Friday, July 31, 2015

Interview With Alessandro Bacci About Lebanon's Oil & Gas Future


July 31, 2015
BEIRUT, Lebanon

Dear friends,

I would like to share with you the interview that I have recently given to Marc Ayoub of Lebanon Gas and Oil, Lebanon's most important gas and oil media platform.   

You may read "Interview with Alessandro Bacci About Lebanon's Oil & Gas Future" of July 2015 on the website of Lebanon Gas and Oil or alternatively you may find below the unabridged text of the interview copied below. 


Marc Ayoub 
July 2015

Exclusive interview with Energy Specialist Alessandro Bacci: “The current situation may not be one of the best, but there is still HOPE in Lebanon!”

After the nuclear agreement between Iran and the P5+1 group that was reached on July 14th in Vienna, experts around the globe will carefully be looking on the implementation steps of this deal, which is expected to have direct implications on both the political and economic situations in the Middle East region.

What about the deal’s impact on the Oil & Gas Sector? Will Iran’s re-entry to the world market affect again oil prices? Or will the immediate post-Iran deal period be a period of hesitation and testing until the time is ripe for broad arrangements?

Lebanon Gas & Oil interviewed Energy Specialist Alessandro Bacci, with whom we had an interesting discussion on all these topics and especially the industry’s situation in Lebanon. Mr. Bacci, who is active in the fields of Policy, Government and Public Affairs in the Middle East and North Africa, is currently a member of the Italy-Kuwait Association. Mr. Bacci's activity is related to the implementation of best practices for creating sound energy institutions and governance, ensuring robust fiscal policy and competitiveness, and transforming energy resources into broader long-term development.

After the Iran nuclear deal, will Lebanon and the Middle East catch the opportunity? Will we see a change in the global O&G scene? (We started hearing that Iran is getting ready to return to the Oil and Gas market.)

Let's start from the O&G scene. According to the perspective one looks into this topic, you can have contradictory results. For example, let’s focus on OPEC, where you have already struggles and different opinions concerning production.. On the one hand, as a consequence of the reduction in the price of oil, OPEC countries are currently earning less money in comparison to last year when in June the price of a barrel was around $105. But under the tight guidance of Saudi Arabia, OPEC countries have decided not to cut their production but to maintain their market quota. The idea was to push out of the market U.S. shale oil producers who have higher extraction costs. Some OPEC members like this strategy, some others are reluctantly following it. So, if the Iranians re-enter the market, it won’t be very easy to accommodate them. In fact, more oil in time of low prices will not increase the price of oil although it's true that it will take time to Iran in order to augment its production. Some estimates of Iran's capacity to restart its oil production in just half a year (six months) are literally too optimistic. One year and a half (18 months) is a more credible possibility when you talk about an additional 1 million BPD in the market.

On the other hand, some OPEC countries already have plans to increase their production. One of these countries is Kuwait, which is now producing around 3 million BPD but it's willing to increase its production by 2020 by an additional million. . So does Iraq, Kurdistan, etc… — all wants to produce more barrels. Thus, I am not so sure that the re-entrance of a super player like Iran could be immensely useful in this transition period for the region and this could probably affect the oil price, which could go lower.

As for the impact on Lebanon, my advice to the politicians is to start thinking in the industry without linkages to other countries because alliances won’t stay the same, and each country would like to run by itself. When we talk about Iran and its interest to return to be more involved in the petroleum sector on a global scale, I think that we have to understand a few things in relation to what this may mean for Lebanon.

In fact, on the one hand, it's quite improbable that a more direct Iranian involvement in Lebanon could really permit the Lebanese government to start with its offshore natural gas program. If Lebanon decides to go on with this program, it will be through an auction for which 12 operators already prequalified. Among them: Chevron, E.N.I., ExxonMobil, Petrobras, Shell, Statoil and Total. Who are these companies? They are the best you may find. In addition, Lebanon's offshore natural gas is not easy to extract because it's deeply buried in the seabed of the eastern Mediterranean. In practice, Lebanon needs this kind of companies. Companies having financial resources and top-notch skills. And if I remember well, the National Iranian Drilling Corporation was one of those companies that were not selected in order to participate in the auction. Similarly, it would not serve the interest of Lebanon to cancel the idea of implementing an auction with many players and start a direct negotiation with some Iranian companies. I repeat if Lebanon decides to move on with the offshore gas it has to do it with the best players out there. Moreover, Iran now in order to restart its petroleum production requires significant external investment. On the other hand, Iranian investments may be very helpful for some other projects linked to the petroleum sector. We know that Iran would like to implement some projects in Lebanon with reference to the construction of refineries and power plants. These projects, if implemented, may well serve the interest of both countries. And for sure Lebanon has to upgrade its downstream petroleum sector”.

What is your opinion about the Lebanese Oil and Gas Industry, especially that you have already published a recent paper of all the aspects of the industry? Until when do you think that the deadlock will remain?

Well, it is true that the situation is not totally amazing. When some companies talk about security reasons, I think it is more as an excuse right now to gain additional time. There need to be patience  in order to work in this part of the world; the situation has stayed the same since two years, at least it has not worsened  in comparison to when the companies were here, asking for data and participating in many conferences that were happening in Lebanon. Many factors together brought us to this standoff situation.

First of all, when we are talking about Lebanon, companies are waiting for the famous 2 decrees to be adopted by the Government. Without the 2 decrees, they cannot understand what the potential of this country is.  The first one delineates the blocks and we know that there is a borders dispute with Israel and companies prefer to know what the blocks will look like. The second decree is the one related to fiscal issues or the Production Sharing Agreement with the IOCs. There is a draft copy, but it has not been approved yet, so companies need to know what the definitive text will be. When you have an official text that is approved by all the entities, you will have something concrete and precise to show to companies.

Then of course, with reference to the situation, there are many different things to be considered: you want to invest in a place that is safe, where you know what your costs are, and what you are extracting and where you are exporting. It’s not the geological conditions that are really scaring to the companies which are accustomed to working in difficult environments, but the cost of working offshore. I believe that the standoff derives from a true combination of all these factors together as well as the current conditions in the petroleum sector.

At this junction of time in Lebanon, officials should decide what they have to do. What they should have done, such as surveys, studies, etc..., has been accomplished well. Right now, you have to do the deals, otherwise, you have to go and tell the people why you cannot go ahead in this. Is it only economical wise? Is it because of companies' competitiveness? You have to give an answer.

What about the EU crisis with Greece? And how will it affect the industry and the European markets? What about Iran and the EU?

Well, for me the EU crisis with Greece is one thing, while the EU energy necessity to diversify its energy providers is a different thing.

The European Union strongly relies on Moscow for almost a third of its overall natural gas demand. But alternative options are not so easy right now, as the EU will look in the near future to Iran, especially after the deal we have talked on, but you have to pass through Turkey and build new infrastructure.

But, I don’t think there will be a connection between the EU crisis with Greece and the EU energy consumption as the EU is always looking into different ways to satisfy its energy needs. At the EU level the current crisis with Greece is not related to energy issues.  

Instead, Iran could be an important provider for the European countries. Let me tell you some statistics:

Combining oil and gas together, Iran is in the third position after Russia and Venezuela. In fact, Iran has the fourth largest oil reserves in the world after Venezuela, Saudi Arabia, and Canada and has the second largest natural gas reserves in the world — Russia, Iran.

Thus, in order to diversify its supply, Europe has to look into these numbers and see what the options available are. It is not easy, I know it, but the Iranian option could be doable at least in the long run.

Speaking about the low current oil prices, how long in your opinion will this last? What are the real causes of this drop?

The economic crisis has an impact on the price of oil. The demand is not very strong, and this is depressing the prices. You have a production of more than 94 million BPD but the demand is not as much as this. Add to that the actual problems in China, which was for the Middle East one of the most important markets. I should mention here that most of the oil of the Gulf goes to Asia (Japan, South Korea, India, etc...), so as a result I don’t see the current oil price moving amazingly up in the next 6 months at least. All this said, there are so many variables that affect the price, so it is very difficult to judge what will happen in the future. One thing we need also to monitor is what is happening in the United States. In fact, the US is diminishing the rigs, for the shale oil and shale gas, but the production is at the same time varying around the same numbers. Probably, in the coming months, there will be a decrease in the barrels produced unconventionally.

You have attended all the conferences that were held in Lebanon since January 2015 concerning the O&G sector. What do you think about them?

Conferences are something that you have to do in Lebanon. Otherwise, you risk losing the grip. If you want to achieve a project, you have to maintain the fire under the project, and the LPA has done this very well. You should always inform people and companies to keep them updated, keep in touch with the Media and tell them where you stand.

Can the Lebanese people still HOPE of a healthy O&G industry?

There’s always HOPE, because what you have as hydrocarbons wealth could be very interesting. The moment is not maybe one of the best in time, but at least you should have good stuff. People should try to identify what the political reasons behind the deadlock are, and I push politicians to move forward today. As I said before, alliances will not probably remain the same in the next 10-15 years, and Lebanese should think about themselves, and what is economically and socially useful for the Lebanese citizens.

Interviewed by Marc Ayoub

Twitter: @Marc_Ayoub