As its bid licensing round is delayed again, will Lebanon’s offshore industry ever take off? Sarah Parker Musarra analyzes the current situation and explores the history of the troubled country.
In April, Lebanon once again delayed its offshore licensing round to August for the fourth – and supposedly final – time. Beyond the normal political posturing that can often complicate frontier country’s initial offshore bid rounds, Lebanon’s list of issues to overcome was long and exceedingly complicated: political gridlock preventing necessary decrees from being signed; maritime border disputes with one neighbor, Israel; violence caused by the wars of another neighbor, Syria.
Najib Mikati’s government resigned during April 2013, and Lebanese politics were at a standstill for the better part of the next year. The country was unable to build a government for 10 months. The new government had only been in place for a few months at the time the fourth delay was announced, and the necessary decrees could not be finalized during the stalemate. Lebanon’s Energy and Water Minister Arthur Nazarian told Reuters on 7 April 2014 that the decrees in question, the tender protocol and the model exploration and production agreement (EPA), would be pushed through without further delay.
“Today [7 April 2014], I signed a memo that probably after four months’ time we will be able to receive bids and close the bid round, which I think is a reasonable time according to what I’m informed by the people concerned,” he told Reuters in an interview.
Despite these promises and the Lebanese government’s best-laid plans, delays continued. On 8 August, Nazarian extended the deadline to submit bids a fifth time, this time with a somewhat blurred deadline – a period not to exceed six months after the adoption of the two decrees.
Resources at stake
Bidding was originally opened on 2 May 2013 for 10 exploration blocks ranging from about 1400-2300sq km. Analyst GlobalData says that such a range is in keeping with frontier countries as they try to attract companies. Lebanon’s Ministry of Energy and Water selected 12 right-holders operators and 34 right-holders non-operators were selected as pre-qualified in April 2013.
According to regulating body Lebanon Petroleum Administration, its evaluation methodology on the right-holdiers operators was based on four areas of criteria: legal, financial, technical, and HSEQ. Within these parameters, the companies must:
- Be joint stock companies “conducting petroleum activities”
- Have assets totaling US$10 billion
- Operate a least one petroleum development in more than 500m of water
- Have HSEQ policy statements and have established and implemented HSEQ management services
The Administration says that there must be three rights-holders at all times, and that explorations activities must be completed within a five-year period, divided into periods of three years and two years. This exploration phase can be extended up to 10 years with the approval of the Council of Ministers. Should a find become commercial, the rights-holders must pay the State royalties equivalent to 4% of the gas produced, and a percentage varying between 5% and 12% of the oil produced. A percentage, to be determined by bidding, of the oil and gas would also be allocated to the right-holders to reimburse their costs. The Administration explains that remaining oil and gas “is split between the State and the right-holders in proportions determined by bidding under a formula pursuant to which the State’s share increases after the right-holders have recovered their investment.”
The US Geological Survey (USGS) estimated in 2012 that Lebanon’s average total undiscovered, technically-recoverable resources to be 320MMboe, and less than 1Tcf of gas. However, on 30 October 2013 the Ministry of Energy and Water Resources triumphantly announced that recent seismic performed vaulted its estimated offshore reserves up to 95.9Tcf of gas and 865MMbo with a probability of 50% – and that was only for about 45% of its waters. It was a remarkable departure from the USGS’ more modest estimates. However, that news was tempered months later in April 2014 by an admission from then-Energy and Water Minister Gebran Bassil to Reuters that despite the fact that no companies had formally withdrawn, the delays in the bid round had made some “hesitant,” and that there were “questions being raised.” Reuters outed Eni and Statoil in particular to be rethinking their interest in the country.
Michael Wachtel is a partner in Clyde & Co.’s Corporate Energy Group and is the head of its upstream oil and gas practice. Having worked in the Middle East for a number of years over a 20-year career in oil and gas, the region is now one of his regions of specialization. He acknowledges the rumors without comment, but admits that the two majors could be up to some posturing of their own.
“Companies may in fact indicate a loss of interest when they are just playing a game. Even if there were rumors out there, they may have put them out themselves to gain interest. I’ve been in the oil business for many years, and what you see is not always what you get,” Wachtel says.
Map of the Lebanese offshore blocks. Image from the Lebanese Petroleum Administration.
Even after Lebanon put a government into place, Will Scargill, upstream fiscal analyst for GlobalData, describes its issues behind cabinet doors as “deep political cleavages.”
Lebanon is directly and extremely impacted by Syria’s war. Lebanon has two main political parties, or blocks, the March 8 Alliance and the March 14 Alliance. These blocks are characterized by their pro-Syrian regime and anti-Syrian regime stances, respectively, as well as by sectarian affiliations, Scargill explains.
“The spillover of the Syrian conflict has hardened these divisions,” he says. “This led to the repeated delay of the offshore licensing round, as a government was required to approve two crucial decrees, delineating the blocks and approving the tender protocol and model [EPA].
“Although a coalition government including both political blocks was formed in February and won a vote of confidence in March, the decrees have still not been signed. This has meant further postponements.”
Gustavo Bianchotti, GlobalData’s senior upstream analyst for Europe, Middle East, and Africa, agrees that “the main problem is political.”
The great pro- or anti-Syrian regime issue dividing the country is reflected in the group of six that constitutes the Lebanese Petroleum Administration. There are six members in the group, each representing one of Lebanon’s ethnic groups to form a consensus.
“Ethnically, there are six groups. Politically, there are two. Each want to control the oil and gas resources because studies show there will be a huge profit. Whoever controls the resources will have more political hold,” Bianchotti says.
However, Wachtel, says the system is not functioning as planned.
“They can’t get any sort of consensus, and in fact, they are not even meeting on regular basis. There’s just complete paralysis in the political machinery at the moment. They haven’t even had a president, and they really haven’t had any sort of executive government until earlier this year,” he says.“Their problems are bigger than just this. You can imagine that anything they want to get done is probably ground to a halt.”
Wachtel characterizes the current political situation as “power vacuums” keeping the decrees from being signed. “When you fold into the mix possible corruption in the oil and gas section, and the maritime border dispute with Israel, there’s not a recipe for rapid resolution for problems they’re having,” he says.
This delay could change the scope of what the participating companies will receive. “The latest postponement states that the licensing round will now close up to six months after the two decrees are approved,” Scargill says. “This longer delay is needed, as even once the decrees pass, participating companies will require time to re-evaluate the opportunity. The process of amending the decrees could mean that they are faced with a significantly different proposition to that which was originally on the table in terms of the contract terms and available blocks.”
Beyond that, the group cannot form a consensus on a bidding strategy. Originally, the government planned to offer roughly half of the 10 offshore blocks for bidding. Some members of the new government feel differently, Scargill says, while others still argue that rolling the blocks out in stages will encourage more competitive bidding and higher revenues.
Oil and gas companies are becoming more educated in how to operate in frontier countries; however, Lebanon does not offer a level playing field. “IOCs are used to operation in politically unstable countries, but the political challenge in Lebanon is not like other countries such as Nigeria or Iraq, where a united government is facing a strong opposition or other political organizations. In Lebanon, the government itself is not united, and it has been always a tough task to reach political consensus to form a government, particularly the Energy Ministry, which will be in the midst of political conflicts,” GlobalData noted in its whitepaper, Political and Exploratory Risk Balance Anticipation for Lebanon’s Initial Bidding Round.
The current maritime border dispute between Israel and Lebanon is not unprecedented. The Leviathan natural gas field, discovered in 2010 off the coast of Israel in the Mediterranean Sea, is estimated by operator Noble Energy to contain 19Tcf of natural gas. Lebanon and Israel initially squabbled over whether the giant field encroached on Lebanon’s waters, escalating to a point where Israeli Minister of National Infrastructure Uzi Landau told Bloomberg on 24 June 2010 that the country “[would] not hesitate to use our force and strength to protect not only the rule of law but the international maritime law.”
In August 2010, Lebanon submitted a proposal to the United Nations stating that, while Leviathan did not extend into Lebanon’s waters, other fields did. The US backed Lebanon’s proposal.
Lebanon is offering 10 offshore blocks with a total area of approximately 17,900sq km. Of these 10, two blocks are in a disputed zone with Israel. “Approximately 5,300sq mi (13,727sq km, 75% of the total acreage) is covered with 3D seismic acquisition, with all blocks being covered with over 70% 3D seismic acquisition except for blocks two and eight. It is likely that the lack of seismic coverage in block eight is intentional as its absence avoids any potential problems of Exclusive Economic Zone (EEZ) border disputes with Israel over an area of 330sq mi (855sq km),” GlobalData notes.
Dr. Amit Mor is a former assistant to the Israeli Minister of Energy and Infrastructure currently serving as the chief executive officer of Israel’s Eco Energy. He was also chief economist in the Economic Planning Authority of Israel’s Ministry of Economic Planning. “The disputed area is very small, absolutely, [in relation] to other conflicts, such as the conflicts over much of the eastern Mediterranean … or other conflicts in the world,” he said. “It is for the benefit of the parties, especially of the Lebanese, that the dispute will be resolved to enable oil and gas exploration. I also hope that the Lebanese will discover oil and gas for the benefit of their people.”
While Nazarian insisted to Reuters in his 7 April interview that companies are interested in the blocks, calling it “only a minor area,” Wachtel says that it is yet another hurdle for the government to contend with. “Maritime border disputes effectively render those parts of the blocks in the disputed areas unsaleable. Some very brave investors may pick up the blocks in the hope that the disputes may get resolved or joint development zones will be agreed. Obviously the value of blocks becomes greatly reduced,” he says.
However, Wachtel insists that despite all the issues the Lebanese government must deal with to get the round underway, hope is not lost.
“These are long-term projects. A delay of one or two years–while it might be frustrating for investors–is not the end of the world for the country or the investors. It is important to keep a perspective,” he says. “These reserves will still be there, and it’s perfectly possible that the price of gas increases.
“Eventually, the economic drivers will be enough, I think, to keep the politicians together,” he said.
Pre-qualified right-holding operators
The Lebanese Petroleum Administration evaluated and selected 12 right-holders operators and 34 right-holders non-operators from the 52 companies that submitted pre-qualification applications. The administration said the companies participating represented 25 countries. The 12 right-holders operators, selected from 16, are:
- Anadarko Petroleum