Lebanon’s natural gas potential could transform the country into a net energy exporter, but there are a whole host of issues to contend with before production, or even exploration, can commence, writes Freddie Heritage.
‘‘Everything is ready and I am frustrated,” exclaims chairman of the Lebanese Petroleum Association (LPA), Nasser Hoteit. “I’ve been working on oil and gas projects all over the world for years and you get delays all the time for different reasons: whether it’s financing in Russia, or political boycott in Iran, but it’s very frustrating here.”
“Not only is everything ready, but things have been done according to international rules and regulations,” says Hoteit. “Lebanon has the same oil and gas certification you get in the US or the UK. The preparatory work is clean.”
Observing the current political and regulatory environment in Lebanon, it’s easy to sympathise with Hoteit, head of the de facto regulator of the country’s petroleum sector since December last year.
Established in 2012, the LPA has worked to prepare Lebanon’s ability to capitalise on its as yet elusive natural gas sector, but as obstacles continue to pile up in front of international oil companies (IOCs) looking to explore the Levant Basin Province in the eastern Mediterranean, Hoteit finds his association’s role increasingly limited by Lebanese politics.
“We work to develop the sector with institutions and within Lebanese society,” he says, “but until the government approves the two decrees, we are waiting.” As GTR goes to press, the interim Council of Ministers in Lebanon has delayed the closing of the country’s first offshore licensing bid round for IOCs a total of five times since early 2013. The LPA, via the Ministry of Energy and Water, has sent recommendations for two decrees in the long-awaited proposal to 46 oil and gas companies currently qualified to operate in Lebanon, to the interim Council, where they remain languishing.
Still in its infancy, the hydrocarbons sector is prevented from progressing because of Lebanon’s political divisions. The licensing must receive government approval before further exploration can begin, but even if the interim Council approve
it, the legitimacy of the ruling may be questioned.
“The IOCs need to understand what they are actually bidding for,” says Mariam Al-Shamma, petroleum sector risk manager at IHS, who believes it may be many more months before upstream progress will be made in the sector. “It’s not something that’s going to be concluded any time soon,” she adds.
WHAT’S ON OFFER?
The two decrees in question relate to the official delineation of Lebanon’s 10 proposed offshore blocks, as well as the fiscal terms that will be offered to IOCs that begin exploring, drilling and producing what they find in them.
The LPA’s proposed exploration and production agreement (EPA) will contractually bind IOCs, or ‘Right Holders’, to the Lebanese state for an initial ‘exploration phase’ of five to 10 years, after which production of any commercially viable oil and gas discoveries must begin within 25 years. From these discoveries, the LPA proposes the Lebanese state receive royalties of 4% of the value of gas produced and between 5 to 12% of the value of oil.
In all probability, there are significant natural gas resources for IOCs to exploit. The 2010 US Geological Survey estimated that 122 trillion cubic feet (Tcf) of recoverable natural gas lies beneath the Levant Basin Province, of which Lebanon lays claim to roughly a third. Its neighbours have already capitalised on major discoveries there, with Israel, Cyprus and the Palestinian Territories successfully developing their sectors (see figure 1).
Syria has the largest hydrocarbon resource base of the countries in the eastern Mediterranean, according to the US Energy Administration, with 2.5 billion barrels of proven oil and 8.5 Tcf of proven natural gas, but the country’s ongoing civil war prevents it from exploiting its reserves.
Israel’s discoveries have been the most commercially lucrative, transforming the country’s gas sector. Oil & Gas Journal estimated in 2000 that Israel’s Levant fields held proven natural gas reserves of 10 billion cubic feet (Bcf). This was revised in 2013 to a total of 9.5 Tcf thanks to a series of offshore discoveries, including the so-called Leviathan field: the largest offshore natural gas discovery of the last 10 years (see figure 2).
Israeli discoveries in the Levant Basin will likely continue and, having signed export deals to the tune of around US$1.7bn in recent years, Israel is positioning itself to be a major gas exporter in the region. Lebanon aims to follow suit should it make similar discoveries.
DOMESTIC NEEDS VS EXPORTS
The likelihood of Lebanon becoming a net energy exporter depends on the size of discoveries made once explorative drilling begins in earnest. The country has a large energy debt, and may wish to ensure domestic needs are met before export deals are made. In 2011 the World Bank measured Lebanon’s energy imports as a net percentage of energy use as 96.76%. The world average was -3.5% (indicating the average country is a net energy exporter).
“The size of what is found will have a huge bearing on what the country can export, but I can guarantee they are very interested [in doing so],” says Al-Shamma. Hoteit outlines three potential outcomes. “If less than 5 Tcf is discovered once exploration begins,” he says, “only the domestic energy market will be guaranteed supply.”
“If there are discoveries of between 5 and 10 Tcf, the domestic market and the regional market, including Syria, Jordan and maybe Egypt, can be supplied. If more than 10 Tcf of gas is discovered, we should seriously think about building a wider energy plan to export part of our gas reserves by pipe to Europe, and by container to Asia.”
Exporting may be the only option as Lebanon lacks energy infrastructure and what Hoteit calls an “upstream culture” – institutions like a state-owned oil and gas company to ensure industry standards are set and regulations upheld.
If discoveries are large enough, public-private partnerships (PPPs) could help build liquefied natural gas (LNG) plants to develop the gas, as well as Lebanon’s domestic infrastructure. A 170-kilometre pipeline stretching the length of the country, from Tripoli to Tyre, is also currently awaiting government approval, and Hoteit believes PPPs are essential for developing such projects. “Piping LNG should be managed by upstream private companies,” he says. “At the moment we don’t know whether [the Tripoli-Tyre] pipeline is being proposed on the basis of international regulation or not, and if we want to start exporting, we need infrastructure that’s built on international rules.”
Al-Shamma is sceptical about Lebanon’s ability to build the necessary infrastructure because of endemic political malfunction and lack of funding, the electricity sector providing a good example. “There are constant power outages because power and electricity has been starved of funding for decades,” she says. “I would be very cautious in my assessment of how quickly any kind of infrastructure’s going to be developed.”
Despite the political climate, Lebanese lenders are well-placed to finance projects when the gas sector takes off. Banking is the country’s main industry and the sector has consistently shown growth for decades.
According to Ziad Ghosn, head of financial institutions and trade finance at BankMed, one of Lebanon’s largest banks, the domestic market has developed strong correspondent relationships with virtually every international lender. Credit appetite for trade business with underlying Lebanese financial institution (FI) risk has been little affected in recent years, despite the global financial crisis and a worsening security situation in the Middle East.
“Banks have the capacity and liquidity to fund gas-related projects if good opportunities arise,” says Ghosn. “The gas sector is undoubtedly a promising one, and it can play a major role in terms of attracting foreign direct and long-term equity investments.”
Lebanese SMEs, which, Ghosn says, account for 90% of total enterprise in Lebanon, could benefit the most from investment in the gas sector. “The industry will provide long-term jobs and shall have a positive impact on the development of the SME sector, through its potential to access the petroleum value chain,” he adds.
In addition to international banks, Lebanon has benefitted from considerable multilateral agency and development bank investment. As part of its Global Trade Finance Programme (GTFP), the IFC supported cross-border trade in the country to the
tune of US$507mn in 2013.
The resignation of prime minister Najib Mikati in March last year began a period of political uncertainty which is yet to conclude. Originally the cause of a dispute to do with the appointment of the chief of the Lebanese internal security force (ISF), Mikati’s resignation and the subsequent political vacuum partially filled by an insubstantial interim government, demonstrates the drawbacks of the country’s confessional system.
In Lebanon, the prime minister must always be a Sunni Muslim, the president a Maronite Christian, and the speaker of parliament a Shia Muslim. Cabinet and parliamentary seats are determined on a confessional basis. Hezbollah, which represents Shia in Lebanon, and the Maronite Free Patriotic Movement, blocked Mikati’s move to install a fellow Sunni as head of the ISF, leading the former prime minister to resign.
The political manoeuvring may have been deliberate. Mikati’s resignation prevents Lebanon from moving forward with the Orthdox Gathering Law, a proposal that would ratify the country as a single electoral district and enable the population only to vote for members of the same sect. The proposed law is reportedly highly opposed by Sunnis in Lebanon whose representation in parliament may be diminished.
Lebanon’s internal political woes are made worse by neighbouring Syria’s ongoing civil war, where Lebanese Sunni Jihadists are reportedly still joining rebel forces. “Security threats in the region are definitely the elephant in the room,” says Al-Shamma. “And you worry about the stability of the state itself.”
“IOCs can plan around day-to-day security threats, and they still operate in very dangerous places, but there’s really no way to hedge against the collapse of the state or the inability of various parties to come together to create a new government,” she adds.
While frustrations mount over the political situation, the LPA and other stakeholders in Lebanon are preparing local society for the arrival of the gas sector in other ways. The Beirut Bar Association has this year formed an energy committee, and reportedly held a special series on oil and gas contracts in July this year.
According to Hoteit, the LPA is currently working with five Lebanese universities to introduce state-of-the-art petroleum engineering programmes, whilst two will open process-engineering courses. In October this year, the organisation ran courses and training seminars for all government ministers involved in oil and gas extraction, to train them in how to manage crises. The LPA is also looking towards European and multilateral institutions to develop oil and gas research. “We are working with the EU to open the European research sphere to Lebanese laboratories,” says Hoteit.