The "OPEC +" agreement ended on the first of April and producers were free to produce oil and gas at will. Saudi Arabia was no longer tied to the production of 9.7 million barrels per day (bpd) and began increasing production up to 12.3 bpd. It was an impressive public announcement that it made, while some were suspecting that the Kingdom will not be able to reach that figure. On the other hand, Russia the other most influential partner in the "OPEC +" agreement announced plans to increase oil production by 300,000 to 500,000 bpd.
At the beginning of the month, the Saudis and the Russians were not interested in any form of negotiations or meetings to stop the price collapse and on the contrary they entered into the blame game phase. However, the situation started changing as US President Donald Trump reached out to the Saudi Crown Prince Mohamad Bin Salman and to the Russian President Vladimir Putin urging them to find a solution that could lead to a 10 million bpd cut the soonest.
As we write this article, OPEC + is meeting remotely to discuss the dual pandemic of decrease in demand and increase in supply. It will be followed by a G20 remote meeting on Friday that will include, of course, the US to compliment the discussions of the OPEC+ or end up canceling the meeting if nothing serious comes out of the Thursday meeting. Recently, discussions began about a global deal to reduce production by as much as 10 million to 15 million bpd. The Russians wanted a larger participation from nations that do not exert state control over output, including the United States and Canada, and that is why it was important to bring into the picture the G20 members to be able to include non-OPEC members in the commitment to “save the oil industry”.
But today, the biggest factor affecting oil prices is DEMAND. Therefore, whatever the outcome of the meetings, we will not see oil prices climbing to what they were prior to March 9, when Saudi Arabia and Russia failed to reach an agreement to continue cutting production. However, any sort of agreement coming out of this week’s meetings will help prevent the price collapse from going below $ 20 a barrel. If the Corona virus is not contained, we will keep on hearing of many more cities going into quarantine and lockdowns which means more pressure on energy demand, and almost all analysis predict that low oil prices are the new reality for the coming two to three years.
Oil prices have fallen by more than half during the past month which have pushed many oil companies to announce extraordinary measures to face this new reality; and some of these measures include postponing or canceling projects – taking into consideration Covid-19 and the low oil prices- and Lebanon’s nascent oil and gas sector could be affected in one way or another. But it is not all bad news!
Block 4: Business As Usual
The good news is the Covid-19 measures taken by the Lebanese government did not affect the drilling activities happening in block 4, north of Beirut. On the contrary, the government exempted Total from the lockdown measures and allowed work to continue with severe precautions taken by the local authorities to prevent the spread of the virus into the drillship. However, if the result of the drilling was negative (dry well), will Total and its partners ask for a second exploratory period, or will they give away their rights in block 4, as part of the expenses cut? Let’s wait and see.
Block 9: C is for Covid-19 And Not for Conspiracy
While we acknowledge that the maritime border dispute between Lebanon and Israel goes beyond delimitation and reaches the “shores of a political dispute”, and many in the country believe “past “ and potential future delays are and will be caused by the US opposition to benefit from whatever block 9 holds before a comprehensive peace deal, the question we should be asking ourselves is around the impact of Covid-19 and the low oil prices. Will the consortium decide to postpone its drilling activities in block 9 that were planned for end of 2020?
Before jumping into the conspiracy theory, it is important to know:
Total announced on many occasions that it was committed to drilling the first well in Block 9 in southern Lebanon away from the disputed borders.
It is true, that no exact date was given, but Total announced that it did commit to drill in block 9 in its 2020 workplan.
But what we need to know as well, besides the commitment from the consortium, that Covid-19 might cause delays in planned activities that might lead to delays in drilling. Before going into details, one thing to think about is that many oil projects globally and in the region might have been delayed because of the virus and once we go back to business as usual, many projects might be back on track and there might be a high demand on drillships that would cause delays in the start of drilling in block 9! Think of it!
Before the lockdown, Total was working on the Environmental Impact Assessment (EIA) for block 9, and once the study is over, the company is required to schedule public consultations in the relevant regions. It was expected to have these consultations mid-year, and no drilling activities could be launched without the public consultations, and there should not be any compromise on that matter, whatever the excuse is! Just saying. So, the question is will these consultations happen on time and will the state of emergency be removed by then and people will be able to gather and meet?
However, the oil and gas world is upside down fighting for its survival, and the consortium must be assessing what makes sense for block 9, taking into consideration that they are committed to drilling one well by the end of the first exploratory period which ends in the second quarter of 2021; and acknowledging that there might be delays due to the virus, they might decide to go ahead with the drilling but by early 2021 and not this year. BUT, if they find commercial quantities in block 4, they mind raise the Force Majeure card included in the contract to ask for postponement beyond 2021 in block 9. Let’s wait and see.
Second Licensing Round Postponed: No Surprise There
History is repeating itself and the political curse is always looming on the horizons of the oil and gas sector in Lebanon. Last week, the Ministry of Energy extended the deadline of the second licensing round from end of April to June 2020 "given the implications of the spread of Coronavirus (COVID-19) worldwide" and "due to the fact that it is no longer possible for international companies to meet the previously set deadlines." This is the second time the second licensing round is postponed; back in January the Ministry extended the deadline from January to April 2020 to allow “interested international companies mainly Chinese companies more time to apply”. Remember 2013?
The announcement of the Ministry did not come as a surprise, on the contrary, this was expected. We have to look at the bigger picture to understand the reasoning behind the postponement and it is not all about the Chinese New Year and the virus. We cannot ignore the failing political system and catastrophic economic situation we are living in as major reasons for the delay. However, the decision to postponed the licensing round – I would have preferred if they postponed beyond June 2020- was a good one. Even if there was no Covid-19 to paralyze movement and disrupt normal life, Lebanon would not have gotten good deals from the international companies under the bad political, economic and fiscal conditions in the country; the risks of investments today in Lebanon are very high and there will be no significant direct benefits for Lebanon from granting new licenses. Forget it!
Lebanon must focus on finding drastic economic and political solutions before anything else. It needs political stability, strong institutions, and a clear path for its economy to grow and then we can start discussing what the role of oil and gas will be in building a strong economy for the future generations.
Laury Haytayan - April 10, 2020 - Beirut
Laury Haytayan is an oil and gas governance and geopolitics expert. She is the Middle East and North Africa director at the Natural Resource Governance Institute (NRGI) in charge of setting the strategic trajectory for the region in accordance with the organizations’ mission and vision.