Last Thursday, Media flooded with the news of Lebanon’s cabinet approving the technical and financial terms for a bid for offshore energy exploration and production by the consortium of French Total, Russian Novatek and Italian Eni (actually, the only consortium submitting an offer) for blocks 4 and 9. After three idle years of wishful thinking, the first exploration and production licensing round relaunched in January this year. Lebanon expects the oil resource to procure contracts for local businesses, to ameliorate the economy through direct O&G sales taxes and royalty fees, and to add jobs to its heavily burdened workforce.
Europe is keeping an eye on you
With about 40% of EU’s gas coming from Russia, any new alternative will decrease the union’s risk and dependency on a single source for their energy raw material. The recent discoveries in the Eastern Mediterranean may justify a pipeline to Italy and the rest of Europe. A recent meeting in Thessaloniki between leaders of Greece, Israel and Cyprus echoed the support for the €6 billion, 2000 km long East Med pipeline project, which proposes to transport 8-16 cbm annually of Natgas, from Israel and Cyprus to Greece which directly competes with the Russian gas. However, the Russian Gas remains 100% cheaper.
Europe is divided between fair competition, the need for cheaper gas, the need for diversification to decrease risk, while the previous US administration encouraged the pipeline as a way to smoothen the lines in the Cyprus-Turkey and Lebanon-Israel conflicts.
However, the US recently changed its policy by focusing more on the internal gas production and shale, eyeing Europe as its first export market, especially as it has already shipped its first LNG cargo to Poland. However, the European renewable energy revolution is casting doubt on the profitability of the pipeline project, which will be paid by companies, not governments.
The next step is to sign the Exploration and Production Agreement (EPA) after which the Consortium can start their explorations.
The exploration phase is five years that can be extended up to ten years with the Cabinet’s approval. Upon discovery, they must appraise its profitability and propose a development plan also for Cabinet approval. Then, right holders produce oil or gas during 25-year production phase extendable five years for more investments.
Revenues are split between the right holders and the state: royalty is at 4% for gas and 5-12% for crude oil depending on conditions. The oil tax law ratified last September set the corporate income tax of exploration and offshore drilling at 20% (instead of normal income tax of 15%). Experts expect some 65% government take from these two initial blocks.
A portion of the revenues is for cost reimbursement balanced between right holders and the state, increased for state once investment is recovered. Local goods and services have preferential rights in contract awards and at least 80% of the workforce must be local.
Although most would consider petroleum engineers, Rig operators and similar jobs as the main target (and now university curricula is already offered), administrative and functional positions will benefit too.
Transparency and awareness
Transparency and awareness are main concerns. Frequent questions are: “who will manage this? How can we battle corruption?” A recurrently advertised idea is to instate a Sovereign Wealth Fund (SWF) where the hydrocarbon proceeds would be maintained, and ensure its fair use in paying up the national debt and invest in healthcare and education.
However, as Prof. John Patterson of Aberdeen University mentioned several times, Lebanon should be reasonable with its expectations both to control social enthusiasm about what and when they will reap the benefits of the hydrocarbon wealth. Nevertheless, Lebanon should be optimistic as it is dealing seriously and professionally with this matter and working on transparent proposals set to benefit state and stakeholders.
The next step
Lebanon should work on awareness. Despite the elite and educated knowing what the hydrocarbon wealth is, and its repercussions on our lives after a pair of decades, the general public remains unsure of the impact: is this a curse, or a blessing (as most experts would assume similar unclear forecast, though).
But paperwork-wise, we await the EPA.
Well, despite the typical adventure, we ended the year with some positivity and hope! Do expect some news for the following year, Happy 2018!
Annie M. Seferian
MBA CISM MOSM
SC Sabic / Aletrnative Thinker / Data Analytics / GasOil