Lebanon expects to start oil production in 2018 and will deposit the resulting revenues into a sovereign wealth fund, President Michel Aoun said last week; “Everything that is extracted will be for the Lebanese people,” he said during a meeting with a press syndicate delegation.
Aoun said the revenues would be invested in development projects, and vowed to increase efforts to upgrade Lebanon’s crumbling infrastructure.
Note that Lebanese Council of Ministers has approved two decrees needed to complete the country’s first offshore licensing round.
The first decree divides the Lebanese Exclusive Economic Zone into 10 blocks and delimits their coordinates, while the second presents the tender protocol (TP) that defines the conditions for participating in the round, the criteria applied in the bids evaluation, and the model exploration and production agreement (EPA) that the state will sign with the successful consortium.
Late last month, the Minister of Energy and Water announced that based on a study by the Lebanese Petroleum Administration, blocks 1, 4, 8, 9, and 10 have been opened for bids.
Pre-qualified companies are invited to submit applications for these blocks on September 15, 2017.
Evaluations and the subsequent signature of the EPAs will follow on November 15, 2017.
Under the new pre-qualification process, international oil and gas companies are invited to participate as potential operators or non-operators as per decree 9882/2013.
Companies already pre-qualified do not need to participate as long as they still meet the prequalification criteria.
The EPA provides companies with the right to explore for, develop, and produce oil and gas reservoirs offshore in Lebanon’s Exclusive Economic Zone.
Those that sign the EPA are called right holders, and there must be at least three of them at all times. Right holders may explore for oil and gas during a five-year exploration phase, divided into two periods of three years and two years (extendable to 10 years with the approval of the Council of Ministers).
If the right holders discover oil or gas, they must appraise the commercial potential of the discovery, and if they conclude it is commercial, they must propose a development plan which, if approved, will be followed by a 25-year production phase, extendable by a further five years assuming the right holders agree to additional investments.
Right holders must pay royalties to the state, equivalent to 4% of the gas produced, and a varying percentage (5-12%) of the produced oil. A percentage (determined by bidding) of the oil and gas will be allocated to the right holders to reimburse their costs, with the remainder split between the state and the right holders.
Among other conditions, right holders must pay cash into a fund to ensure that facilities are properly dismantled after the reservoir is depleted, and must give preference to Lebanese goods and services in awarding contracts, with at least 80% of the employees Lebanese nationals.
This will entail a mandatory training program to ensure that Lebanese nationals occupy management, engineering, and other professional positions.
But Lebanon’s ambitions face three serious problems:
- Low oil and gas prices
- Difficulty of marketing gas
The business environment is very different from 2011, when the world’s largest oil companies were sufficiently intrigued by Lebanon’s potential to qualify. Then, global LNG prices averaged about $15 per million British thermal units; today, even helped by high winter demand, they are at about $9 and a further glut is on the way.
With the steep drop in oil prices, several of those previously qualified have gone bust, been taken over, or their assets have declined below the required limit. Others, conserving capital or concentrating on shale in North America, will not be interested in exploring hitherto untested waters up to 2,100 metres deep. Some Lebanese politicians act as though they can already spend the gas revenues; there is a real risk there may be nothing to find.
The continuing war in Syria does not encourage investors to come to the region. Even more seriously, Lebanon has lost credibility after the long political stalemate that stymied the last bid round. In Israel, gas production was severely delayed by changes in tax and monopoly rules, and populist pressure.
Oil companies will ask if they will invest millions of dollars in exploration, perhaps hundreds of millions in drilling wells, only to have development prevented by gridlock in the factionalised Lebanese politics. They will also be worried about the disputed borders of all the blocks except No 4.
Lebanon is a small gas market, yet only large offshore finds will be commercial. Pipelines to take surplus gas to consumers in Turkey will have to cross the disputed waters of Cyprus, which wants to export its own gas, or across the seabed of war-torn Syria. Or perhaps, in partnership with Cyprus, gas could flow south to Egypt.
Lebanon needs companies with the financial and technical strength to take on these challenges. But at the same time, it should not raise the bar too high and discourage hungry, capable mid-size players. The more competitive the bidding, the more likely it is to get a good deal and move quickly on to discovering whatever resources its waters hold. Only if it can then negotiate squabbling local factions and the intricacies of regional geopolitics will the residents of Lebanon gain some benefits.
Sources: Lebanon NNA & Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis.
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