Friday, February 28, 2014

Only Political Stability May Provide Lebanon With the Long-Awaited Energy Sector

February 28, 2014

BEIRUT, Lebanon — A country without political stability and consequently without good governance is a country with no encouraging future. And Lebanon exactly epitomizes a  condition of chronic political instability now exacerbated by the possible spillover of the civil war ravaging neighboring Syria. In addition to this, in Lebanon there are more than one million of Syrian refugees, whom the already well-strained Lebanese economy is unable to accommodate. Following recent years' discoveries of relevant quantities of oil and gas — current estimates speak of 1.7 billion barrels of oil and 123.6 trillion cubic feet of gas — in the Levant Basin, in the eastern Mediterranean, Lebanon is now trying to develop its oil and gas sector, which could spur that much needed economic growth and reduce the country's public debt standing in 2013 at 145.9 percent of G.D.P. The problem is that under the current political instability, internal as well as external, such an endeavor is almost an impossible target. Not to mention the security of Lebanon where Al-Qaeda-linked explosions now occur almost on a weekly basis.       

Proof of Lebanon's difficulties is the fact that of the countries touched by the Levant Basin — Syria, Lebanon, Israel, Gaza and Cyprus — in the oil and gas business Lebanon is consistently behind schedule, notwithstanding that it could probably have the largest reserves. For instance, it's quite impressive that after two and a half years of war, Syria, as recently as last December, signed a deal with Soyuzneftegaz, a Russian state-controlled energy group, with reference to the rights to develop and to produce oil and gas off Syria's coast. Similarly, Cyprus is implementing its gas licensing rounds and wants to build an L.N.G. export terminal, while Israel already carried out its first gas delivery on March 31, 2013, and recently signed a deal with two Jordanian firms to sell $500 million of gas — first agreement of this type outside of Israel. In Gaza, after years of embittered relations between Israel and Gaza over territorial waters, the Palestinian Authority and Russia are in talks to sign an agreement permitting Russia to develop Gaza's offshore gas fields.

In Lebanon, 2D and 3D seismic surveys offered positive results and brought the previous minister of energy and water, Gebran Bassil — he is now foreign minister — to affirm that the country could have, under a 50 percent probability, 95.9 trillion cubic feet (TCF) of gas and 865 million barrels (MMBL) of oil. Last year, forty-six companies prequalified to bid for the Lebanese offshore gas riches, which had been split among 10 sea blocks. Last November, the government should have held the auction for these blocks, but since then this auction has been postponed three times and its official deadline is now April 10, 2014. This postponement is linked to the government's inability to approve two decrees that deal with the demarcation of the sea blocks and the clarification of the financial features of the energy contracts. Despite possible interesting reserves, oil and gas companies with difficulty could be lured into investing without plain details.  
Minister of Foreign Affairs Gibran Bassil (previously minister of energy and water)
Will this auction be postponed one more time? It's probable. But here one consideration stands out immediately. The real problem for Lebanon is not what to include in the two fundamental decrees. Lebanon is not the first country nor the last that will have to strike a balance between its economic interests and those of the energy companies. In the oil and gas sector — where there are always important sunk costs — there is constantly a balance between the involved parties. And similarly, developing reserves in deep waters, like for instance those of Lebanon, is not anymore an impossible task for international oil and gas companies. It could cost more, but again we go back to striking a fair balance between the hosting state, on the one side, and the companies, on the other side. So what is stopping Lebanon from developing its energy sector? The answer is simple: its political instability, which now is increasing thanks to the Syrian civil war.

In fact, also during normal times, politics in Lebanon is difficult because it's based on sectarian divisions. According to the country's Constitution, the president of the republic has to be a Christian Maronite, the prime minister a Sunni and the speaker of the Parliament a Shia. Furthermore, the seats in the Parliament are divided on a sectarian basis as well. After the resignation of Prime Minister Najib Mikati in March 2013, a caretaker government was in charge for almost one year. Only on February 15, 2014, a new government was formed with Mr. Tammam Salam as prime minister. At present, the new government is drafting its policy statement, which later the Parliament will have to approve. Drafting this document is not easy because there is the controversial issue of how to define the presence in Lebanon of the armed resistance embodied by Hezbollah. At the same time, this new government is perceived as temporary because it should be in charge until May's presidential elections, unless the political factions are not able to reach an agreement on the new president. Moreover, to an already complicated domestic political environment, the Syrian crisis has added further complexities: The Lebanese politicians are now divided between those who support Syria's government forces and those who rather favor the opposition to Bashar al-Assad. 
Lebanon's First Offshore Licensing Round

Besides, the Sunni-Shia conflict is well evident in relation to the energy issue. Indeed, on the one side, the two still-to-be-signed energy decrees have found strong opposition from the March 14 Alliance (a Sunni and Christian alliance whose main party is the Future Movement, a Sunni party), which is close to Saudi Arabia, a country that does not see with great favor the establishment of an upstream oil and gas sector in Lebanon. On the other side, the pro-Iran March 8 Alliance (a Christian and Shia alliance, whose main parties are the Free Patriotic Movement, a Christian party, and Hezbollah, a Shia party) supports the development of the energy sector. It's still premature to know whether the newly appointed Minister of Energy and Water Arthur Nazarian, an Armenian, will speed up the development of the energy sector. But one consideration stands out immediately: Considering that this winter in Lebanon has been almost completely without rainfalls, it's probable that Mr. Nazarian's first concern will be the availability of water for the agriculture sector and for a population that with the Syrian refugees has increased by 25 percent — from 4 million to 5 million at least. 

Summing up, it's very difficult that the political agenda of the next months may include a real advancement of the energy dossier in Lebanon. It's a sort of irony that during last year's political debates many local politicians discussed how to invest the future energy profits so as to avoid the so-called resource curse, although with Lebanon's proposed contracts (production sharing agreements) profits are postponed to the beginning of production. And in Lebanon if we started to develop the energy sector tomorrow, it would take at least six to seven years before we could get oil or gas. But again, without political stability and  good governance it's quite difficult that Lebanon will establish its oil and gas sector.  

For more information about the development of an energy sector in Lebanon please see:

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