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.    

 

 

 

 

Forty-Six I.O.C.s Will Bid for Lebanon's Offshore Hydrocarbon Exploration

April 19, 2013

BEIRUT, Lebanon — The prequalification phase is over and 46 international oil companies (I.O.C.s) have prequalified to bid for Lebanon's offshore gas exploration contracts, declared yesterday Lebanon's caretaker energy and water minister, Gibran Bassil (Prime Minister Najib  Mikati had announced resignation of his government on March 22, 2013). The deadline for submitting the applications was March 28. Then, after three weeks, the Lebanese Petroleum Administration (L.P.A.) has now decided the list of the accepted companies.

According to the minister, 12 companies are entitled to bid as right-holders operators (the companies running the day-to-day field operations on behalf of rights’ holders), while the remaining 34 companies could bid as non-operators  right-holders in the licensing round that should be opened on May 2 and should last until November 4. In other words, from May the companies will have around six months in order to prepare their bids and form consortiums of at least three companies (one has to be the operator). If everything proceeds according to the minister's schedule by March 2014 the exploration licenses could be awarded. Of course, the problematic situation of Lebanon's sectarian politics and the civil war in neighboring Syria are two big unknowns, but, as a matter of fact, for the moment the scheduled timing has been well observed.

It also important to underline that notwithstanding scarce transparency and political maneuvering in the appointing process of the L.P.A., the six-member board has been able to meet the agreed-upon deadlines and to draft a valid set of bidding requirements (financial, legal, technical and environmental and Q.H.S.E. which stands for Quality, Health, Safety, Environment) that have attracted important I.O.C.s.

The 12 companies selected for bidding as operators are with no doubt between the best  I.O.C.s at the world level:

• Anadarko Petroleum Corp
• Chevron Corp
• ENI
• ExxonMobil
• Inpex
• Maersk
• Petrobras
• Petronas
• Repsol
• Shell
• Statoil
• Total.

Given their expertise, if these players find relevant gas reserves they will be able to develop them.

The government has now to pass two decrees in relation to gas exploration contracts. The first one is related to the demarcation of the 10 maritime exploration blocks (whose dimension ranges from 1,259 square kilometers to 2,374 square kilometers) to be auctioned off, while the second one has to define a revenue-sharing model. Without these two decrees it will be impossible to award the contracts. The problem now is that a caretaker government is not entitled to pass these two decrees. For the time being, their approval has been postponed until the designated new prime minister, Tamam Salam, has formed a new cabinet. Mr. Bassil is strongly determined to launch the tender on May 2 no matter whether a new government will be in place by that date or not. “Negotiations with the winning companies need the approval of the Cabinet, but that will not stop us from continuing our work” said Mr. Bassil.

With reference to the dispute between Lebanon and Israel over the maritime border, the minister pointed out that Lebanon's government is willing to extract offshore gas within the borders as delineated by the government, notwithstanding more than 330 square miles of Lebanese territorial waters disputed with Tel Aviv (in addition to this, Beirut has still some open disputes with Cyprus about other maritime boundaries). “The issue of the borders with Israel will not have an impact as long as we are alert. ... There are many cases around the world of disagreement over borders, where oil is extracted without one side harming the other.” he added.

It's crystal clear that there is a strong international interest for the Lebanese offshore gas resources. And the result of the prequalification phase is undoubtedly a great success. The government and the L.P.A. were not expecting so big a number of important I.O.C.s for both operator and non-operator roles. Only four applications were rejected for the role as operator. In specific, in relations to these four discarded applications,  one company was not accepted because it was not able to meet any of the eligibility criteria, two companies did not own assets in excess of the required $10 billion and one company was not able to demonstrate experience at depths exceeding 500 meters. On the non-operator side, 34 companies out of 38 that submitted prequalification applications are eligible to bid for a license. It was explained that the four rejected companies did not have assets valued more than $500 million or the required top-notch expertise linked to previous oil and gas operations.

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 so that additional funds could be utilized with the goal of increasing the overall economic performance of the country. Lebanon has a chronic electricity shortage and the country's power plants run at the maximum of their capacity with no available operating reserve. Also in Beirut's most expensive and fashionable neighborhoods electricity is cut for three hours a day. In the countryside the situation is in some areas really dramatic with few hours of energy per day. The state electricity company runs at loss. According to data from Mr. Nassib Ghobril, the head of economic research at Byblos Bank, a Lebanese bank, the electricity deficit costs the Treasury on average $2 billion per annum, while in 2012 the paid bill reached almost $3 billion.     

This dependence upon external energy sources was until today a circumstance common to all the countries now involved in this gas rush in the eastern Mediterranean Sea. Some of these countries, like Israel, Turkey and Cyprus, are well ahead in developing their gas resources, while now Lebanon is trying to catch up soon and with no doubt its offshore gas could really help pay off the country's debt to G.D.P., which is among the highest in the world.

  

On April 22-23 I will participate in the Lebanon Oil & Gas 2013 Summit organized in Beirut, Lebanon by International Research Networks (I.R.N.).  This is the webpage of the event: http://www.lebanonsummit.com/#



 

Will Oil in the End Divide Iraq?

March 31, 2013

BEIRUT, Lebanon — Crude oil is the cornerstone of the dispute between Iraq's central government and the semi-autonomous region of Iraqi Kurdistan. During recent months the tension between Erbil and Baghdad has consistently increased, especially after rumors about a possible energy partnership (ranging from exploration to export of crude oil) linking Turkey with the Kurdistan Regional Government (K.R.G.). It's esteemed that the K.R.G. has 45 billion barrels of oil reserves and more than three trillion cubic meters of natural gas.

   

For Ankara this proposed partnership has with no doubt an economic logic: It could provide Turkey with oil and gas in a time of hasty economic growth, when Ankara is paying Russia around $2 billion for fuel every month. Conversely, the United States — one of Turkey's most important allies — is deeply concerned about the consequences of this plan. In fact, Washington fears about the disintegration of Iraq, an event that could prompt Iran to additionally extend its influence over proper Iraq. "If oil from Kurdistan goes through Turkey directly, that will be like dividing Iraq. This is our big concern," Deputy National Security Adviser Safa al-Sheikh Hussein of Iraq said recently on the fringes of an Iraqi conference.

      

Last Friday, these rumors were well confirmed when Recep Tayyip Erdogan, the Turkish prime minister, in an interview with CNN-Turk, expressly said that Turkey is currently in the process of signing a trade deal with the K.R.G. And when he went on referring to the Baghdad-controlled oil pipeline to Turkey, he underlined that the pipeline was operating well below its capacity (70.9 million tons a year) and that something had to be done in order to utilize it in a more business-oriented manner, like, for instance, extending it with multiple oil and gas pipelines. When talking about the quarrel between Baghdad and Erbil, Prime Minister Erdogan affirmed that according to the Iraqi constitution the K.R.G. had the right to use part of its energy endowment with every foreign country it selected. "There is no article in the constitution [the Iraqi constitution] that can prevent [the K.R.G.] from making this trade contract with us" added Mr. Erdogan.

Prime Minister Erdogan's declarations are not easily accepted in Baghdad. Since long time Turkey has courted Iraqi Kurdistan while the K.R.G. relations with the Shiite-controlled government in Baghdad have been consistently deteriorating. Today, Turkey is a major trading partner for the semi-autonomous region. And in addition to energy issues, Baghdad has recently quarreled with Ankara with reference to Turkey's refusal to extradite Iraq's fugitive vice-president Tareq al-Hashemi, who took repair in Ankara in order to avoid Iraq's Central Criminal Court's sentence that condemned him in absentia to death.

On the energy side, Baghdad's position is very clear: thwarting all possible energy deals between Ankara and Erbil. For example, last November, Iraq strongly opposed Turkey's national energy company T.P.A.O. from bidding for an oil exploration contract in the K.R.G. Later, in December, the Iraqi government stopped an aircraft carrying the Turkish energy minister Taner Yildiz from landing in Kurdistan. The basic assumption was that the energy minister was en route to Erbil for signing one of these Turkey-K.R.G. energy deals that are so despicable for Baghdad.   

The K.R.G. used to ship the lion's share of its oil production through the Baghdad-controlled pipeline that connects Iraq's Kirkuk to Turkey's port of Ceyhan, but as a result of these energy wars, after last December's dispute with Baghdad over the payments to the companies operating in Kurdistan, this channel was quickly interrupted. In practice, some of the companies working in Kurdistan and then shipping oil abroad through the Kirkuk-Ceyhan Pipeline have at present not been remunerated for a good portion of what they have shipped abroad. The K.R.G. affirms that it has not gotten enough money to pay for the companies working in Iraqi Kurdistan. It seems that the problem arose after some changes in the way the central government calculates the procedures for paying the operators.

As a consequence of the non utilization of the pipeline, the K.R.G. is continuing to increase its crude oil deliveries by truck to Turkey. According to Kurdish sources, Kurdistan's export volumes were 12,000 barrels per day in October 2012, but deliveries are now continuing to increase. January's data spoke about 30,000 barrels per day of crude oil and condensate (the latter is a light form of oil). This trucking activity irritated Baghdad that menaced reprisals against the K.R.G. and the foreign companies involved in the oil exports. In December, the trading house Trafigura was banned from operations in Iraq. Baghdad when referring to the oil trucked to Turkey defines it as "smuggled oil" to well underline the illegality of this activity.

Things again escalated earlier this March when Iraq's 2013 Budget Law was passed into law with the absence of the Kurdish M.P.s (168 M.P.s were present and the quorum was 163 members). The result was a very anti-Kurd Iraqi budget law. The government expenditure for 2013 totals $118.3 billion with an increase of 18 percent over 2012 and exceeding 70 percent of G.D.P. The proportion allocated to Kurdistan is $12.5 billion according to the 17 percent quota (since 2007) set for the region minus a certain number of sovereign expenses that are deducted. If the K.R.G. now decided to pay by itself the foreign companies, it would immediately lose half the allotted budget.

   

Erbil requested $3.5 billion to cover the costs accumulated by the companies operating in Kurdistan in the last three years — among them ExxonMobil, Chevron and Russia's Gazprom Neft. But the central government considered some of these contracts illegal and consequently reduced the amount to be given to Kurdistan to $650 million. The shortfall is quite evident. The companies operating in Kurdistan need to be paid. The K.R.G. internal oil market and the export of some oil to Turkey is not a reliable solution. Budget Law 2013 is based on a $90 barrel price and on averaged exports of 2.9 million barrels per day including Kurdistan's production. An additional tough condition included in the law is that the K.R.G. has to resume crude exports at a level of 250,000 barrels per day before funds are released by Baghdad. As per the new budget law, the K.R.G. could only be able to cover two months of payments to the foreign companies. Some sources explain the low amount paid for by Baghdad with its intention to force these foreign companies out of Kurdistan.

   

Given the K.R.G. non utilization of the Kirkuk-Ceyhan Pipeline, it's quite improbable that trucking crude oil to Turkey could be any soon stopped although in no way may trucks transport the entire crude oil production of the K.R.G. In fact, Erbil should send by truck around 250,000 barrels of oil a day, which is not doable. To provide an example, K.R.G.'s Taq Taq crude oil is currently routed to Turkey's Mersin port and given the small amount trucked every day to fill up an oil tanker it may require up to two months. After the interruption of December, Iraq exported 2.4 million barrels per day in January mainly from the south.

One point should be clear: The future developments in the K.R.G. will have a huge impact in all the Middle East, a region where oil is politics and politics is oil. And surely, both Turkey and the K.R.G. have relevant interests with reference to the development of improved business relations. On the K.R.G. side, if Erbil were able to raise its production to 400,000 barrels per day of oil and to export it with a new Kurdish pipeline to Turkey, it could make $14.6 billion (considering a $100 per barrel of oil). This value is consistently superior to the budget allocation that Erbil should receive now from Baghdad. In other words, economic self-sufficiency could be a potent tool to declare independence from Iraq in the future.

For these considerations, the K.R.G. and Turkey are definitely set to build an oil pipeline to Turkey, notwithstanding the contrary advice of the United States. A new pipeline with a capacity of 200,000 barrels per day should be ready by the end of 2014 or the beginning of 2015. And according to the K.R.G. energy minister Ashti Hawrami, a gas pipeline could be easily converted to ship up to 200,000 barrels per day of crude oil by June. The British-Turkish company Genel Energy is as well planning another pipeline to ramp up oil exports to Turkey by 2014. This pipeline will link Iraqi Kurdistan's oilfields directly to Turkey, but it could also connect to the Baghdad-controlled Kirkuk-Ceyhan pipeline. And there is also a plan to build a parallel pipeline that would supply several hundred million cubic feet of natural gas per day to Turkey annually by 2014. Turkey’s national oil company (T.P.A.O.) would be involved in this deal, under which it would acquire the rights to five exploration blocks in Iraqi Kurdistan. In addition to all these planned pipelines, another scheme of cooperation involves energy swaps between Turkey and the K.R.G. with the latter pumping gas to the former's power plants, which in turn would send back electricity to Kurdistan.

On the Turkey's side, improved relations with the K.R.G. would have important economic and political consequences. And economically speaking, Turkey needs the K.R.G. energy resources. In this way, Turkey would really become a major energy hub connecting the Middle East with Europe. Already of two foreign businesses in Kurdistan one is Turkish, and this testifies the reciprocal economic interests between Ankara and Erbil. But politically speaking, the developments could also be very relevant. The initial point for understanding these evolutions is that at the moment Ankara is trying to resolve its domestic problems with its internal Kurdish minority. There is the necessity to end a conflict that has killed more than 35,000 people over thirty years. Turkey's foreign policy steered clear from the idea of having good relations with all the country's neighbors. The Syrian conflict put Sunni Turkey in direct competition versus the Shiite-dominated Iran, Iraq and Syria. For Turkey, obtaining peace at home with the Kurdish minority, would trim down the possibility that greater autonomy in the K.R.G. could represent a reignited spur to obtaining independence from Ankara for the Kurdish minority located in Turkey. And as a consequence, geopolitically speaking, the K.R.G. would gravitate around Turkey.

If the pipelines are built they will partially alter the geopolitical chessboard in the region. In fact, they are a real game-changer because they will give Erbil those economic resources that will permit it to sever the chain of Baghdad's political control. For Iraq, embittering the relation with the K.R.G. — for instance, drafting a very anti-Kurdish budget law — not only could not bring back the K.R.G. in line with the central government, but also it could rather force Erbil to try to get the opposite result: independence. There is no easy solution to this impasse because in any case both parties want to have under their control the ethnically mixed city of Kirkuk, which lies in the territory disputed between Erbil and Baghdad and which sits on one of Iraq's largest oil fields.

Kirkuk's Citadel - Source: Wikipedia

The U.S. would like to avoid a conflict that could subtract energy resources from energy markets while inflaming one more time the Middle East. Plus, the U.S. energy companies have interests in both the K.R.G. and Iraq. By contrast, Europe is desperate for energy resources and getting them from a Kurdistan gravitating around Turkey could be safer than negotiating with Iraq. At this regard, around ten days ago the K.R.G. prime minister Nechirvan Barzani participated to an international conference concerning energy security that was organized by Germany's Christian Democratic Party and presided by Chancellor Angela Merkel. On this occasion, Prime Minister Barzani stated plainly that the K.R.G. could well satisfy on a long-term basis Europe's energy needs, while at the same time help Europe to diversify its energy suppliers. He said that if the right infrastructure were built by 2019 more than three million barrels of oil per day could be flowing from the K.R.G. to the international markets. Last but not least, as a perfect corollary to his meeting in Germany, on his way back to Kurdistan he then stopped in Turkey.