Shall Libya Develop Its Unconventional Gas Reserves? Some Preliminary Considerations

May 31, 2013

ISTANBUL, Turkey — On May 23-24, 2013, the International Research Networks (I.R.N.), a leading business intelligence group, organized the 2nd New Libya Oil & Gas Forum 2013. This two-day summit, which was held in Istanbul, Turkey, brought together many stakeholders — with a large participation of members of the National Oil Corporation (N.O.C.) of Libya — interested into the development of the country's energy sector especially after the changes ushered in by the regime change occurred during 2011.  

Last March, the energy sector, after an almost complete stop during the civil war, was able to climb back to 1.4 million barrels a day (MMBL) of oil or approximately 90 percent of the prewar production level — data by the International Energy Agency (I.E.A.). Currently, the production should be around 1.5 MMBL of oil (May 2013). Notwithstanding the occurrence of violent incidents, which are sadly a persistent feature of the energy sector (often armed militias invade oil fields, and local people, who demand jobs, block energy facilities, not to mention the Mellitah gas installation's incident that last March temporarily halted trans-Mediterranean exports to Europe), the production recovery has been reached thanks to a concerted effort between the N.O.C. and the major foreign energy companies working in the country.

Libya has been part of the energy landscape since 1956 when two American oil companies got a concession covering about 14 million acres. Three years later, in 1959, Esso Libya discovered the Zletin oil field. Then, in 1961, after the completion of the 167-kilometer pipeline connecting the oil fields located in the interior to the Mediterranean Sea, the country became an oil exporter. And already in 1969, the year when Col. Muammar Gaddafi deposed in a military coup King Idris, Libya was able to have a production of 3 MMBL per day. Gaddafi's years (with their nationalizations) saw a decline in the oil production, especially after the mid-1980s. Indeed, this decline was due to contractual stiffening and the enforcement of the U.S./U.N. sanctions. Only in recent years (from 2006 onwards) the production has hovered around 1.7 MMBL per day. The Libyan participants to the forum confirmed that Tripoli was now deeply focused on the complete restoration and amelioration of its oil and gas production, which accounts for 90 percent of the government revenue and for 60 percent of Libya's G.D.P. In Istanbul, the N.O.C. chairman, Nuri Berruien stressed the point that the downstream sector needed to be modernized immediately. 

What, instead, emerged as the most interesting point of the two-day event was the shale gas chapter, which was covered by three speakers: Dr. Daniel Clark-Lowes of Nubian Consulting Ltd.; Dr. Nuri Ben Hmeda, professor at University of Tripoli, Libya and Mustafa Rahooma with the N.O.C. 

It's a matter of fact that we could be at the beginning of the golden age of gas as the I.E.A. underlined in June 2011 with its report "Are We Entering a Golden Age of Gas?". Of the fossil fuels, natural gas will probably be the only one in the future to increase its share within the global energy mix. This gas growth is linked to at least four factors:

• energy demand growth in China and in Asia in general (demand side), 
• possible reduction in the utilization of coal-fired power plants and of nuclear power as well (demand side), 
• displacement of some oil products in transportation in favor of gas (demand side) and
• the boom of unconventional gas at competitive prices and the growing role of L.N.G. (supply side).     

Shale gas resources are widely present across much of North Africa. The majority of shale gas is concentrated in Algeria (9th position in the ranking of the countries with shale gas reserves, according to the U.S. Energy Information Administration (E.I.A.)  in 2011), Libya (8th position) and Tunisia (25th position). 

Libya's shale gas reserves are located in two basins: the Ghadames Basin (Tannezuft and Frasnian formations) straddling between Algeria, Libya and Tunisia, and the Sirte Basin (Sirt-Rachmat and Etel formations), which is located entirely within Libya's borders. 

According to estimates by the E.I.A.: 

Algeria has 231 trillion cubic feet (TCF) of technically recoverable shale gas resources with 159 TCF of proven reserves, 

Libya has 290 TCF of technically recoverable shale gas resources with 54.7 TCF of proven reserves, and 

Tunisia has 18 TCF of technically recoverable shale gas resources with 2.3 TCF of proven reserves.

The map below provides a basic understanding of the world's distribution of shale gas basins. The values are expressed in cubic meter (1 cubic meter is equal to 35.3 cubic feet).

 

Between the three countries, Algeria is the one proceeding faster. At this regard, Parliament approved amendments to the hydrocarbons law with the specific goal of luring investors with reference to unconventional exploration. The idea was to lower petroleum taxes and to offer foreign majors a rate of return from 10 percent to 25 percent.   

But interest towards shale gas is emerging strongly also in  Libya. "Gas has never been a priority for us, but it is now. We may have some of the most important shale gas deposits in the world," said during a North Africa Gas Summit held in Vienna last year Mr. Berruien. It's true that in general the whole gas sector — including also the conventional side — is relatively undeveloped in Libya. In fact, in Libya gas has historically been neglected by all the exploration companies.  

The following comparison chart taken from Dr. Nuri Ben Hmeda's presentation at the Istanbul forum well shows the differences between conventional and shale gas. 
  

Source: Dr. Nuri K. Ben Hmeda — Shale Gas Resources in Libya (May 2013)

Starting from the assumption that shale gas is a commercial commodity, that if extracted within a certain cost threshold in relation to the price of gas on the international markets (we have always to remember that according to the geographical location the final price is different: for instance in Asia — with Japan and South Korea as buyers — 1 million British thermal unit (MMBtu) of gas is more expensive than in North America or in Europe) may generate profits, it's important to underline the issues to be considered before giving the green light to shale gas development in Libya. 

There are at least four major issues:
 

1) The environmental impact — This point was touched upon extensively in Istanbul. The impact of shale drilling (1500 wells to 3000 wells to produce 2 billion standard cubic feet per day (BBCF/d) against 40 wells to 60 wells to produce 2 BBCF/d for conventional gas) on water supplies causes a lot of concern. According to data released last year by Halliburton, a U.S. oilfield services company, a shale well may require up to 5 million gallons of water. This quantity is equal to 50 percent of the water consumed per day in a major city. Water protection and management are already relevant issues in Libya, especially for rural communities and their agribusinesses. At the same time, there is fear about potential groundwater contamination, waste-water disposal and the possible causal relation with seismic activity. 

 



Source: The Economist (March 2011)



This problem is real because Libya is one of the driest countries in the world with only the narrow coastal region (less than 5 percent of the whole country) getting more than 100 millimeters of rain per year. There are two important aquifers in the country: the Sandstone Aquifer System, under the eastern part of the Sahara Desert straddling between Libya, Chad, Sudan and Egypt; and the North-Western Sahara Aquifer System,  which straddles between Algeria, Libya and Tunisia. If we compare the map of the shale gas reserves and the map of the aquifers we do notice quite substantial an overlapping between the Sirte Basin and the Sandstone Aquifer System and between the Ghadames Basin and the North-Western Sahara Aquifer System.

 

Source: The Economist (March 2011)

 

2) The cost of extraction — Extracting shale gas is a costly operation and requires advanced technologies, which not all the energy companies have. Until recently, there has been no convenience in shale gas, and with market prices below $8.5 per MMBtu the extraction was totally uneconomical. According to I.H.S. CERA, a provider of global market and economic information, shale gas may now be produced at cheaper costs than in the past. And the predictability of shale gas wells, combined with the growing experience in how to reduce the time and cost of drilling and fracking wells, means that currently many firms are claiming to be able to produce shale gas at a marginal cost of less than $4 per MMBtu, as  in the U.S.  Barnett Shale did George Mitchell in 2009 when he started the 'fracking revolution'. Of course, later the gas has to be sold at a value higher than $4 per MMBtu.  

At the same time, it must be considered — as it was well explained in Istanbul by Dr. Daniel Clark-Lowes of Nubian Consulting Ltd — that in Libya energy companies never considered the importance of gas, which still today remains consistently both undeveloped and undiscovered (the E.P.S.A. IV 'gas round' helped only partially redress the balance). In fact, "Out of circa 90 gas discoveries country-wide (non-associated gas and gas cap fields), there are circa 70 that are undeveloped" said Dr. Clark-Lowes. And taking into account current gas prices, the advancement of technology and infrastructure (especially new gas pipelines) a good part of these discoveries are now commercially viable. "Some are recently discovered and are being assessed for commerciality, e.g., the very significant Hess discovery offshore Sirt, A54/1" added Dr. Clark-Lowes. In other words, shale gas will be relevant in Libya, but there is still plenty of associated and non-associated gas, both undeveloped and yet-to-be discovered. And the decision between conventional and unconventional gas shall be primarily based onto economic considerations.

3) The existence of markets where to sell the gas (domestic and international markets) — If Libya decides to develop shale gas it will be of paramount importance to understand where to sell it. Internally, there is a constant trend in the country (but it's more correct to say in all the North Africa's countries) toward an increase of domestic gas consumption. Roughly speaking up to 2010 (data from E.I.A., see the chart below) one-third (growing) of the gas production had been directed towards internal energy requirements and two-thirds had been exported. 

 

According to the geographical location of Libya, European countries should be Libya's preferred serviced countries (in April 2013 the price of 1 MMBtu was in Europe $12.88, well higher the previously mentioned  $4 extraction cost). Up to now, with conventional gas, the lion's share of the gas was exported via pipeline to Italy (ENI's Greenstream Pipeline) to Europe with small volumes also shipped in the form of L.N.G. to Spain. With reference to shale gas both options are still viable in the long run. It's difficult to imagine different customers than the Europeans, who have to diversify their gas supplies from Russia. But as usual, the real determiner of some possible new deals between Libya and the European countries will always be the price charged by Tripoli. Surely, Qatar and Australia (the latter from 2014 onward) are better positioned than Libya to provide gas to Asian countries. And it is' important to underline that China has the biggest world's reserve of shale gas with 1,275 TCF, and it could try to develop them in the future. North America has plenty of gas, while in Africa there are huge infrastructural problems.

4) A contractual framework more in line with shale gas production: E.P.S.A. IV contracts need to be revised — The fiscal terms typically on offer in Libya could be a barrier. In fact, standard production sharing agreements (P.S.A.s) designed for conventional exploration need to be revised. The N.O.C. is planning to "modify the 1955 Petroleum Law and [the] regulations to adopt and to allow for the exploration and exploitation of the unconventional 'shale gas' resources at attractive contractual and fiscal terms" affirmed Mr.  Rahooma of the N.O.C. Moreover, there still some uncertainties around the contracts signed in Gaddafi's era.

Under the classic P.S.A.s, I.O.C.s are obliged to conduct seismic surveys and to drill at least one exploration well over a certain time frame. These terms when linked to unconventional exploration do not work well. In fact, shale gas requires much more capital expenditures given all the geological tests and the big number of exploratory wells to be drilled. The cost-recovery demands of the I.O.C.s are always the difficult point in their negotiations with governments because companies want contract terms that permit them to recoup the initial investments. Algeria could be a model to follow. It has a new hydrocarbons law and companies there will be paying taxes on profits and not on revenues while exploration risk will be shared with the government. All these observations point to the fact that the Exploration and Production Sharing Agreements IV (E.P.S.A. IV) which Libya has started to offer since 2005 are not in line with shale gas operations. Under E.P.S.A. IV the winners are mainly determined based on how large is the share of production that I.O.C. is willing to offer to the N.O.C. The fourth round of bidding in December 2007 (12 gas areas on offer) saw a scarce participation on the I.O.C.s side.

Summing up, Libya has to evaluate its shale gas reserves while at the same it does not have to expect to start the development of these wells any time soon. As ExxonMobil's Mr. Jeff Farr told the Italy-Kuwait Association (IKA) in Istanbul "Libya has for the moment just to know its shale gas potential".



 

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. 

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/#