Sunday, April 28, 2013

Lebanon's Offshore Gas Resources: It's Time to Decide

April 28, 2013

BEIRUT, Lebanon — On April 22-23, 2013 the International Research Networks (I.R.N.), a leading business intelligence group, organized in Beirut the Lebanon Oil & Gas 2013 Summit. This two-day summit brought together all the different stakeholders concerned with the development of Lebanon's offshore gas resources.
At this preliminary stage of the process, the most expected speaker was Dr. Neil Hodgson, the geologist who is the exploration director of Spectrum, a Norway-based company, which has already completed 2-D and 3-D surveys of Lebanon's seabed. The survey area of the Norwegian company is related to 3,000 square kilometers located in Lebanon's south-west exclusive economic zone (E.E.Z.), which seems to have a high prospect of hydrocarbons.
The E.E.Z. is the sea zone defined by the United Nations Convention on the Law of the Sea over which a state has special rights for the exploration and use of marine resources. It stretches from the seaward edge of a state's territorial sea (12 nautical miles) out to 200 nautical miles from its coast. It could also include the continental shelf beyond the 200-mile limit.
Dr. Hodgson explained that recent data showed that the access to the offshore gas wealth could be easier than previously thought. In fact, the conducted 3-D surveys have permitted to understand that on Lebanon's offshore there are two different plaques (layers). Initially, the assumption was that there was one layer dating back to the same period as the Tamar and Leviathan's plaque, offshore Israel. Instead, the big difference is the presence of a second layer, which is shallower than the first one, and is located at a depth of 3.5 kilometers.  The second layer has high prospects and at the same time could permit to reduce the operating efforts and consequently the costs of tapping the resources, i.e., to have a much more commercially viable product. It's worth remembering that for the first layer, the oil and gas companies would have had to drill at a depth between 6 kilometers to 7 kilometers — which would have resulted in high operating costs. According to the expert, around 70 percent of Lebanon's offshore acreage has already being mapped with 3-D seismic surveys and his company will in the next week acquire another 3-D survey bringing data coverage to approximately 95 percent of the offshore acreage. He then envisaged a timeframe of six to seven years before the country is able to produce gas and underlined that this mapping activity would permit the companies to spot immediately where to drill saving from two to three years. Spectrum evaluates that, just in the 3,000 square kilometers already analyzed, there could be between 30 TCF and 40 TCF of gas. He concluded predicting that also the ground structures of west Bekaa Valley and northern Bekaa are well compatible with the presence of hydrocarbons.
Moving from the geologists to the economic experts and the people with energy companies — the latter two categories have always to factor in additional variables than the simple presence of hydrocarbons — the picture is at least for now less enthusiastically oriented. Dr. Carole Nakhle, an energy economist with the U.K. Surrey Energy Economic Center, pointed out that there is a big danger for Lebanon because the gas business could become consistently the largest industrial sector in the country. In fact, the oil and gas sector, in general, is capital intensive; requires relevant upfront investments; and does not create many new jobs, although it may have a spillover effect for other sectors. In other words, the fear of the Dutch Disease, a.k.a. resource curse, is quite evident, especially in a country with weak government institutions. It will be of paramount importance to pour oil and gas resources in the economy in a sustainable way avoiding any possible currency appreciation ushering in a competitiveness reduction for a country that already is not very competitive in many economic sectors.
This call was also echoed by the words of Alia Mobayed, an economist with Barclays MENA. Indeed, Lebanon has important twin deficits in its fiscal and current account balances and once hydrocarbons revenues are available the priority for the government should be to fix the twin deficits. Implementing an oil and gas business is not an easy task. For several reasons, governments may have the tendency to spend money that they will recover only in the future.  And, when there is a government spending spree, possible cost overruns or delays could have a strong impact because they might oblige the governments to renegotiate contracts with worsened conditions.
Several times during the summit it was named Norway as the perfect example to be followed in order not to be subjected to the Dutch Disease. In the oil and gas sector Norway is always a role model (at the summit there were also some lawyers with the Norwegian law firm Arntzende Besche, which is specialized in the oil and gas practice, and Norway's ambassador to Lebanon, Svein Aas) because it has well managed the energy sector for more than 40 years. In Norway, the oil and gas industry is well diversified, at an advanced level of liberalization and it has contributed to the development of other sectors of the economy. The energy sector was founded in 1965 when Oslo awarded the first production licenses. The country's national oil company (N.O.C.) Statoil, which holds a 50 percent stake in the licenses, was established in 1972. Six years later was created the Norwegian Petroleum Directorate (N.P.D.) to fulfill the role of regulator and to grant licenses. Then, in 2001 the government partly privatized the company selling around 20 percent to private investors. Finally, in 2007 Statoil merged with Hydro Oil& Gas. Currently, the Norwegian government owns around 67 percent of the new company Statoil ASA. Norway charges a high tax of 50 percent in addition to the regular 28 percent corporate tax rate. Despite high taxes, foreign investors have never stopped investing in Norway.
Booz & Co. (2011)
There are no doubts that Norway's oil and gas sector is a model on a world scale. If this model may be replicated in Lebanon is another story. The well-known international and internal political challenges that may affect Lebanon's oil and gas developments are:
  • The incapacity of the government to establish a sound and transparent oil and gas sector under parliamentarian control.
  • Marine disputes with neighboring countries.
  • The different E.E.Z.s overlap part of their acreage according to the different national maps. Civil war in Syria could spread out into Lebanon.  
But the real key element is the future development of the global energy gas market. In fact, in the next 20 years a vast quantity of natural gas will be put on the market. Between 2015 and 2020 Australia will expand its production of gas from 25 million tons per year to 88 million tons per year. The United States will produce over the next decade 230 million tons and it will double the global gas supply. Shale gas will be developed in many countries scattered around the globe. In other words, in some years Lebanon will enter a gas market where there should not be too many a worry for gas shortage and where there will be more contractual flexibility. These two factors mean: an abundance of gas; and less oil-indexed and long-term gas contracts. Once again, the real game changer in order to maintain high prices for natural gas could be a projected upsurge in demand from Asia, mainly from China and the other Asian economic powerhouses. Houston University's professor Michael Economides during the summit confirmed that China's demand for natural gas out of its annual energy consumption would increase from 4 percent today to 10 percent in 2020. Currently, L.N.G. for delivery in May or June in northeast Asia costs $15.15 per Btu, the lowest price since last November and down from a record $19.40 registered on February 4, 2013. Prices in southeast Europe are around $12.90. These high prices may disappear in the long-run and according to Professor Economides there could be a price convergence in a three-year timeframe to approximately $8 per unit.
Summing up, it possible that the gas market will not be oversupplied, but there is a tendency toward a price convergence at lower level in comparison to what has been experienced up to now in Europe and Asia. And of course, Lebanon to be successful will be obliged to commerce its gas at market prices. Plus, until the energy companies do not start drilling and discover what the final cost of the Lebanese gas is, it's difficult to build up reliable cost simulations. Norway may well be the example to follow, but the macroeconomic conditions of the 1970s were consistently different.
The summit saw the presence of four important energy companies: U.S. Chevron, Italy's Eni, Kuwait's Kufpec and U.A.E.'s Mubadala Petroleum. Energy companies are accustomed to making profits in difficult and harsh environments. An Eni official told the Italy Kuwait Association (IKA) that "until we start drilling we don't know exactly what we'll find". He continued stating that 2-D and 3-D surveys are useful means, but they are not a guarantee of success. For the companies the points to be clarified are:
  • The demarcation of the 10 maritime exploration blocks, which range from 1,259 square kilometers to 2,374 square kilometers. At the moment there is only an unofficial map and it is unknown whether the government will auction off all the ten blocks during the first licensing round. It seems that blocks 8 and 9 will be put up for auction, but part of their acreage is disputed with Israel. Tendering them could trigger additional tensions in the region, although the oil and gas companies might not be deterred by boundary disputes.
  • The definition of a revenue-sharing model. This is the nitty-gritty of the issue for the companies. The revenue-sharing model is the means through which they earn profits. And they need to know what this will be. Information about taxation, increments and terms of renewal, minimum work obligations are the basics on which companies may decide to bid for the 10 blocks.
Offshore Exploration Blocks (al-Akhbar leaked version)

The summit was surely a useful occasion for bringing together all the involved parties in order to discuss about the future development of Lebanon's offshore gas resources. Now, in less than one week, the Lebanese government has to start providing some additional details to permit the energy companies to do their evaluations and then to bid.    

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