change has occurred in the appraisal of the natural gas and condensate resources in the Leviathan reservoir, see the immediate report of June 5, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference With respect to the Partnership s approval for the operator of the Leviathan project, Noble Energy Mediterranean Ltd., to enter into agreements at a total aggregate scope of approx. $120 million (100%) for receipt of engineering services, including Front End Engineering Design (FEED) in connection with the processing and production rig, as approved in the Development Plan, see the immediate report of June 22, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference. In this framework it is noted that in July 2016 the Leviathan partners approved a budget for the development of the Leviathan reservoir in the sum of approx. $119 million (100%) for 2016 until the end of January 2017 for the purpose of performance of the required actions that will allow timely completion of the Development Plan once approved by the Leviathan partners in the framework of the adoption of a final investment decision (FID). 5. Section of the Periodic Report the 351/Hanna license (the Hanna License ) With respect to the decision of the Commissioner of July 21, 2016 not to recognize the Dolphin natural gas reservoir located in the area of the Hanna License as a discovery, within the meaning thereof in the Petroleum Law, , see the immediate reports dated June 21, 2016 and July 21, 2016 (ref. no.: and , respectively), the details appearing in which are included herein by way of reference. It is noted that on August 18, 2016, the partners in the Hanna License filed an appeal with the Minister of National Infrastructures, Energy and Water Resources (the Minister of Energy ) from the Commissioner s decision as aforesaid. 6. Section of the Periodic Report the I/16 Tanin and I/17 Karish leases (the Leases ) With respect to the Partnership s engagement, together with Delek Drilling Limited Partnership ( Delek Partnership ), in an agreement for the sale of all of the interests of the partnerships and Noble Energy Mediterranean Ltd. in the Leases to Ocean Energean Oil and Gas Ltd., see the Partnership s immediate reports of August 16, 2016 (ref. no.: and ), the details appearing in which are included herein by way of reference. 7. Section 7.9 of the Periodic Report the 399/Roy license (the Roy License ) On August 7, 2016, Ratio Oil Exploration (1992) Limited Partnership ( Ratio ) announced that the Commissioner had approved an update to the work plan in the Roy License, as follows:

6 3 Period By April 14, 2017 Concise Description of the Planned Work Plan By September 1, 2016 Submission of a summary report regarding the detailed analysis of the pore pressure and fracture gradient at the designated depths of the well to be drilled, based on 3D seismic material and other material. By September 15, 2016 submission of an environmental document according to the directives of the Ministry of Energy. By October 15, 2016 submission of a signed contract with a drilling contractor for the drilling of a well in the area of the Roy License. By December 15, 2016 commencement of drilling in the area of the Roy License according to an approved drilling plan and while delivering all of the geological and engineering reports, as defined in the directives of the Ministry of Energy. Three months from completion of the drilling submission of an end-of-well report and delivery of all of the findings, including cuttings, electric logs, cores and test results (if performed) and other tests performed in the well, as defined in the directives of the Ministry of Energy. It is clarified that in view of the fact that the Partnership has an option only in the Roy License, and it has no access to information of the joint venture, the description of the planned work plan and the timetables of the said actions are based on public reports of Ratio only. Warning regarding forward-looking information the above description regarding the planned actions in the Roy License, including timetables for the performance thereof, is forward-looking information, within the meaning thereof in the Securities Law, , and is based on public reports of Ratio only. Actual performance of the work plan, including the timetables, may be materially different than as specified above and is contingent, inter alia, on the applicable regulation, on technical ability and on economic merit. 8. Section 7.11 of the Periodic Report the 353/Eran license (the Eran License ) In the framework of a petition filed by the partners in the Eran License with the High Court of Justice ( HCJ ) against the Minister of Energy and the Commissioner from the decision of the Minister of Energy to dismiss an appeal filed by the partners in the Eran License from the decision of the Commissioner not to extend the validity of the Eran License, on June 2, 2016, the HCJ entered a decision on the parties agreement to resort to mediation per its proposal. With the parties consent, the (retired) President of the Supreme Court, A. Grunis, was appointed as mediator, and a first session between the parties was held on June 29, No additional date has yet been scheduled. According to the decision of the HCJ, the parties are required to update the court regarding the outcome of the mediation no later than November 1, Section of the Periodic Report engagements for the supply of natural gas to the domestic market With respect to the signing of agreements for the supply of natural gas between the partners in the Leviathan project and in the Tamar project, including the Partnership, and IPM Beer Tuvia Ltd., see the immediate report of May 29, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference.

7 4 10. Section (b)(4) of the Periodic Report participation in a tender for the purchase of oil and/or gas exploration rights in Cyprus With respect to the submission of a bid in a tender that was published by the Cypriot government for the purchase of oil and/or natural gas exploration rights in the EEZ of Cyprus by a consortium that includes the Partnership, Delek Partnership and Capricorn Oil Limited, see the immediate report of July 24, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference. 11. Section 7.19 of the Periodic Report human capital On June 5, 2016, the general meeting of the holders of the participation units in the Partnership approved, inter alia, a compensation policy for officers in the Partnership and in the Partnership s general partner. For further details, see the immediate reports of April 15, 2016, May 18, 2016, May 23, 2016, May 30, 2016 and June 5, 2016 (ref. no.: , , , and ), the details appearing in which are included herein by way of reference. 12. Section of the Periodic Report financing through bonds With respect to current rating reports of bonds which were issued to accredited investors in Israel, in the U.S. and in other countries by Moody s, Standard & Poor s Global and S&P Maalot, respectively, see the immediate reports of June13, 2016, July 10, 2016 and July 11, 2016 (ref. no.: , and , respectively), the details appearing in which are included herein by way of reference. 13. Section (d) of the Periodic Report the 337/Avia and 338/Qeren licenses (the Licenses ) On March 30, 2016, a hearing was held in the petition filed by the Partnership together with the Delek Partnership (jointly: the Petitioners ) with the HCJ against the Minister of Energy and the Commissioner (jointly: the Respondents ), from the decision of the Minister of Energy to dismiss an appeal filed by the Petitioners from a decision of the Commissioner not to extend the validity of the Licenses. At the conclusion of the said hearing, the HCJ issued an order nisi, instructing the Respondents to respond as to why the Petitioners should not be granted a license for the Avia and Qeren areas for a restricted and limited period, subject to a very tight schedule for forming a partnership and for drilling. The Respondents response was given on August 21, No date has yet been scheduled for a hearing of the said petition. 14. Section 7.29 of the Periodic Report legal proceedings In a motion that was filed with the Tel Aviv District Court for class certification by a consumer of the Israel Electric Corporation Ltd. (the IEC ) against the Tamar partners regarding the price at which the Tamar partners sell natural gas to the IEC (the Certification Motion ), on April 20, 2016, the Tamar partners filed a motion for summary dismissal of the Certification Motion, concurrently with a motion to order the Attorney General to consider filing a position on his behalf in the proceeding. On May 15, 2016, the court ordered the Attorney General to consider filing a position in the proceeding and to file the same (if he so wishes) by June 1, 2016, and ruled that the motion for dismissal would be decided after receipt of the

8 5 position of the Attorney General (if filed). The Attorney General filed a position on his behalf whereby the Certification Motion should be summarily dismissed. On July 7, 2016, a hearing was held on the dismissal motion. A decision in the dismissal motion is expected to be issued in the upcoming months (if the action is not summarily dismissed with prejudice). 15. Section of the Periodic Report targets and business strategy - structural changes With respect to a presentation that was published by the Partnership and which was presented at a meeting of the holders of the participation units in the Partnership at a discussion on the issue of examination of a possible restructuring by way of a merger of the Partnership and the Delek Partnership (the Merger Transaction ), see the immediate report of June 5, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference With respect to interim decisions of the independent board committee that was appointed to examine the Merger Transaction, see the immediate report of August 7, 2016 (ref. no.: ), the details appearing in which are included herein by way of reference. 16. Set forth below is a table that includes production data of natural gas and condensate in Q1 and Q2 of 2016 in the Tamar project 2 : Natural Gas Condensate Q1 Q2 Q1 Q2 Total output (attributed to the holders of the equity interests of the Partnership) during the period (in MMCF for natural gas and in barrels in thousands for condensate) 12,067 12, Average price per output unit (attributed to the holders of the equity interests of the Partnership) (dollars per MCF and per barrel) Average royalties (any payment derived from the output of the producing asset, including from the gross revenues from the petroleum asset) paid The State per output unit (attributed to the holders of the equity interests of the Third Partnership) (dollars per MCF and per barrel) Parties Interested Parties Average production costs per output unit (attributed to the holders of the equity interests of the Partnership) (dollars per MCF and per barrel) Average net revenues per output unit (attributed to the holders of the equity interests of the Partnership) (dollars per MCF and per barrel) Date: August 23, 2016 Avner Oil Exploration - Limited Partnership via Avner Oil & Gas Ltd., General Partner Signed by: Gabi Last, Chairman of the Board and Yossi Abu, CEO 2 The rate attributed to the holders of the equity interests of the Partnership in the output, in the royalties paid, in the production costs and in net revenues, was rounded up to two digits after the decimal point. 3 It is emphasized that the average production costs per output unit include current production costs only, and do not include the reservoir s exploration and development costs.

9 Avner Oil Exploration ± Board of Directors Report on the State of the Partnership s Affairs

10 This report is a translation of Avner Oil Exploration - Limited Partnership's Hebrew-language Board of Directors Report of the General Partner. It is prepared solely for convenience purposes. Please note that the Hebrew version constitutes the binding version, and in the event of any discrepancy, the Hebrew version shall prevail. August 23, 2016 Avner Oil Exploration Limited Partnership Report of the Board of Directors of the General Partner for the Period Ended June 30, 2016 The board of directors of Avner Oil & Gas Ltd. (the General Partner ) hereby respectfully submits the board of directors report for the three-month and six-month periods ended June 30, 2016 (the "Report Period"). Part One Explanations of the Board of Directors on the State of the Corporation s Business 1. Main figures from the description of the Corporation s business The limited partnership, Avner Oil Exploration (the Partnership or Avner ) was founded on August 6, 1991 between the trustee, Avner Trusts Ltd. as limited partner of the first part, and Avner Oil & Gas Ltd. as general partner of the second part. Main changes that occurred in the Report Period: For a comprehensive description of the main changes in the Partnership s business in the Report Period, see the update to Chapter A (Description of the Corporation s Business) of the Periodic Report for 2015 (the Periodic Report ), the condensed financial statements as of March 31, 2016, and the condensed financial statements as of June 30, 2016, which are attached below. 2. Results of operations A. General As of the date of approval of the Interim Condensed Financial Statements, the Partnership is primarily engaged in the production and sale of natural gas and condensate from the Tamar project, the promotion and planning of an additional expansion of the production system of the Tamar project, the promotion and planning of gas commercialization and the development of the Leviathan reservoir and the Aphrodite reservoir, and exploration operations in the petroleum assets held by the Partnership. The Partnership s profits in the Report Period amounted to approx. $61.8 million, compared with approx. $53.4 million in the same period last year. 1

11 The increase in the Partnership s profits mainly derived from an increase in the revenues of the Partnership from the Tamar project. The Partnership s profits in Q2/2016 totaled approx. $31 million, compared with approx. $24.2 million in the same period last year. B. Analysis of income statements Below are main figures with regards to the Partnership s income statements (Dollars in thousands): 1-3/ / / / / Revenues: From gas and condensate sales 62,842 65, , ,817 52, ,089 Net of royalties 10,820 11,186 22,006 19,391 8,995 42,589 Net revenues 52,022 53, ,853 93,426 43, ,500 Expenses: Cost of gas and condensate production 5,091 5,492 10,583 11,081 5,845 21,583 Depreciation, depletion and amortization expenses 6,327 7,180 13,507 12,154 5,098 37,343 Oil and gas exploration expenses and other direct expenses, net 1, ,850 1, ,493 G&A expenses ,432 1, ,446 Total expenses 13,493 13,879 27,372 26,633 12,564 66,865 Operating profit 38,529 39,952 78,481 66,793 31, ,635 Financing expenses ) 9,226( ) 9,409( ) 18,635( ) 16,743( ) 8,157( ) 36,726( Financing revenues 1, ,343 3,306 1,304 5,665 Net financing expenses ) 7,823( ) 8,469( ) 16,292( ) 13,437( ) 6,853( ) 31,061( Profit before tax for the period 30,706 31,483 62,189 53,356 24, ,574 Petroleum and gas profit levy 33 ) 471( ) 438( Profit for the period 30,739 31,012 61,751 53,405 24, ,868 Other comprehensive loss in respect of items which may subsequently be reclassified to profit or loss: Profit (loss) in respect of financial assets available for sale , Revaluation of financial assets available for sale ) 1,305( ) 1,250( ) 464( Total other comprehensive income (loss) 1, ,490 ) 1,305( ) 1,250( ) 464( Comprehensive income for the period 31,870 31,371 63,241 52,100 22, ,404 Gas sales in BCM Condensate sales in thousands of barrels The figures refer to natural gas sales from the Tamar and Yam Tethys projects rounded off to one tenth of a BCM. 2 The figures refer to condensate sales (100%) from the Tamar project, rounded off to thousands of barrels. 2

12 Revenues net of royalties amounted in the Report Period to approx. $105.9 million compared with approx. $93.4 million in the same period last year, an increase of approx. 13%. The increase in revenues in the Report Period compared with the same period last year derives mainly from the increase in the amounts of natural gas and condensate sold at the Tamar project which was offset by the decrease in the average price of a natural gas output unit and a condensate barrel. Revenues net of royalties for Q2/2016 totaled approx. $53.8 million, compared with approx. $43.6 million in the same period last year. The cost of production of gas and condensate mainly includes the operating expenses of the Tamar project. The cost of gas production in the Report Period amounted to approx. $10.6 million compared with approx. $11.1 million in the same period last year. The decrease in the cost of production of gas and condensate mainly derives from a reduction in the costs of transportation, transit and maintenance in the Tamar project, which was offset against a recorded expense of operator fees in the Tamar project in the sum of approx. $0.6 million for previous years, in view of understandings reached between the partners in the Tamar project and the Joint Venture operator during the Report Period (for further details, see Note 3B2E to the financial statements attached below). Gas production cost for Q2/2016 totaled approx. $5.5 million, compared with approx. $5.8 million in the same period last year. Depreciation, depletion and amortization expenses amounted in the Report Period to approx. $13.5 million compared with approx. $12.2 million in the same period last year. Depreciation expenses in the period include depletion depreciation in the Tamar project in the sum of approx. $13.5 million and in the corresponding period included inter alia depletion depreciation expenses in the Tamar project in the sum of approx. $10.7 million and an update of costs of retirement of petroleum and gas assets in the Yam Tethys project. Depletion, depreciation and amortization expenses for Q2/2016 totaled approx. $7.2 million, compared with approx. $5.1 million in the same period last year. The increase in the Report Period and in Q2 derives from the increase in the amount of gas produced from the Tamar reservoir. Oil and gas exploration expenses amounted in the Report Period to approx. $1.9 million, compared with approx. $1.5 million in the same period last year. Oil and gas exploration expenses include, inter alia, expenses of geologists, engineers and consulting. G&A expenses in the Report Period amounted to approx. $1.4 million compared with approx. $1.9 million in the same period last year, and include, inter alia, expenses for professional services, salary expenses and management fees of the General Partner. Furthermore, G&A expenses include expenses in the amount of approx. $0.4 million (approx. $0.3 million last year), which were recorded against a capital reserve for transactions between a 3

13 corporation and a controlling interest holder thereof and which mainly derive from costs financed by the General Partner and related parties, which, according to the Partnership Agreement, are not loaded on the Partnership. The decrease in G&A expenses in the Report Period compared with the same period last year mainly derives from a reimbursement of past expenses received from a business partner. G&A expenses for Q2/2016 totaled approx. $0.5 million compared with approx. $0.9 million in the same period last year. The decrease derives from the aforesaid reason. Financing expenses in the Report Period amounted to approx. $18.6 million compared with approx. $16.7 million in the same period last year. The majority of the financing expenses derived from interest expenses in respect of bonds issued in May 2014, out of which the Partnership capitalized financing expenses in the amount of approx. $5.3 million (approx. $6.4 million in the same period last year), which were attributed to the expansion of the Tamar project and to the Leviathan project The increase in financing costs in the Report Period relative to the same period last year derives mainly from the amount of financing capitalized during the Report Period. Financing costs in Q2/2016 amounted to approx. $9.4 million compared with an amount of approx. $8.2 million in the same period last year. Financing Revenues totaled approx. $2.3 million in the Report Period, compared with approx. $3.3 million in the same period last year. Financing revenues for Q2/2016 amounted to approx. $0.9 million, compared with approx. $1.3 million in the same period last year. The decrease in financing revenues in the said periods derives from the amount of short-term interest-bearing investments. The petroleum and gas profit levy amounted in the Report Period to an expense of approx. $0.4 million, compared with a revenue in the amount of approx. $49 thousand in the same period last year. The amount of the levy in the Report Period is comprised of an update to the levy for previous years. 3. Financial position, liquidity and financing sources A. Financial position Below is a specification of the main changes in the items of the balance sheet as of June 30, 2016, compared with the balance sheet as of December 31, 2015: The total balance sheet as of June 30, 2016 is approx. $1,398.7 million compared with approx. $1,362.3 million as of December 31, The current assets of the Partnership as of June 30, 2016 amount to approx. $324.7 million compared with approx. $241.9 million as of December 31, 2015, as specified below: 4

14 1) Cash and cash equivalents as of June 30, 2016 total approx. $18.8 million compared with approx. $13.5 million on December 31, ) Short-term investments as of June 30, 2016 total approx. $180 million compared with approx. $167.7 million as of December 31, 2015 and include, inter alia, corporate bonds, short-term deposits, deposits serving as a safety cushion for bonds and an ETF held as a financial asset available for sale. 3) Trade receivables as of June 30, 2016 total approx. $31.3 million compared with approx. $28.2 million as of December 31, ) Trade and other receivables as of June 30, 2016 total approx. $30.9 million compared with approx. $32.5 million as of December 31, ) Assets held for sale as of June 30, 2016 total approx. $73.7 million, which derive from the classification of the cost of the Karish and Tanin assets from petroleum and gas assets to assets held for sale (for further details, see Note 3B3 to the financial statements attached below). The non-current assets of the Partnership as of June 30, 2016 amount to approx. $1,074 million compared with approx. $1,120.1 million as of December 31, 2015, as specified below: 1) Investments in petroleum and gas assets as of June 30, 2016 total approx. $971.8 million compared with approx. $1,007.6 million as of December 31, The decrease mainly derives from the classification of investments in the assets of the leases Karish and Tanin as assets held for sale in the amount of approx. $73.7 million and from depreciation and amortization expenses in respect of the Tamar project in the amount of approx. $13.5 million. On the other hand, an increase was recorded in investments in the amount of approx. $5.9 million in the development of the Tamar project, in investments in the amount of approx. $8.8 million in the Leviathan project, and also in investments in other projects. 2) Long-term investments and deposits as of June 30, 2016 amount to approx. $83.5 million, compared with an amount of approx. $96.2 million as of December 31, 2015; Of these, an amount of approx. $50.6 million serve as a safety cushion for bonds and approx. $32.9 million are pledged to secure guarantees to the Ministry of National Infrastructures, Energy and Water in respect of all of the petroleum rights for which guarantees have been furnished. 3) Other long-term assets as of June 30, 2016 total approx. $18.7 million compared with approx. $16.5 million as of December 31, The assets mainly include advance payments on account of the construction of gas export infrastructures in the sum of approx. $2.1 million, drilling equipment in the amount of approx. $3.1 million and advance payments on account of royalties paid to the State, to related parties and to a third party in the amount of approx. $13.2 million. 5

15 Current liabilities as of June 30, 2016 amount to approx. $219.3 million compared with approx. $222.4 million as of December 31, The decrease chiefly derives from a repurchase of bonds in the amount of approx. $7.6 million. Non-current liabilities as of June 30, 2016 amount to approx. $828.7 million compared with approx. $827.5 million as of December 31, 2015, as specified below: 1) Bonds issued in May 2014 in the amount of $1 billion are presented net of issue expenses. As of June 30, 2016, the bonds are presented under noncurrent liabilities in the amount of approx. $791.3 million and under current liabilities in the amount of approx. $184.4 million, compared with a sum of approx. $790.6 million under non-current liabilities and a sum of approx. $191.7 million under current liabilities as of December 31, ) Other long-term liabilities as of June 30, 2016 total approx. $37.4 million, compared with approx. $36.9 million as of December 31, 2015, and mainly include asset retirement obligations in the Tamar project and in the Yam Tethys project. The capital of the limited partnership as of June 30, 2016 totaled approx. $350.7 million versus approx. $312.4 million as of December 31, The increase in the capital derives from the profit for the period, recorded in the Report Period in the amount of approx. $61.8 million, and from an increase in a capital reserve for activities between a corporation and a controlling interest holder thereof in the amount of approx. $0.4 million and from an increase of approx. $1.5 million due to the revaluation and disposition of financial assets available for sale. Conversely, a decrease in the sum of approx. $25 million was recorded in the capital of the Partnership due to profits distributed during the Report Period and also approx. $0.4 million of payments on account of tax in respect of 2015 which constitute a distribution of profits. B. Cash flow The cash flows that derived from the Partnership s current operations amount, in the Report Period, to approx. $71.4 million versus approx. $54 million in the same period last year. The cash flows that were used for investment activity amount in the Report Period, to approx. $34.8 million compared with investments in the sum of approx. $59.1 million in the same period last year. In the Report Period, the Partnership invested mainly in the purchase of the rights of Noble for the purpose of selling the Karish and Tanin leases, in the expansion of the Tamar project and in the Leviathan project. Conversely, the Partnership has cash derived of investment activity in connection with the sale of financial assets available for sale, the disposition of short-term investments and a decrease in other receivables the operator of the joint ventures. 6

16 Cash flows used for financing activity total approx. $41.3 million in the Report Period, compared with cash flows used for financing activity in the sum of approx. $10.4 million in the same period last year. Cash flows for financing activity in the Report Period were used for the distribution of profits, as set forth in Paragraph C below, for the purchase of bonds issued as stated in Note 10 to the annual financial statements for 2015 and in Part Four below, and also for the payment of advance tax payments for the holders of participation units. C. Distribution of profits On March 29, 2016, the board of directors of the General Partner and the Trustee approved a distribution of profits to the holders of the participation units in the sum of approx. $25 million ($ per participation unit), which were distributed on April 20, D. Engagement in an agreement for the sale of all of the rights in the Karish and Tanin leases On August 16, 2016, the Partnership notified of its engagement, jointly with Delek Drilling Limited Partnership (jointly: the Partnerships ), in an agreement for the sale of all of the rights of the Partnerships and Noble in the Karish and Tanin Leases to Ocean Energean Oil and Gas Ltd. For further details with respect to the terms and conditions of the aforesaid agreement, including the conditions precedent for the closing thereof, see Note 3B3 to the condensed financial statements attached below. It is noted that the said engagement was approved by the audit committee and board of directors of the General Partner of the Partnership as an irregular transaction of the Partnership with another person in which transaction the controlling interest holder has a personal interest, in accordance with Regulation 1(4) of the Companies Regulations (Relaxations in Transactions with Interested Parties), , which does not require approval by the general meeting of the holders of participation units of the Partnership, due to the undertaking of the Partnerships, which are controlled by the same controlling interest holder, to sell their share together within the agreement. 7

17 Part Two Exposure to and Management of Market Risks In the course of the reported period, no change occurred in the areas of the Partnership s exposure or in the market risks, as reported in the Board of Directors Report for 2015, except as stated below: 1. Hedging against exposure to changes in the LIBOR interest rate The Partnership and Delek Drilling (the Partnerships ) are jointly acting toward engaging with banking corporations for the financing of their share in the costs of development of the Leviathan project (for further details with respect to the development costs of the Leviathan project, see Note 3B1A to the condensed financial statements attached below); the financing, according to the expected conditions thereof, will bear variable LIBOR interest with an additional margin that will be determined (the Projected Loan ). As a result, the Partnerships are exposed to possible cash flow changes that may derive from changes in the LIBOR interest rate. In the framework of the Partnership s risk management policy, the Partnership has decided to perform IRS cash flow hedging transactions, which hedge against changes in the LIBOR interest rate. As of the date of approval of the financial statements and after the date of the condensed statement of financial position, the Partnership has performed cash flow hedging transactions of $450 million. 2. Report according to linkage bases as of June 30, 2016 (Dollars in thousands) Financial balances In Dollars or Dollarlinked In nonlinked ILS Nonfinancial balances Total Assets Cash and cash equivalents 8, ,802 Short-term investments 179, ,025 Trade receivables 31, ,307 Trade and other receivables 15,722-15,212 30,934 Assets held for sale ,665 73,665 Investments in petroleum and gas assets , ,814 Long-term investments and deposits 83, ,477 Other long-term assets ,697 18,697 Total assets 319, ,079,388 1,398,721 Liabilities Trade and other payables 29, ,833 34,965 Bonds 975, ,671 Other long-term liabilities ,408 37,408 Total liabilities 1,005, ,241 1,048,044 Total balance sheet balance, net ) 686,504( 34 1,037, ,677 8

18 3. Report according to linkage bases as of December 31, 2015 (Dollars in thousands) Financial balances In Dollars or Dollar-linked In nonlinked ILS Non-financial balances Total Assets Cash and cash equivalents 11,306 2,215-13,521 Short-term investments 167, ,705 Trade receivables 28, ,151 Trade and other receivables 27,598-4,885 32,483 Investments in petroleum and gas assets - - 1,007,635 1,007,635 Long-term investments and deposits 96, ,203 Other long-term assets ,541 16,541 Total assets 330,870 2,308 1,029,061 1,362,239 Liabilities Trade and other payables 24, ,459 30,488 Declared profits for distribution Bonds 982, ,319 Other long-term liabilities ,912 36,912 Total liabilities 1,007, ,371 1,049,873 Total balance sheet balance, net ) 676,312( 1, , , Tests of sensitivity to changes in Dollar/ILS exchange rate (Dollars in thousands) Profit/(loss) from Profit/(loss) from Fair the changes the changes Sensitive instrument value 10% 5% -5% -10% Cash and cash equivalents ) 20( ) 10( Bank deposits ) 8( ) 4( Trade and other Payables ) 259( ) 13( ) 26( Total ) 2( ) 1(

19 5. Tests of sensitivity to changes following the LIBOR rate (Dollars in thousands): Sensitive Instrument Profit/(loss) from the changes Fair value Profit/(loss) from the changes 10% 5% -5% -10% Foreign bonds ) 118( ) 59( 25, Total ) 118( ) 59( 25, Tests of sensitivity to changes in market prices (Dollars in thousands): Sensitive instrument Profit/(loss) from the changes Fair value Profit/(loss) from the changes 10% 5% -5% -10% Assets available for sale ,937 ) 247( ) 494( Financial derivatives ) 261( ) 347( Total 1, ,956 ) 508( ) 841( 10

20 Part Three Disclosure in connection with the Corporation s Financial Reporting 1. Subsequent events For material events after the date of the balance sheet, see Note 6 to the Financial Statements as of June 30, 2016, which are attached below. 2. Critical accounting estimates No material change occurred in the Report Period compared with the reports for

21 12 Part Four Details of bonds issued by Delek & Avner (Tamar Bond) Ltd. (A company jointly owned by the Partnership and Delek Drilling Limited Partnership, below, the Bond Company ) (Dollar in thousands) Bond Series Par value on issue date 3 400, , , , ,000 Issue date May 19, 2014 May 19, 2014 May 19, 2014 May 19, 2014 May 19, 2014 Par value as of June 30, , , , , ,000 Linked par value as of June 30, , , , , ,000 Value in Partnership s books as of June 30, , , , , ,555 Market value as of June 30, , , , , ,390 Rate of annual interest 2.803% 3.839% 4.435% 5.082% 5.412% Principal payment date December 30, 2016 December 30, 2018 December 30, 2020 December 30, 2023 December 30, 2025 Interest payment dates Linkage base: basic index Conversion right Semiannual interest payable on every June 30 th and every December 30 th commencing as of the date of issuance in Semiannual interest payable on every June 30 th and every December 30 th commencing as of the date of issuance in Semiannual interest payable on every June 30 th and every December 30 th commencing as of the date of issuance in None None Semiannual interest payable on every June 30 th and every December 30 th commencing as of the date of issuance in Semiannual interest payable on every June 30 th and every December 30 th commencing as of the date of issuance in The par value in the books of the Bond Company. In the Partnership s books, the value of the liabilities for the bonds is presented according to the Partnership s share (50%). 4 The Partnership's share, after deduction of 2016 Series bonds, which have been purchased by the Partnership. 5 The bonds are traded in Israel on the TACT-Institutional system on TASE.

22 Right to prepayment or mandatory Right to prepayment conversion 6 Guarantee for payment of the liability See Note 10 to the financial statements for Name of the trustee HSBC BANK USA, NATIONAL ASSOCIATION Name of responsible person at the Jane Yang trust company Trustee s address and HSBC Bank USA, National Association, as TRUSTEE 452 5th Avenue, 8E6 New York, NY CTLANYDealManagement@us.hsbc.com Rating as of the issuance date Moody's: Baa3 S&P: BBB- Midroog Ltd: Aa2 Standard & Poor s Maalot: ilaa Rating as of the report date 7 Moody's: Baa3 S&P: BBB- Midroog Ltd: Aa2 Standard & Poor s Maalot: ilaa Has the company fulfilled, until June Yes 30, 2016 and in the three months ending on such date, all of the conditions and obligations under the indenture Have any conditions establishing cause No for acceleration of the bonds been met Pledges to secure the bonds See Note 10 to the financial statements for Each of the Partnerships is entitled to prepay the loan in whole or in part at any time, subject to a prepayment fee. Prepayment following certain events set forth in the bonds may be effected without a prepayment fee. 7 See immediate reports of the Partnership dated April 29, 2014, May 5, 2014, May 29, 2014 and June 8, 2014 (Ref. No , , , , respectively), immediate reports of the Partnership dated June 17, 2014 (Ref. No , ) and the immediate reports of January 13, 2016, June 13, 2016, July 10, 2016 and July 11, 2016 (Ref. No , , and , respectively). 13

23 14 Additional information The board of directors of the General Partner expresses its appreciation of the management of the General Partner of the Partnership, the officers and the entire team of employees for their dedicated work and their significant contribution to the promotion of the Partnership s business. Sincerely, Gabi Last Chairman of the Board of Directors Yossi Abu CEO Avner Oil & Gas Ltd. On behalf of: Avner Oil Exploration Limited Partnership

24 15 Annex to the Board of Directors Report Figures regarding Delek & Avner (Tamar Bond) Ltd.

25 Further to the provisions of Note 10 to the financial statements for 2015 and further to the provisions of Part Four of the Board of Director s Report and following a tax ruling received by the Partnership immediately prior to the bond issuance, below are financial figures which will be disclosed to the holders of bonds of Delek & Avner (Tamar Bond) Ltd. Statements of Financial Position (Expressed in US$ Thousands) Assets: Current Assets: Short term Bank deposits Loans to Shareholder Unaudited 256, , , Unaudited 24,504 * 24, Audited 124, , ,631 Noncurrent Assets: Loans to shareholders Long term bank deposits 1,600, ,195 1,701,195 2,000, ,041 2,100,041 1,600, ,212 1,700,212 2,357,781 2,124,545 2,224,843 Liabilities and Equity: Current Liabilities: Bonds Related parties Noncurrent Liabilities: Bonds Loans from shareholders 400, , ,781 1,600, ,000 1,700,000-24,545 24,545 2,000, ,000 2,100, , , ,843 1,600, ,000 1,700,000 Equity * * * 2,357,781 2,124,545 2,224,843 * Less than $1,

26 Statements of Comprehensive Income (Expressed in US$ Thousands) For the Six Month Ended For the Six Month Ended For the Three Month Ended For the Three Month Ended For the Period Ended Unaudited Unaudited Unaudited Unaudited Audited Financial expenses 44,081 43,167 22,156 21,580 87,103 Financial income ) 44,081( ) 43,167( ) 22,156( ) 21,580( ) 87,103( Comprehensive Income

27 SPONSOR FINANCIAL DATA REPORT 8 Cash flow for the period from April 1, 2016 June 30, 2016 Avner Oil Exploration LP Item Quantity/Actual Amount (In thousands) A. Total Offtake (BCM) (100%) B. Tamar Revenues (100%) 9 422,114 C. Loss Proceeds, if any, paid to Revenue Accounts - D. Sponsor Deposits, if any, into Revenue Accounts - E. Gross Revenues (before Royalties) 62,955 F. Overriding Royalties (a) Statutory Royalties ) 7,705( (b) Third Party Royalties ) 3,568( G. Net Revenues 51,682 H. Costs and Expenses: (a) Fees Under the Financing Documents - Interest Income 144 (b) Taxes - (c) Operation and Maintenance Expenses ) 5,419( (d) Capital Expenditures ) 2,041( (e) Payments under the Tamar FUA - (f) Insurance ) 3,325( I. Total Costs and Expenses (sum of Items H(a), (b), (c), (d), (e) and (f)) ) 10,641( J. Total Cash Flows Available for Debt Service (Item G minus Item H) 41,041 K. Total Debt Service (Interest Expense) 10 21,571 8 The aforesaid report is delivered to the trustee for the bonds on a quarterly and annual basis and represents the cash flow derived for the Partnership from the Tamar project relative to the amounts required for the debt service in such period. 9 Sections A and B are based on 100% of Tamar partners. 10 For the period from December 31, 2015 until June 30,

28 Avner Oil Exploration ± Financial Statements

29 Avner Oil Exploration Limited Partnership Condensed Interim Financial Statements as of June 30, 2016 in U.S. Dollars in Thousands Unaudited This report is a translation of Avner Oil Exploration - Limited Partnership's Hebrew-language financial statements. It is prepared solely for convenience purposes. Please note that the Hebrew version constitutes the binding version, and in the event of any discrepancy, the Hebrew version shall prevail. Contents Page Review report 1 Condensed Statements of Financial Position 2 Condensed Statements of Comprehensive Income 3 Condensed Statements of Changes in the Partnership s Equity 4-6 Condensed Statements of Cash Flows 7 Notes to the Condensed Interim Financial Statements

30 Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel Aviv Tel: Fax: Introduction Auditor s review report to the partners of Avner Oil Exploration Limited Partnership We have reviewed the accompanying financial information of Avner Oil Exploration Limited Partnership (the Partnership ), which includes the Condensed Statement of Financial Position as of June 30, 2016 and the Condensed Statements of Comprehensive Income, Changes in the Partnership s Equity and Cash Flows for the six- and three-month periods then ended. The board of directors and management of the Partnership s general partner are responsible for the preparation and presentation of financial information for these interim periods in accordance with IAS 34 Interim Financial Reporting, and they are responsible for the preparation of financial information for these interim periods under Chapter D of the Securities Regulations (Periodic and Immediate Reports), Our responsibility is to express a conclusion on the financial information for these interim periods, based on our review. Scope of Review We conducted our review in accordance with Review Standard 1 of the Institute of Certified Public Accountants in Israel Review of Interim Financial Information Performed by the Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Generally Accepted Auditing Standards in Israel, and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the above financial information is not prepared, in all material respects, in accordance with IAS 34. In addition to the statements in the previous paragraph, based on our review, nothing has come to our attention which causes us to believe that the above financial information does not meet, in all material respects, the disclosure provisions under Chapter D of the Securities Regulations (Periodic and Immediate Reports), Tel Aviv, August 23, 2016 Kost Forer Gabbay & Kasierer Accountants 1

31 Avner Oil Exploration Limited Partnership Condensed Statements of Financial Position (Dollars in thousands) As of June 30 As of December Unaudited Audited Assets: Current assets: Cash and cash equivalents 8,802 51,312 13,521 Short-term investments 180, , ,705 Trade receivables 31,307 25,868 28,151 Trade and other receivables 30,934 50,731 32, , , ,860 Assets held for sale 73, , , ,860 Non-current assets: Investments in petroleum and gas assets 971,814 1,023,926 1,007,635 Long-term deposits in banks 83,477 95,984 96,203 Other long-term assets 18, ,541 1,073,988 1,120,534 1,120,379 Liabilities and equity: Current liabilities: 1,398,721 1,391,171 1,362,239 Bonds 184, ,743 Declared profits for distribution Trade and other payables 34,965 38,798 30,488 Non-current liabilities: 219,335 38, ,385 Bonds 791, , ,576 Other long-term liabilities 37,408 36,084 36, ,709 1,024, ,488 Equity: Partnership s equity 89,860 89,860 89,860 Capital reserves 3,324 ) 366( 1,400 Retained earnings 257, , , , , ,366 1,398,721 1,391,171 1,362,239 The attached notes constitute an integral part of the Condensed Interim Financial Statements. August 23, 2016 Date of approval of the financial statements Gabi Last Chairman of the Board Yossi Abu CEO Yossi Gvura Deputy CEO for Financial Affairs Avner Oil & Gas Ltd. Avner Oil & Gas Ltd. Avner Oil & Gas Ltd. General Partner General Partner General Partner 2

32 Avner Oil Exploration Limited Partnership Condensed Statements of Comprehensive Income (Dollars in thousands) For the six months ended June 30 For the three months ended June 30 For the year ended December Unaudited Unaudited Audited Revenues: From natural gas and condensate sales 127, ,817 65,017 52, ,089 Net of royalties 22,006 19,391 11,186 8,995 42, ,853 93,426 53,831 43, ,500 Expenses and costs: Cost of production of natural gas and condensate 10,583 11,081 5,492 5,845 21,583 Depreciation, depletion and amortization expenses 13,507 12,154 7,180 5,098 37,343 Oil and gas exploration and other direct expenses, net 1,850 1, ,493 G&A 1,432 1, ,446 Total expenses 27,372 26,633 13,879 12,564 66,865 Operating profit 78,481 66,793 39,952 31, ,635 Financing costs ) 18,635( ) 16,743( ) 9,409( ) 8,157( ) 36,726( Financing income 2,343 3, ,304 5,665 Financing costs, net ) 16,292( ) 13,437( ) 8,469( ) 6,853( ) 31,061( Income before tax 62,189 53,356 31,483 24, ,574 Petroleum and gas profit levy ) 438( 49 ) 471( Income for the period 61,751 53,405 31,012 24, ,868 Other comprehensive income (loss) for items which may subsequently be reclassified to profit or loss: Income (loss) from financial assets available for sale 1,026 ) 1,305( 359 ) 1,250( ) 464( Transfer to profit or loss from disposition of financial assets available for sale Total other comprehensive income (loss) 1,490 ) 1,305( 359 ) 1,250( ) 464( Total comprehensive income for the period 63,241 52,100 31,371 22, ,404 Income for the period per participation unit (in dollars) Weighted number of participation units for the purpose of the said calculation (in thousands) 3,334,830 3,334,830 3,334,830 3,334,830 3,334,830 The attached notes constitute an integral part of the Condensed Interim Financial Statements. 3

33 Avner Oil Exploration Limited Partnership Condensed Statements of Changes in the Partnership s Equity (Dollars in thousands) Investment in the Partnership s equity Capital reserve for transactions between a corporation and the holder of control thereof Capital reserve for available-forsale financial assets Retained earnings Total equity Unaudited For the six-month period ended June 30, 2016: Balance as of January 1, 2016 (audited) 89,860 1,864 ) 464( 221, ,366 Income for the period ,751 61,751 Other comprehensive income - - 1,490-1,490 Total comprehensive income for the period - - 1,490 61,751 63,241 Profits distributed ) 25,013( ) 25,013( Tax advances that constitute distribution of profit ) 351( ) 351( Capital reserve for benefits from a control holder Balance as of June 30, ,860 2,298 1, , ,677 For the six-month period ended June 30, 2015: Investment in the Partnership s equity Capital reserve for transactions between a corporation and the holder of control thereof Capital reserve for availablefor-sale financial assets Unaudited Retained earnings Total equity Balance as of January 1, 2015 (audited) 89, , ,072 Income for the period ,405 53,405 Other comprehensive loss - - ) 1,305( - ) 1,305( Total comprehensive income (loss) for the period - - ) 1,305( 53,405 52,100 Capital reserve for benefits from a control holder Balance as of June 30, , ) 1,305( 237, ,478 The attached notes constitute an integral part of the Condensed Interim Financial Statements. 4

34 Avner Oil Exploration Limited Partnership Condensed Statements of Changes in the Partnership s Equity (Dollars in thousands) (Cont.) For the three-month period ended June 30, 2016: Investment in the Partnership s equity Capital reserve for transactions between a corporation and the holder of control thereof Capital reserve for availablefor-sale financial assets Unaudited Retained earnings Total equity Balance as of April 1, 2016 (audited) 89,860 2, , ,107 Income for the period ,012 31,012 Other comprehensive income Total comprehensive income for the period ,012 31,371 Capital reserve for benefits from a control holder Balance as of June 30, ,860 2,298 1, , ,677 For the three-month period ended June 30, 2015: Investment in the Partnership s equity Capital reserve for transactions between a corporation and the holder of control thereof Capital reserve for availablefor-sale financial assets Unaudited Retained earnings Total equity Balance as of April 1, 2015 (audited) 89, ) 55( 213, ,375 Income for the period ,230 24,230 Other comprehensive loss - - ) 1,250( - ) 1,250( Total comprehensive income (loss) for the period - - ) 1,250( 24,230 22,980 Capital reserve for benefits from a control holder Balance as of June 30, , ) 1,305( 237, ,478 The attached notes constitute an integral part of the Condensed Interim Financial Statements. 5

35 Avner Oil Exploration Limited Partnership Condensed Statements of Changes in the Partnership s Equity (Dollars in thousands) For the year ended December 31, 2015: Investment in the Partnership s equity Capital reserve for transactions between a corporation and the holder of control thereof Capital reserve for available-forsale financial assets Audited Retained earnings Total equity Balance as of January 1, , , ,072 Net profit , ,868 Other comprehensive loss - - ) 464( - ) 464( Total comprehensive income (loss) - - ) 464( 106, ,404 Profits distributed ) 49,995( ) 49,995( Declared profits for distribution ) 154( ) 154( Tax advances that constitute distribution of profit ) 20,192( ) 20,192( Capital reserve for benefits from a control holder - 1, ,231 Balance as of December 31, ,860 1,864 ) 464( 221, ,366 The attached notes constitute an integral part of the Condensed Interim Financial Statements. 6

36 Avner Oil Exploration Limited Partnership Condensed Statements of Cash Flows (Dollars in thousands) For the six-month period ended on For the three-month period ended on For the year ended on Unaudited Unaudited Audited Cash flows from current operations: Income for the period 61,751 53,405 31,012 24, ,868 Adjustments for: Depreciation, depletion and amortization 14,247 12,803 7,544 5,420 38,729 Deferred taxes, net ) 45( 161 ) 12( 221 ) 132( Change in fair value of financial derivatives, net 229 ) 33( 229 ) 33( 112 Update in liabilities due to asset retirement Revaluation of short-term and long-term investments and deposits 88 ) 2,056( ) 584( ) 218( 2,332 Expenses (revenues) due to revaluation of sharebased payment 72 ) 115( 72 ) 130( ) 138( Loss from disposition of financial assets available for sale Benefits from a control holder included in expenses against a capital reserve ,231 15,985 11,438 7,697 5,608 43,069 Changes in assets and liabilities items: Decrease (increase) in trade receivables ) 3,156( 2,235 ) 1,897( ) 3,266( ) 48( Increase in trade and other receivables ) 2,640( ) 7,349( ) 2,366( ) 2,712( ) 4,246( Increase in other long-term assets ) 2,113( - ) 1,370( - ) 3,017( Increase (decrease) in trade and other payables 1,567 ) 5,715( ) 6,377( ) 7,874( ) 9,049( ) 6,342( ) 10,829( ) 12,010( ) 13,852( ) 16,360( Net cash deriving from current operations 71,394 54,014 26,699 15, ,577 Cash flows from investment activity: Investment in petroleum and gas assets ) 49,103( ) 48,876( ) 8,541( ) 20,360( ) 69,986( Disposition of (investment in) other long-term assets 777 ) 65( - ) 65( ) 752( Proceeds from lease of petroleum and gas assets, net - 5,693-2,830 11,262 Short-term investments, net 5,559 28,683 5,037 40,122 ) 7,618( Deposit in long-term deposits and investments ) 7,799( ) 34,191( ) 299( ) 31,924( ) 34,249( Maturity of long-term deposits 1,324 5, ,957 Sale (purchase) of financial assets available for sale 9,500 ) 14,985( - - ) 14,985( Decrease (increase) in other receivables in respect of operator of joint ventures 4,976 ) 1,295( ) 2,755( ) 4,948( 1,473 Net cash used for investment activity ) 34,766( ) 59,079( ) 6,558( ) 14,345( ) 108,898( Cash flows from financing activity: Purchases of issued bonds ) 7,616( ) 500( - ) 500( ) 8,006( Tax advances that constitute distribution of profit ) 8,559( ) 9,950( ) 8,192( ) 6,181( ) 19,984( Profits distributed ) 25,172( - ) 25,172( - ) 49,995( Net cash used for financing activity ) 41,347( ) 10,450( ) 33,364( ) 6,681( ) 77,985( Decrease in cash and cash equivalents ) 4,719( ) 15,515( ) 13,223( ) 5,040( ) 53,306( Cash and cash equivalents balance at the beginning of the period 13,521 66,827 22,025 56,352 66,827 Cash and cash equivalents balance at the end of the period 8,802 51,312 8,802 51,312 13,521 (a) (b) Investment activity not involving cash flows: Investments in petroleum and gas assets against liabilities 5,651 14,949 5,651 14,949 11,129 Additional information on cash flows: Interest paid (including capitalized interest) 21,354 21,571 21,354 21,571 43,183 Interest received 1,900 2, ,825 Dividend received Petroleum and gas profit levy that was paid ,912 The attached notes constitute an integral part of the Condensed Interim Financial Statements. 7

37 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 1 General: A. Avner Oil Exploration Limited Partnership (the Limited Partnership, the Partnership ) was founded according to a limited partnership agreement signed on August 6, 1991 between Avner Oil & Gas Ltd. (the General Partner ), and Avner Trusts Ltd. (the Trustee and the Limited Partner ). The Trustee and Limited Partner have various rights in the Limited Partnership, by virtue of a trust agreement and it serves as trustee in respect of these rights for the holders of the participation units, under the supervision of the supervisor Gissin & Keidar, with the only person acting on its behalf being Adv. Guy Gissin. In the Partnerships Ordinance [New Version], and in the limited partnership agreement, the supervisor was granted certain supervision powers. The ongoing management of the Partnership is carried out by the General Partner Avner Oil & Gas Ltd. The address of the Limited Partnership s registered office is 12 Abba Even, Herzliya. B. As of the date of the approval of these Financial Statements, the Partnership mainly engages in the production and sale of natural gas and condensate from the Tamar project, in the promotion and planning of an additional expansion of the production system of the Tamar project, in the promotion and planning of the gas commercialization and the development of the Leviathan reservoir and the Aphrodite reservoir, and in exploration activity in the petroleum assets held by the Partnership. C. The Partnership s Condensed Interim Financial Statements should be read together with the Partnership s annual financial statements for December 31, 2015 and the notes attached thereto (the Annual Financial Statements ). Therefore, notes regarding relatively insignificant updates to information that was already reported in the notes to the Partnership s last Annual Financial Statements were not presented in these Condensed Interim Financial Statements. D. On August 16, 2015, a government resolution was adopted in respect of a framework for the increase of the natural gas quantity produced from the Tamar natural gas field and expeditious development of the Leviathan, Karish and Tanin natural gas fields and other gas fields (the Gas Framework or the Government Resolution ), which took effect on December 17, 2015, upon the granting of an exemption from the provisions of the Antitrust Law to the Partnership, Delek Drilling - Limited Partnership ( Delek Drilling ), Ratio Oil Exploration (1992) Limited Partnership and Noble by the Prime Minister, in his capacity as the Minister of Economy, pursuant to Section 52 of the Antitrust Law (the Exemption ). Further to the taking of effect of the Gas Framework as aforesaid, petitions were filed to the High Court of Justice (HCJ), as specified in Note 12I to the Annual Financial Statements. On March 27, 2016, the HCJ judgment on the aforementioned petitions was issued, which mainly rules as follows: (a) the validity of the Gas Framework on the whole (separately from the stability clause) is not contingent on its establishment in primary legislation; (b) use of Section 52 of the Antitrust Law, which provides an exemption from the provisions of this law on grounds of foreign policy and security considerations, was made with authority; and (c) the stability clause, as worded in the Gas Framework, as defined in Note 12J1 to the Annual Financial Statements, cannot stand and the State was given a period of one year to act to regulate the stability issue in the Gas Framework. One year after the date of the judgment, and insofar as no regulation is achieved, the Gas Framework will be cancelled. 8

38 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 1 General: (cont.) On May 22, 2016, the Government readopted its resolution in respect of the Gas Framework, while determining an alternative arrangement on the issue of stable regulatory environment, to ensure a regulatory environment that encourages investments in the natural gas exploration and production segment. The Partnership is acting, together with its partners in the various projects, for the implementation of the Gas Framework (as amended) in accordance with the terms and conditions thereof and the terms and conditions of the leases. In addition, the Partnership is acting for continued performance of the investments and the actions required for swift development of the Leviathan reservoir and the planning of a further expansion of the production system of the Tamar project, for promotion of negotiations for the signing of agreements for the supply of natural gas from the Tamar project and from the Leviathan project, for examination of alternatives for financing the investments in Tamar and in Leviathan including financing by way of loans from financial corporations, bonds, various equity instruments and additional alternatives, if any, in the framework of implementation of the Gas Framework. On August 16, 2016, the Partnership, together with Delek Drilling, entered into an agreement for the sale of all of their interests and Noble s interests in the Karish and Tanin leases, as specified in Note 3B3A below, and is examining various alternatives for the sale of all of its interests in Tamar, including by way of a sale to a third party and/or a sale through an offering to the public and/or various appropriate equity instruments. E. The Financial Statements comply with the provisions of IAS 34. F. The Condensed Interim Financial Statements fulfill the disclosure provisions pursuant to Chapter D of the Securities Regulations (Periodic and Immediate Reports), Note 2 - Significant Accounting Policies: a. The Condensed Interim Financial Statements were prepared according to the same accounting policy and calculation methods that were used in the Annual Financial Statements. See Paragraph b. below. b. Assets held for sale: A non-current asset or group of assets are classified as held for sale when settlement thereof is made primarily through a sale transaction rather than through extended use. The aforesaid is applicable when the assets are available for immediate sale, in their as-is condition, the Partnership has an obligation to sell, there is a plan to identify a buyer, and the disposition is highly likely to be consummated within one year from the date of the classification. These assets are not depreciated from the date of their first classification as such and they are presented separately as current assets, at the lower of their book value or fair value net of sale costs. 9

39 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: A. Composition: Unaudited Unaudited Audited Evaluation and exploration assets 69, , ,357 Petroleum and gas assets 902, , ,278 Total 971,814 1,023,926 1,007,635 B. Developments in Investments in Petroleum and Gas Assets: 1. Ratio-Yam joint venture: a) Outline for the development of the Leviathan reservoir: In February 2016, the Leviathan project partners submitted to the Petroleum Commissioner (the Commissioner ) the outline of the plan for development of the Leviathan project including the supply of natural gas and condensate to the domestic market and for export (in this section: the "Development Plan" or the "Plan"), the principles of which are as follows: 1) 8 production wells (two of which have already been drilled and will be completed for production in the context of the Development Plan) will be connected by a subsea pipeline to a permanent platform (in this section: the "Platform"), which shall be constructed offshore in accordance with the provisions of National Outline Plan 37/H (the amendments for which were approved in March 2016) and on which all gas treatment systems will be installed. The gas will flow from the Platform to the northern onshore entry point of the national transportation system of Israel Natural Gas Lines ( INGL ) as defined in National Outline Plan 37/H (the "INGL Connection Point"). On April 5, 2016, the National Council for Planning and Building approved the principles of such Development Plan, according to the provisions of the National Outline Plan. 2) The ability of production, treatment and transportation of the wells, the Platform, the pipeline leading thereto from the field and the related facilities (in this section jointly: the "Production System") is planned to amount to approx. 21 BCM per year, and the capacity of the pipeline from the Platform to the INGL Connection Point is planned to amount to approx. 12 BCM per year. The gas to be supplied at the INGL Connection Point will be designated for the domestic market and for supply through the national transportation system to neighboring countries. Furthermore, the Platform will include an additional exit point, which is designated for connection to a subsea pipeline with a capacity of up to approx. 12 BCM per year, which will be chiefly designated for export to countries in the region. 10

40 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) 3) According to an initial estimate, the cost of the full Development Plan until the commencement of natural gas piping as specified above is approx. $5-6 billion (the Partnership s share is approx. $ billion).the Development Plan may be implemented in full or in two phases, according to the maturity of the relevant markets, as specified below: a first phase that includes four development wells (including the completion for production of two existing wells) and installation of the Platform with treatment facilities having a capacity of up to approx. 12 BCM per year, total cost of which, according to an initial estimate, is approx. $3.5-4 billion (the Partnership s share is approx. $ billion); a second phase that includes four additional wells and expansion of the Platform's treatment capacity by additional approx. 9 BCM per year. 4) It is noted that in order to enable production in such scope as shall be required from time to time, and to use the resources of the Leviathan reservoir during the life of the project, additional production wells will be required. 5) Concurrently with the arrangement of the stability issue in the Gas Framework (as specified in Note 1D above), the Leviathan partners intend to promote the required regulatory approvals and the signing of binding gas sale agreements in order to make a final investment decision (FID) with respect to the Development Plan in Q4/2016, with the purpose of enabling the commencement of gas production from the Leviathan project in Q4/ ) It is clarified that insofar as the scope of demand for gas exceeds the capacity of the Production System, as defined in the Development Plan, the Leviathan partners will act to update the Development Plan in such manner so as to allow for the addition of additional treatment facilities, which are not presently included in the Development Plan. It is noted that the aforesaid with respect to the details of the Development Plan, the initial estimates with respect to the costs of the Development Plan, the dates regarding the adoption of a final investment decision, the commencement of the gas production from the project and the target markets for the sale of the natural gas, are merely estimates and there is no certainty that they will be realized, in whole or in part, and they may be realized in a significantly different manner. In June 2016, the Commissioner approved the development plan at a maximum production scope of approx. 21 BCM per annum, as aforesaid. The Commissioner determined the processes for the implementation of the development plan, stating, inter alia, that at this stage, in view of the data of the Ministry of Infrastructures and according to an opinion of an international company that was issued to the ministry, the estimated quantity of natural gas that will be produced from the Leviathan reservoir is 17.6 TCF, according to the production plan that was submitted (the Estimated Production Quantity ). In addition, the Commissioner stated that after receipt of additional data and mainly after the drilling of the Leviathan 5 well, and upon receipt of data that shall be received in the course of the production from the field, the Estimated Production Quantity will be updated, inter alia, for the purpose of export approval calculations, as required. 11

41 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) It is emphasized that the Partnership estimates that the Estimated Production Quantity is sufficient for implementation of the development plan, at a production scope of approx. 21 BCM per annum, as approved, in full, and is sufficient for implementation of all of the export agreements relevant to the development plan at this scope. In addition, no change has occurred in the appraisal of the natural gas and condensate resources in the Leviathan reservoir which was performed by the NSAI, as stated in Note 7C2B to the Annual Financial Statements. In June 2016, the Leviathan partners authorized Noble to enter into agreements at a total aggregate scope of approx. $120 million for the entire period of the project (for all of the partners) for receipt of engineering services, including the performance of Front End Engineering Design (FEED) in connection with the processing and production rig, as approved in the development plan. It is noted that the Leviathan partners are acting for the signing of additional engagements for the purchase of equipment and/or services in connection with the development plan, as approved, which are expected to be signed in the upcoming period. In July 2016 (after the date of the Condensed Statement of Financial Position), the Leviathan partners approved a budget for development of the Leviathan reservoir in the sum of approx. $119 million (100%) for 2016 and until the end of January 2017, for the purpose of performance of the actions required that will allow timely completion of the development plan, once approved by the Leviathan partners in the framework of the making of a final investment decision (FID). As of the date of approval of the Statement of Financial Position, a final investment decision has not yet been made for the development plan by the Leviathan partners. b) Engagement for the supply of natural gas: 1. A natural gas supply agreement between the Partnership and the other Leviathan partners and Edeltech Ltd. ("Edeltech"): In January 2016, a natural gas supply agreement was signed between the Partnership and the other Leviathan partners and Edeltech (the "Purchaser"), whereby the Purchaser will purchase natural gas from the Leviathan partners for the purpose of operating power plants, which it intends to construct, jointly with its Turkish partner, in Ashdod and the Rotem plane (in this section: the "Supply Agreement"). According to the Supply Agreement, the Leviathan partners have undertaken to supply the Purchaser natural gas in the total amount of approx. 6 BCM (in this section: the "Total Contractual Quantity"), in accordance with the conditions specified in the Supply Agreement. 12

42 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) The Supply Agreement provides a mechanism, whereby the Purchaser may adjust the purchased quantities (including the Total Contractual Quantity) until the date of commencement of the gas piping, in accordance with the size of the power plants to be constructed, and the gas quantities to be required thereby at such time, and all subject to the restrictions determined in the Supply Agreement. The term of the Supply Agreement shall commence on the date of the piping of gas in commercial quantities from the Leviathan reservoir to the Purchaser and end at the elapse of 18 years of such date or on the date on which the Purchaser consumes the Total Contractual Quantity, whichever is earlier. The parties have the right to extend the term of the Supply Agreement by a period of up to two additional years or until the consumption of the Total Contractual Quantity, whichever is earlier. The Purchaser has undertaken to purchase or pay for ("Take or Pay") a minimum annual quantity of gas in the scope and in accordance with the mechanism provided in the Supply Agreement. For further details, see Notes 12D2d and 12D3 to the Annual Financial Statements. 2. Engagement in an agreement for the supply of natural gas from the Leviathan project to IPM Beer Tuvia Ltd.: In May 2016, an agreement was signed for the supply of natural gas between the Partnership and the other Leviathan partners and IPM Beer Tuvia Ltd. (the Buyer ), whereby the Buyer will buy from the Leviathan partners natural gas for the purpose of operating a power plant which it is due to build in Beer Tuvia s industrial zone (the Supply Agreement ). According to the Supply Agreement, the Leviathan partners undertook to supply to the Buyer natural gas at a total scope of approx. 13 BCM (the Total Contractual Quantity ), in accordance with the terms and conditions specified in the Supply Agreement. The term of the Supply Agreement shall commence on the date of the gas flow in commercial quantities from the Leviathan reservoir to the Buyer and is expected to end on the earlier of the following dates: (1) the date on which the Buyer consumes the Total Contractual Quantity; (2) 18 years after the date of commencement of the commercial operation of the Buyer s power plant or after the date of commencement of the commercial operation of the Leviathan project (whichever is earlier). The parties are entitled to extend the term of the Supply Agreement by a period of up to two additional years or until the date of consumption of the Total Contractual Quantity, whichever is earlier. 13

43 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) The Buyer undertook to take or pay for a minimum annual quantity of gas at the scope and according to the mechanism set forth in the Supply Agreement (the Minimum Annual Quantity ). The Supply Agreement determines a mechanism whereby the Buyer will be entitled to reduce the quantities purchased (including the Total Contractual Quantity) until the date of the Buyer s financial closing and in any event no later than 6 months from the date of execution of the Supply Agreement, according to the size of the power plant that will be built and the gas quantities that the Buyer is expected to require, all subject to the restrictions set forth in the Supply Agreement. According to the provisions of the Gas Framework, as stated in Note 1D above, the Buyer will have an option to reduce the Minimum Annual Quantity to an amount equal to 50% of the average annual quantity it actually consumed in the 3 years preceding the date of the notice of exercise of the option, subject to adjustments, as determined in the Supply Agreement ( Reduction of the Purchase Quantity ). Reduction of the Purchase Quantity will be possible at any time during a 3-year period commencing on the later of the following dates: (1) 4 years after the date on which the Petroleum Commissioner approves the transfer of the rights in the Karish and Tanin leases in accordance with the Gas Framework (the Date of Opening of the Options ); (2) 5 years after the date of commencement of the piping of the gas from the Leviathan project to the Buyer. The notice of exercise of the option for Reduction of the Purchase Quantity shall take effect 12 months after the date of the giving of the notice as aforesaid. Upon Reduction of the Purchase Quantity, the other quantities determined in the Supply Agreement shall be reduced accordingly. In accordance with the mechanisms set forth in the Gas Framework, the Supply Agreement determined that the gas price shall be linked to the electricity production tariff, as determined from time to time by the Electricity Authority, and includes a floor price. The Supply Agreement includes several conditions precedent, and mainly approval of the Leviathan reservoir s development plan, receipt of a license for the gas transportation system from the Leviathan reservoir in accordance with the Natural Gas Sector Law, , adoption of a final investment decision (FID) by the Leviathan partners by the end of 2016 and financial closing of the Buyer s financing. It is further noted that concurrently with the execution of the Supply Agreement, an agreement was signed for the supply of natural gas between the Tamar partners and the Buyer whereby the Buyer shall purchase from the Tamar partners natural gas for the purpose of operation of the Buyer s power plant in quantities similar to the quantities determined in the Supply Agreement. The term of the agreement is approx. 15 years from the date of the commercial operation of the Buyer s power plant. In accordance with the provisions of the Gas Framework, the Buyer will have an option to shorten the term of the agreement to a date between the Date of Opening of the Options until 3 years thereafter. 14

44 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) The notice regarding the shortening of the term of the agreement shall take effect 12 months after the date of the giving of the notice as aforesaid. In view of the present capacity for supply from the Tamar project, and considering the terms and conditions of the agreement, including the fact that according to this agreement the gas will be supplied subject, inter alia, to the gas quantities that shall be available to the Tamar partners at such time after supplying the gas to other customers of the Tamar partners, this agreement is not material to the Partnership. c) Further to the provisions of Note 12E to the Annual Financial Statements, on June 30, 2016, the Partnership, together with the other partners in the project, signed an amendment to the joint operating agreement in respect of the Leviathan North and Leviathan South leases, whereby the operator will be paid indirect expenses (cost of indirect services and overhead expenses) at a rate of 1% of all of the direct expenses, as defined in the agreement, subject to certain exclusions. 2. Michal and Matan joint venture: a) Appraisal of the natural gas and condensate reserves in the Tamar gas field: According to a report prepared by NSAI in March 2016, according to the SPE-PRMS, the natural gas reserves in the Tamar project, which includes the Tamar (reserves under production) and Tamar SW reservoirs, as of December 31, 2015 which are classified as proved reserves are approx BCM and the quantity of reserves classified as proved + probable reserves is approx BCM. According to the said report, the condensate reserves in the Tamar (reserves under production) and Tamar SW reservoirs as of December 31, 2015 which are classified as proved reserves are approx. 9.5 million barrels and the quantity of reserves classified as proved + probable reserves is approx million barrels. The above reserves do not include the reserves that overflow into the Eran license (see Paragraph 5D below). The aforesaid estimates regarding the reserves of natural gas and the condensate in the lease are based, inter alia, on geological, geophysical, engineering and other information which has been received from the wells and from the Operator of the said rights. The aforesaid estimates constitute professional conjectures and estimates of NSAI s with respect to which there is no certainty. The actual quantities of natural gas and condensate to be produced may differ from the aforesaid conjectures and assessments, as a result, inter alia, of operational and technical conditions and/or regulatory changes and/or conditions of supply and demand in the natural gas and/or condensate market and/or commercial conditions and/or as a result of the actual performance of the reservoirs. The aforesaid conjectures and assessments may be updated insofar as additional information accumulates and/or as a result of a gamut of factors related to oil and natural gas exploration and production projects. 15

45 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) b) Engagements for the supply of natural gas: 1. Further to Note 12D1c1 to the Annual Financial Statements, in February 2016, Eastern Mediterranean Marketing Limited ("NBL") and Arab Potash Company and Jordan Bromine Company agreed to increase the annual and the daily supply quantities, as set in the supply agreement of February 2014, to a total quantity of up to approx. 2 BCM. 2. Further to Note 12D1b to the Annual Financial Statements, the trial run of the compressor system ended during Q2/2016. The Tamar partners and the IEC agreed that the exact date of increase of the gas quantities would be scheduled in coordination between them during Q3/2016 or in proximity to this date. 3. See Paragraph 1B2 above regarding an agreement that was signed between the Tamar partners and IPM Beer Tuvia Ltd. c) Further to Note 12G2 to the Annual Financial Statements, on April 14, 2016, the decision of the Minister of Energy was received, which denied the appeal filed by the Tamar partners from the Commissioner's decision in respect of approval of the operation of the natural gas and condensate production system of the Tamar project, whereby the Tamar partners were compelled, inter alia, to submit guarantees in the amount of ILS 100 million (100%). In view of such decision by the Minister of Energy, the Tamar partners are examining the legal options available to them. d) On June 30, 2016, the Tamar partners made a decision regarding the drilling of the Tamar 8 development and production well and the construction of related infrastructures in the Tamar field (the Well ). The offshore well is a distance of approx. 100 km west of Haifa and is expected to reach a final depth of approx. 5,050 meters from sea level. The drilling is expected to begin in Q4/2016 and to take approx. four months (including completion and connection to the production system). The purpose of the Well is to allow optimal production from the Tamar reservoir. The drilling of the Well and connection thereof to the existing subsea production system of the Tamar project are expected to be performed consecutively. The Petroleum Commissioner approved a current development plan of the Tamar project, whereby the Tamar 8 well will be drilled and connected to the production system of the Tamar field. The Tamar partners intend to promote receipt of the remaining approvals from the Energy Ministry for the drilling of the Well, which include, inter alia, receipt of approval for an environmental survey that was submitted in April 2016 and receipt of approval for the drilling plan, once submitted. The Well s budget, including the completion and development of the subsea system and connection of the Well to the existing infrastructure in Tamar, is approx. $265 million (100%, the Partnership s share is approx. $41.1 million), of which approx. $37 million is in respect of equipment that was purchased for development of the Tamar South-West reservoir ( Tamar SW ). It is noted that development of the Tamar SW field is planned to be carried out in the future, in accordance with the development and production plan of the Tamar project. 16

46 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) e) Further to the provisions of Note 12E to the Annual Financial Statements, on June 30, 2016, the Partnership, together with the other partners in the Tamar project, signed an amendment to the joint operating agreement whereby from January 1, 2016, the operator will be paid indirect costs (cost of indirect services and overhead expenses) at a rate of 1% of the total direct costs, as defined in the agreement, subject to certain exclusions. In addition, the Partnership, together with the other partners in the project, signed a settlement agreement whereby the operator will be paid indirect costs in the sum of approx. $22.4 million (100%) in respect of the period from July 24, 2006 until December 31, 2015 (in addition to $15.6 million, 100%, which was paid in 2013), the majority of which was capitalized to petroleum and gas assets. 3. The Karish and Tanin leases: a. Further to the provisions of Note 12J1C1 to the Annual Financial Statements, on August 16, 2016 (after the date of the Condensed Statement of Financial Position), an agreement was signed between the Partnership and Delek Drilling (the Sellers ) and Ocean Energean Oil and Gas Ltd. (the Buyer or Energean ), in accordance with the terms and conditions set forth in the agreement, the main principles of which are specified below: 1. Energean shall purchase from the Sellers all of the interests of the Sellers and of Noble in the I/16 Tanin and I/17 Karish leases (the Leases ) in accordance with their holdings as follows: % the Partnership s interests, % Delek Drilling s interests and % Noble s interests (the Sold Interests and the Agreement, respectively). 2. The Buyer shall pay the Sellers the sum total of U.S. $148.5 million (in equal shares between them) which constitutes reimbursement of the past expenses that were invested in the Leases by the Sellers and Noble, plus royalties in connection with natural gas and condensate that shall be produced from the Leases as follows: a. Payment in cash of $10 million which will be deposited in an escrow account in proximity to the execution of the Agreement and will be remitted to the Sellers on the transaction closing date; b. An additional payment in cash of $30 million will be paid to the Sellers on the transaction closing date; c. The balance of the consideration, in the sum total of $108.5 million, will be paid to the Sellers in ten annual equal installments, plus interest, in the mechanism and at the rate determined in the Agreement, which shall begin on the date on which a final investment decision (FID) shall be made in connection with development of the Leases or on the date on which the sum of the Buyer s expenses in connection with development of the Leases exceeds $150 million, whichever is earlier; 17

47 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) d. The Sold Interests shall be transferred to the Buyer together with the royalties existing in the Leases which each one of the Sellers bore in relation to their original share in the Leases ( % for each one of the Sellers) (the Existing Royalties ), and accordingly, the duty to pay the same to the royalty holders shall apply from the transaction closing date to the Buyer; e. The Buyer shall transfer to each one of the Sellers a right to royalties in connection with natural gas and condensate that shall be extracted from the Leases at the rate of 3.75% (in relation to 100% of the interests in the Leases) before payment of a petroleum profit levy by virtue of the Taxation of Profits from Natural Resources Law, (the Levy ) in connection with the Leases, and at the rate of 4.125% (in relation to 100% of the interests in the Leases) immediately upon commencement of payment of the Levy (and in total for the Sellers together, at the rate of 7.5% - before payment of the Levy, and 8.25% after payment of the Levy), net of the amount of the Existing Royalties in relation to the share of such seller in the Leases, as specified in Section d. above. 3. In accordance with the provisions of the Gas Framework, the Agreement determines that the Buyer shall transfer to the Sellers and to the other Leviathan partners the export quota from the Leases. 4. The Agreement includes several conditions precedent, which are mainly receipt of the Commissioner s approval and receipt of the approval of the meetings of the holders of the participation units of the Partnership and of Delek Drilling approving the engagement in the Agreement as aforesaid, or approval of the supervisors, insofar as required under the circumstances. 5. The transaction closing date has been scheduled for 3 business days after fulfillment of the conditions precedent. Each one of the parties has been given the right to terminate the transaction in the event that the conditions precedent have not been completed within 45 days from the date of signing. At this stage, the Partnership is examining the accounting implications of the transaction contemplated in the Agreement, if closed, on its financial statements. b. The cost of the Leases in the sum of approx. $73.7 million includes a sum of approx. $36 million, which were paid in the account period to Noble in respect of the purchase of the right to sell Noble's rights in Karish and Tanin, in the framework of the agreement closed in January 2016, as described in Note 7C3c to the Annual Financial Statements. It is noted that the Commissioner gave his approval to a "benefit" deriving from the right to sell Noble's rights as aforesaid being registered in the Petroleum Register. The Partnership classified the cost of the Leases as aforesaid as Assets held for sale. 18

48 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) 4. Cyprus: a. Block 12: 1. In January 2016, the Partnership notified of the Cypriot Government's waiver of the demand to perform an additional exploration well (outside the boundaries of the Aphrodite discovery), as required in the context of the work plan planned for Block 12 in Cyprus ("Block 12"), in the framework of the closing of the transfer of 50% of the rights of Noble Energy International Ltd. in Block 12 to BG Cyprus Limited. 2. In April 2016, the partners in Block 12 filed an updated plan for the development of the Aphrodite reservoir in a format that is substantially similar to the plan described in Note 7C4e to the Annual Financial Statements, concurrently with the filing of an application for a production license. It is noted that the expiration date of the Block 12 license is on May 23, 2016 (the Expiration Date of the Exploration License ), prior to the receipt of the approval of the Cypriot government for the development plan and for the request for a production license as aforesaid. To the Partnership s best knowledge, upon the Expiration Date of the Exploration License the exploration areas that are not included in the area of the Aphrodite reservoir and in the interim period after the Expiration Date of the Exploration License and before the receipt of a production license, as aforesaid, the partners in the license will be entitled to receive a production license in in the area of the Aphrodite reservoir, after the development plan shall have been approved (if and to the extent approved). The partners in the Aphrodite reservoir are acting vis-à-vis the Cypriot government to receive such approvals, and are concurrently continuing to engage in contacts for the supply of natural gas to the Cypriot domestic market and for the export of natural gas through a pipeline to other markets, including the Egyptian market. b. Participation in a Tender for the Purchase of Oil and/or Gas Exploration and Production Rights in Cyprus: In July 2016 (after the date of the Condensed Statement of Financial Position), the Partnership submitted a bid in a tender that was published by the Cypriot government for the purchase of oil and/or natural gas exploration and production rights in the area of the EEZ of Cyprus (the Bid and the Tender, respectively). The Bid was submitted in the framework of a consortium which includes the Partnership, Delek Drilling and Capricorn Energy Limited (collectively: the Partners ), in accordance with the principles determined between the Partners in an agreement regulating the terms and conditions of the Bid. The results of the Tender are not expected to be published before Q4/

49 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 3 Investments in Petroleum and Gas Assets: (cont.) 5. Additional details regarding the Partnership s licenses: a. Further to the provisions of Note 7C8B to the Annual Financial Statements, in July 2016 (after the date of the Condensed Statement of Financial Position), the Commissioner notified the partners in the Hanna license of his decision not to recognize the Dolphin reservoir, which is in the area of the license, as a discovery. The partners in the license are of the opinion that they have reached a discovery that gives entitlement to receipt of a lease pursuant to the provisions of the Petroleum Law. On August 18, 2016, the partners filed an appeal with the Minister of National Infrastructures, Energy and Water Resources from the Commissioner s decision as aforesaid. The Partnership estimates, based on an opinion of its legal advisors, that the chances of the appeal being granted are higher than 50%. In view of the aforesaid, the Partnership s share in the cost of the well is approx. $12.7 million included in the investments in petroleum and gas assets item. b. On March 1, 2016, the 367/Alon-D license expired. On February 25, 2016, the Partnership, jointly with its partners in the aforementioned license, filed an appeal with the Minister of Energy from the aforesaid decision of the Commissioner. As of the date of approval of these Financial Statements, the decision of the Minister of Energy on such appeal has not yet been received. c. February 2016 saw the expiration of the Ruth C License. d. Further to Note 7C8f to the Annual Financial Statements, with respect to a petition to the High Court of Justice filed by the partners against the Minister of Energy and the Commissioner (the "Respondents"), regarding the decision of the Minister of Energy to deny an appeal filed by the partners from the decision of the Petroleum Commissioner not to extend the validity of the Eran License, a hearing on the petition was held on April 18, 2016, at the end of which, the High Court of Justice proposed that the parties defer to mediation. The partners agreed to such proposal, and on June 2, 2016 the agreement was sanctioned as a decision. With the parties consent, a mediator was appointed, and a first session between the parties was held on June 29, An additional date has not yet been scheduled. According the court s decision, the parties are required to update the court regarding the outcome of the mediation no later than November 1, e. In March 2015, the Partnership, together with Delek Drilling, filed a petition to the High Court of Justice against the Minister of Energy and the Commissioner (the "Respondents"), regarding the decision of the Minister of Energy to deny the appeal filed by the Partnership and Delek Drilling in respect of the Commissioner's decisions not to extend the validity of the 338/Qeren and 337/Avia licenses, which had expired. A hearing on the petition was held on March 30, 2016, at the end of which the High Court of Justice issued a decree nisi, ordering the Respondents to reply why the Partnership and Delek Drilling should not be given a license in the areas of Qeren and Avia for a limited and restricted period, with an extremely tight schedule for the formation of a partnership and for drilling. The Respondents' response was given on August 21, No date has yet been scheduled for a hearing on the said petition. 20

50 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 4 Additional Information: A. Appointment and interim decisions of the independent committee for examination of the possibility of a structural change by way of a merger: On April 14, 2016, the board of directors of the General Partner (the "Board") appointed a special autonomous board committee, independent of the controlling interest holder of the Partnership, composed solely of independent directors (the "Committee"), which was authorized, inter alia, to examine any issue related to the possibility of a merger between the Partnership and Delek Drilling (the "Partnerships" and/or the "Merger Transaction"), to take all required measures, according to its exclusive discretion, for the purpose of executing its said authorities, including engaging with external and independent professional consultants, inter alia, for the purpose of supporting the process legally and economically in connection with setting the price for the Merger Transaction and determining the compensation conditions of such consultants at the expense of the Partnership, conduct independent negotiations in connection with the Merger Transaction, which will resemble, to the greatest extent possible, negotiations between unrelated parties, all in accordance with the best interests of the Partnership and the holders of participation units, formulating a merger agreement and determining the terms and conditions thereof (if and insofar as it so deems fit), and also formulating a recommendation to the audit committee and to the Board in respect of the Merger Transaction. It is noted that the Committee is authorized to decide not to execute the Merger Transaction or to stipulate specific conditions for the approval thereof. The Committee will receive all relevant information from the Partnership, and the Committee's members are authorized to request any relevant document or information originating in the Partnership or in the General Partner in the Partnership. It is noted that concurrently with the appointment of the Committee at the Partnership as aforesaid, the board of directors of Delek Drilling Management (1993) Ltd., the general partner in Delek Drilling, appointed an independent committee from among its members, which holds identical authorities to the authorities of the Committee at the Partnership. Following the discussions held by the Committee with respect to the Merger Transaction, whereby one partnership (the Target Partnership ) shall be merged with and into the second partnership (the Surviving Partnership ) pursuant to the provisions of Chapter One of Part Eight of the Companies Law, (the Companies Law ), such that all of the assets and liabilities of the Target Partnership shall be transferred and granted to the Surviving Partnership, and consequently the Target Partnership shall be liquidated without dissolution pursuant to the provisions of Section 323 of the Companies Law and shall be deleted from the records of the Registrar of Partnerships, and the limited partner in the Surviving Partnership shall issue participation units to the holders of the participation units in the Target Partnership in consideration for the participation units held thereby, the Partnership received, on August 4, 2016 (after the date of the Condensed Statement of Financial Position), notice from the Committee, the main principles of which are as follows: 1. Merger of the Partnership and Delek Drilling is in the best interests of the Partnership. 21

51 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 4 Additional Information: (cont.) 2. It has been decided to recommend to the Audit Committee and the Board of Directors of the general partner of the Partnership that the Surviving Partnership will be Delek Drilling and the Target Partnership will be the Partnership. 3. It has been decided that the conversion ratio that the Committee shall recommend to the Audit Committee and the Board of Directors of the general partner of the Partnership will be one participation unit of Delek Drilling per 5.32 participation units of the Partnership (1:5.32). According to the Committee s notice, during the upcoming period, the Committee intends to act, together with the independent committee of Delek Drilling and their legal advisors, for the formulation of final and agreed language of a merger agreement, and for the formulation of final recommendations in connection with the merger process and presentation thereof for the approval of the competent organs at the Partnership. It is noted that concurrently with receipt of the Committee s notice, the Partnership received notice from the independent committee at the Delek Drilling Partnership, which mainly includes decisions identical to the decisions of the Committee specified above. If and insofar as language of a merger agreement is formulated, the final recommendations of the committees, which include the merger agreement, shall be presented for the approval of the audit committees, the boards of directors of the general partners of the Partnerships and the general meetings of the holders of the participation units, at each one of the Partnerships. It is noted that the closing of the merger will be contingent on receipt of additional approvals, including approvals from third parties, approvals and/or consents of government authorities, including the Petroleum Commissioner, approval of the Cypriot authorities, a pre-ruling of the Tax Authority with respect to the taxation arrangements in connection with the merger, the ISA, the Tel Aviv Stock Exchange Ltd. and approval of the Registrar of Partnerships for the closing of the merger. It is clarified that there is no certainty that all of the said consents and approvals shall be received, and there is no certainty that the merger will be closed, whether according to the principles stated above or in any other format. B. Terms of employment of the CEO of the General Partner: Mr. Abu has been serving as the CEO of the General Partner, in a full-time position, since February 1, Mr. Abu has also been serving as the CEO of Delek Drilling Management (1993) Ltd., the general partner in the Delek Drilling partnership, since April 1, 2011, under an employment agreement that ended on March 31, 2016, concurrently with his service as the CEO of the General Partner. 22

52 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 4 Additional Information: (cont.) In April 2016, the board of directors of the General Partner, following approval by the compensation committee and subject to approval by the general meeting of the holders of participation units, approved the terms of office and employment of Mr. Abu as the CEO of the General Partner in the Partnership. It is noted that, on the same date, the board of directors of the general partner in Delek Drilling, following approval by the compensation committee of Delek Drilling and subject to approval by the general meeting of the holders of participation units in Delek Drilling, approved the terms of office and employment of Mr. Abu as the CEO of the general partner in Delek Drilling. According to the proposed engagement, Mr. Abu will serve as the CEO of the General Partner in the Partnership and as the CEO of the general partner in Delek Drilling, in a fulltime position (100%), with the general partners of the Partnerships bearing the cost of employment of Mr. Abu in equal parts between them (50%-50%). According to the employment agreement, the term of employment is for a 5-year period as of April 1, The total monthly salary of the CEO will be in the amount of ILS 110 thousand (in gross terms) (100%) (the "Monthly Pay"). The Monthly Pay will be updated according to changes in the Consumer Price Index (positive only) once every three months. The CEO will be entitled to the related benefits common amongst executives in the market. The CEO will be entitled to an annual bonus for every calendar year in the course of the term of the employment agreement and a one-time special bonus, in accordance with the compensation policy. In the event of termination of his employment, the CEO will be entitled to an adjustment bonus and a retirement bonus in accordance with the compensation policy approved in April 2016, as updated in May The CEO will be entitled to approx. 7,734,410 million phantom units (the underlying asset of which is a participation unit, which grant a participation right in the rights of the General Partner in the Partnership (in this section: the "Participation Units") (subject to adjustments as specified in the employment agreement) (the "Phantom Units"). The Phantom Units will vest in five installments (the "Overall Package"), with each of the installments included in the Overall Package being exercisable as of the vesting date of that installment and until the end of 90 days after the termination of the CEO's employment under the employment agreement (i.e., June 30, 2021). The exercise price, as defined above, and/or the Phantom Units, will be subject to adjustments in respect of profit distribution, distribution of securities by way of benefit, capital split and consolidation, rights offerings and mergers and acquisitions. On the date of exercise of a Phantom Unit, the CEO will be entitled to a cash bonus in an amount equal to the difference between the market price of a Participation Unit known on the exercise date and the exercise price as defined above, for every Phantom Unit exercised by him. The maximum benefit to derive for the CEO from the of exercise of every Phantom Unit shall not exceed 100% of the exercise price determined for the Phantom Unit included in the exercised installment on the grant date. 23

53 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 4 Additional Information: (cont.) The fair value of the Phantom Units granted to the CEO total approx. ILS 3.6 million as of April 13, 2016 (the fair value estimate was performed according to the binomial model). The principal assumptions on which the said value estimation was based were as follows: (1) Exercise price of ILS 2.20 for the first installment with an addition of 5% every year; (2) Participation Unit price of approx. ILS 2.10; (3) Standard deviation rate of 32.54%; (4) Riskfree interest rate of 1.02%; (5) Contractual duration of 5.22 years; (6) Abandonment rate after vesting period of 0%; (7) Limitation of benefit as aforesaid. The CEO was further granted approx. 1,506,025 phantom units in the general partner of Delek Drilling. In June 2016, the general meeting approved the terms of employment of Mr. Abu. C. On March 29, 2016, the board of directors of the General Partner and the Trustee approved the distribution of profits to the holders of the participation units in the sum of $25 million ($ per participation unit), which were distributed on April 20, D. In April 2016 and in May 2016, the Board of the General Partner, after receipt of the recommendation of the compensation committee, approved a policy on compensation of officers in the Partnership and in the General Partner for a 3-year period as of the date on which it is approved by the meeting of the holders of participation units. The compensation policy was approved in June 2016 by the general meeting. E. Further to Note 12J5 to the Annual Financial Statements, in January 2016, the Partnership extended additional guarantees in the aggregate amount of approx. $7.5 million, in respect of the Karish and Tanin leases. Concurrently the guarantees that had been provided by the Partnership in favor of the Alon-A and Alon-C Licenses were released. F. The bonds presented under current liabilities are net of bonds purchased by the Partnership in the total amount of approx. $15.5 million. G. Further to Note 20B to the Annual Financial Statements, on June 7, 2016 the Partnership published certificates for the calculation of the tax for an entitled holder due to the holding of a unit for the tax years 2012 and In addition, further to Note 20D to the Annual Financial Statements regarding tax advances paid by the Partnership, the Partnership is continuing discussions vis-à-vis the various regulators, including the tax authorities and the Ministry of Justice, in relation to the manner of implementation of the provisions of Section 19 of the Taxation of Profits from Natural Resources Law, and its interpretation. 24

54 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 4 Additional Information: (cont.) H. Further to Note 12I2 to the Annual Financial Statements, in a motion that was filed with the Tel Aviv District Court for class certification by a consumer of the Israel Electric Corporation Ltd. (the IEC ) against the Tamar partners regarding the price at which the Tamar partners sell natural gas to the IEC (the Certification Motion ), on April 20, 2016, the Tamar partners filed a motion for summary dismissal of the Certification Motion concurrently with a motion to order the Attorney General to consider filing a position on his behalf in the proceeding. On May 15, 2016, the court ordered the Attorney General to consider filing a position in the proceeding and to file the same (insofar as he is so interested) by June 1, 2016, and ruled that the motion for dismissal will be decided after receipt of the Attorney General s position (if filed). The Attorney General filed a position on his behalf whereby the Certification Motion should be summarily dismissed. On July 7, 2016 (after the date of the Condensed Statement of Financial Position), a hearing was held on the motion for dismissal. A decision on the motion for dismissal is expected to be issued in the coming months (in the event that the action is not summarily dismissed with prejudice). I. The Partnership and Delek Drilling (collectively, the Partnerships ) are jointly acting toward engaging with banking corporations for the financing of their share in the costs of development of the Leviathan project, according to the expected conditions thereof, will bear variable LIBOR interest with an additional margin that will be determined (the Projected Loan ). As a result, the Partnerships are exposed to possible cash flow changes that may derive from changes in the LIBOR interest rate. In the framework of the Partnership s risk management policy, the Partnership has decided to perform IRS cash flow hedging transactions, which hedge against the changes in the LIBOR interest rate. As of the date of approval of the financial statements and after the date of the Condensed Statement of Financial Position, the Partnership has performed cash flow hedging transactions of $450 million. 25

55 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 5 Financial Instruments: Fair Value of Financial Instruments A. The fair value of the financial instruments presented in the financial statements is at or around their book value, with the exception of issued bonds whose fair value, as of June 30, 2016, is approx. $1,012 million (as of December 31, 2015: approx. $1,005 million, as of June 30, 2015: $1,014 million), and whose book value is approx. $975.7 million (as of December 31, 2015: approx. $982.3 million, as of June 30, 2015: approx. $988.8 million). B. Set forth below are figures regarding the fair value hierarchy of the financial instruments measured at fair value which were recognized in the Condensed Statements of Financial Position: Unaudited Level 1 Level 2 Level 3 Total Available-for-sale financial assets 4, ,937 Financial assets at fair value through profit or loss 25, ,261 Total 30, , Unaudited Level 1 Level 2 Level 3 Total Available-for-sale financial assets 13, ,679 Financial assets at fair value through profit or loss 88, ,741 Total 102, , Audited Level 1 Level 2 Level 3 Total Available-for-sale financial assets 13, ,422 Financial assets at fair value through profit or loss 61, ,070 Total 75, ,492 26

56 Avner Oil Exploration Limited Partnership Notes to the Condensed Interim Financial Statements as of June 30, 2016 (Dollars in thousands) Note 6 Events After the Date of the Condensed Statement of Financial Position: A. For details regarding approval of the Leviathan partners for the development budget until January 2017, see Note 3B1A. B. For details regarding an agreement that was signed for the sale of all of the interests in the Karish and Tanin leases, see Note 3B3. C. For details regarding participation in a tender for the purchase of oil and/or gas exploration and production rights in Cyprus, see Note 3B4. D. For details regarding the Commissioner s notice in connection with the Hanna license, see Note 3B5a. E. For details regarding the notice of the independent committee for examination of the possibility of a structural change by way of a merger, see Note 4A. F. For details regarding the performance of IRS cash flow hedging transactions, see Note 4I. 27

57 Avner Oil Exploration ± Report on the Effectiveness of Internal Controls for Financial Reporting and Disclosure