Saturday, May 11, 2013

Oil & Gas in Lebanon: Interview With Egypt's Citadel Capital's Managing Director, Mr. Mohamed Shoeib

May 11 , 2013
BEIRUT, Lebanon — Lebanon's business magazine Al-IktissadWal-Aamal organized in Beirut on May 9-10, 2013 the 21st annual Arab Economic Forum (A.E.F. 2013). In specific, the second day of the event was dedicated to the seminar "Oil and Gas in Lebanon and in the Eastern Mediterranean". This seminar saw the presence of some members of the Lebanese Petroleum Administration (L.P.A.) and of caretaker Minister of Energy and Water Gebran Bassil.

Minister of Energy and Water Gebran Bassil

The minister stated that offshore scanning is almost complete with reference to about 70 percent of Lebanon's territorial waters, i.e., an area of 15,000 square kilometers. According to the minister, data have been analyzed in 10 percent of the examined area, but already there are — according to preliminary surveys — 30 trillion cubic feet of natural gas and 660 million barrels of oil. He added that production could start in a fast timeframe like four years. The minister's declarations seemed with no doubt to be optimistic at least for energy experts, who since last year have predicted a longer time in order to start the production phase in Lebanon.
During the seminar, the Italy-Kuwait Association (IKA, Alessandro Bacci) has had the opportunity to interview Mohamed Shoeib, managing director of Egypt's Citadel Capital, one of the most relevant private equity firms in the MENA region. Mr. Shoeib has worked for more than 30 years in the energy sector and he is one of the best experts in the Middle East.
Below there is the text of the IKA conversation with Mr. Shoeib.
Q: Good morning, we appreciated a lot your intervention during the session "Geostrategic Aspects of the Project and its Economic Impact". 
Mr. M. Shoeib — Good morning, thank you.  
Q: How do you see the oil and gas situation here in Lebanon as an external actor?  
Mr. Shoeib  I have worked in this field for more than 33 years. I was the chairman of the Egyptian Natural Gas Holding Company (EGAS) and previously for many years I had been the chairman of many oil companies working upstream, midstream and downstream in the oil and gas business. Currently, I am with Citadel Capital one the largest investors in Egypt. 
In my opinion, Lebanon is at a very early stage with reference to speaking of oil reserves. There are no reserves, at least not yet. What they are thinking about is based on stratigraphic 2-D and, in some cases, 3-D surveys. But this data can be confirmed only by drilling. After the initial drilling, the separation drilling, there will be the appraisal drilling and only at that time you may have a partial assessment and then the development of the field. You can define reserves only after the production because you are not able to define production now. In fact, it's when you begin the production and when you start knowing the nature of the reservoir that you may have an idea of the reserves. 
At this stage you may just say that there is a "potential" and during the seminar I used this word in English in order to be very clear with everyone. There is a potential, but not reserves. The definition of reserves is different. Anyway, Lebanon has to start working in the oil and gas sector only now. For example, you can't store gas, but you can start building your L.N.G. infrastructure so that if you have a shortage of gasoil, the gas will go to the grid, otherwise it will be exported as L.N.G. But to speak a lot about reserves at this stage is unprofessional speech.


Q: Two weeks ago the IKA attended another conference here in Beirut about Lebanon's offshore gas [I.R.N.'s Lebanon Oil & Gas 2013 Summit] and I can tell you that your opinion perfectly matches the opinion of the oilmen present there. In specific, some Eni officials pointed out that until you do real drilling you do not know exactly what you may find. Two-D and three-D surveys are not sufficient.
Mr. Shoeib  People are already saying: "Will we depend on oil or on gas?" But, at the time being, they do have neither oil nor gas. Of course, there is a potential for gas. In my opinion, if Lebanon is lucky the first gas production will happen between seven years to ten years. It will be offshore gas, but they do not know at what depth they have to drill. Moreover, the way they are defining the contractual conditions — I heard them here today — is unclear. By all means, they consider that they own the gas, they own the oil, so that they will implement a mixed system with royalties, profit sharing agreement conditions, taxes and with the requirement that at least 80 percent of the employed personnel has to be Lebanese. By the way, they are defining very harsh conditions, although they have no experience at all in the energy sector. 
You mentioned before Eni. I have worked with Eni many times. Whenever it can, Eni will depend on local manpower because it's cheap, but it has to be qualified, with skills. It's clear that offshore operations are for the most part unmanned, but still they need experts that are not present here in Lebanon. For example, if after one year a company needs ten geologists of whom, according to the proposed contractual conditions, eight have to come from Lebanon there is a big risk for the company. 
Q: The companies want to have some specific guarantees.  Is there anything else?
Mr. Shoeib  I deem that here politics leads too much over economics. Plus, there is an excessive taxation. These energy resources are not yet a reality.  
Q: When two weeks ago I spoke to oilmen the tone was very different. Oilmen wanted to know the real cost of extracting hydrocarbons. They wanted to know how to export the resources because the relations between  the involved countries in the eastern Mediterranean Sea are not amicable. Suffice it to say that the different exclusive economic zones (E.E.Z.s) overlap part of their acreage according to the different national maps.
Mr. Shoeib — The countries spoke too much about this issue although  international law defines the matter well. In fact, a State's E.E.Z. extends to a distance of 200 nautical miles from its coastal baseline if the distance with a neighboring country is more than 400 nautical miles. If it's less the center line is the border for both of them. It's defined. 
[It's true that the center line may be the border, but it's not mandatory. In other words, according to UNCLOS Art. 74 "Delimitation of the exclusive economic zone between States with opposite or adjacent coasts", first paragraph:
"The delimitation of the exclusive economic zone between States with opposite or adjacent coasts shall be effected by agreement on the basis of international law, as referred to in Article 38 of the Statute of the International Court of Justice, in order to achieve an equitable solution." 
In other words, States have to find an agreement between themselves.]
Q: But all the countries continue to do a lot of noise about maritime borders. Why?
Mr. Shoeib — As I said before, this is due to the influence of politics. Syria, Lebanon and Israel have all their possible energy resources in their E.E.Z.s in front of their coastline. It's clear. 
Q: What do you think about Syria and a possible spillover of Syria's civil war into Lebanon? This point was very lightly touched upon today. Oilmen are not so scared about a possible spillover because they are accustomed to working in very difficult environments. They know that something may happen but at the same time they have to look for oil and gas resources in harsh conditions and complicated countries. But the real losers in the case of a spillover are the Lebanese people because companies may recover their sunk costs in other locations while Lebanon needs the energy riches.  
Mr. Shoeib  There is a lot of speech, but first of all one consideration. When you are speaking of 46 big companies that will drill because Lebanon insisted to have three companies for each concession, in reality you don't have 46 companies but you have 12 companies. At the same time, if in the concessions the operator has at least a 35 percent stake, this means that it could happen that the other two companies could get a 65 percent stake. With these percentages which company will take up a difficult drilling decision in a risky field? In my opinion, they put conditions as if they were seated on Saudi Arabia's oil reserves.