Wednesday, February 13, 2013

Internal Politics May Thwart the Development of Lebanon's Offshore Gas Fields

February 13, 2013

BEIRUT, Lebanon The U.S. Geological Survey values that in the Levant Basin there could be around 120 trillion cubic feet (TCF) of technically recoverable gas. The countries that directly share the water of the Levant Basin are Cyprus, Israel, Gaza, Lebanon and Syria. In addition to them, Northern Cyprus which is under Turkish control claims part of the area under Greek Cypriot control. Turkey's aim is now to stop any explorations until its requests are acknowledged. Among all these countries maritime boundaries are defined to so poor a degree, like the well-known and strongly contested land borders.

When, on January 17, 2009, Israel discovered the Tamar Gas Field (containing around 9.7 TCF of gas) 50 miles off Haifa's coast, immediately neighboring countries began taking steps in order to explore consistently their areas in the Levant Basin. Since 2008, Lebanon has indentified some important gas deposits in the waters off its coast, but only after Israel's discovery Beirut realized that hadn't it speeded up its operations, it would have really risked being left out from the newly discovered gas riches. And considering that Lebanon was still technically at war with Israel not to mention the existence of a wedge of sea of 850 square kilometers contended between the two countries and that it had still some open disputes with Cyprus concerning maritime boundaries, it was absolutely mandatory for Beirut to explore extensively its part of the Levant Basin as soon as possible.

Lebanon is almost 100 percent dependent upon foreign energy sources in order to meet its energy needs. Fifteen percent of Lebanon's G.D.P. is destined to pay for the country's hydrocarbons account. In other words, gas self-sufficiency could provide a powerful boost to Lebanese economy. This dependence upon external energy sources has been until today a circumstance common to all the countries now involved in this gas rush in the eastern Mediterranean Sea. Some estimates calculate that having its own gas could permit Lebanon to right away save $1 billion just in transportation costs. Of course, Lebanon does not have the technological skills to develop it offshore gas fields and key to the development of its gas reserves is to bring in international energy companies, which do have the necessary expertise, but that at the same time could be driven off by Lebanon's political instability.

Notwithstanding a very difficult Lebanese political environment with increased sectarian affiliation and the current war in Syria with its spillover into Lebanon, Beirut understood immediately the importance of gas exploration for the development of its economy and in 2010 passed a petroleum law. Moreover, at the end of last year, when many of the energy companies desiring to bid in the future for the Lebanese gas were becoming very frustrated by the government's inability to name the six members of the Lebanese Petroleum Administration (L.P.A.), a solution was found and the authority was then established. This committee will now oversee the issuance of the licenses. According to recent estimates, Lebanon should have about 25 TCF within an area of 3,000 squared kilometers. Such an endowment is larger than Syria's and Cyprus' gas endowments combined.

According to Mr. Salah Khayat, C.E.O. of Lebanon's upstream oil and gas company Petroleb (established in mid-2011) "The 3-D data provided by Spectrum and Petroleum Geo-Services suggest that we have oil and gas resources valued in tens of billions of dollars when extracted over the next four decades". He then added that Lebanon could well have a gas endowment larger than Israel's. Lebanese gas reserves are located below the sea bed at a depth from 1,000 meters to 2,500 meters so that top-notch oil extraction expertise is required.

Beginning to develop these gas resources is also important because if some gas wells in the open sea could be operative in less than two years, building an industrial system capable of exporting the produced gas will require from six years to eight years. And of course, initially Lebanon will have to transform its domestic energy infrastructure. Electric power plants, which now run on diesel oil, will have to be modified and/or new ones have to be built in order to run on natural gas. Not to mention that given the strained relations among Levantine countries finding gas purchasers won't be an easy task.

The regional political contest doesn't help none of the Levantine wannabe gas producers. But Lebanon has to overcome also an additional hurdle: its internal politics, which, since the independence from France in 1943, has been a constant and destabilizing factor. For the Jameson Foundation, a U.S. think tank, it's probable that the country's sectarian rivalries and divisions will engender a dispute over the control of the newly discovered energy resources. Lebanon most relevant antagonism is between the March 8 coalition, dominated by Hezbollah, which is now in power, and the opposition represented by the March 14 coalition. Today's Lebanon has 17 recognized sects which all wrangle for power. With no doubt, an impaired government (no national budget has been passed since 2005) does not provide the best guarantees for a bidding process to which more than 40 international energy companies have showed interest according to Energy Minister Gebran Bassil. In addition, Lebanon has armed forces badly equipped and subjected to sectarian tensions. This overall combination could not be able to adequately protect the gas fields with reference both to military assaults or terrorist attacks. Presently, Lebanese naval forces mainly implement coast guard tasks (search-and-rescue and smuggling interdiction operations) and should be upgraded in order to well patrol Lebanon's maritime exclusive economic zone (E.E.Z.). Moreover, Lebanon's corruption is endemic and it's almost unthinkable that gas revenues, estimated initially at $40 billion, will not be subject to bribery.

The pre-qualification process for the international energy companies desiring to bid for the exploration licenses had to begin in the first week of February, after several months of delay linked to political issues. For the moment, nothing has happened probably because the Council of Ministers has still to issue a decree authorizing the bidding process. The scheduled timetable envisaged to award contracts in March 2014 and to start the activity in 2017.

According to Cesar Abi Khalil, an advisor to the Energy Ministry, exploration and production agreements (E.P.A.s) will soon, probably in April, be approved by the Council of Ministries and the companies will start bidding on May 2, but for the moment it is not clear which blocks will be auctioned to the foreign companies. Initially, international oil companies were obliged to have in any case a Lebanese partner creating a joint venture. Now, according to a government source, foreign companies do not need a Lebanese partner if they are able to propose a viable strategy. Successively, pre-qualified companies will be allowed to form joint ventures between themselves if they deem it useful. It seems that companies that want to participate in the auction must have at least $500 in assets to perform the role of non-operators.

Definitely, there is already the need to specify the fiscal and financial structure of the contracts. This point is very noteworthy because companies have the necessity to structure their investments. Failing to provide them with a complete picture could lately force the involved companies to reopen negotiations once their initial bids have been accepted.

Summing up, the big unknown is whether the new authority will be capable of being free from political pressures. With its members appointed after a lot of political bickering it won't be easy. But for a country that has suffered many years of war the possibility of developing its offshore gas fields is really an opportunity not to be missed.