"Prospecting for oil is a dynamic art… The greatest single element in all prospecting, past, present and future, is the man willing to take a chance," says Everett DeGolyer Everette a prominent American oilman, geophysicist and philanthropist in Dallas.
And Lebanon seems acting decisively towards that goal…after years of deferral…
For more than 15 years now, documented news about Lebanon sitting on an offshore wealth of oil and gas resources have actively encouraged multinationals to move towards this sector. Huge investments in this sector promise to create a new resource for oil and gas through the development of large-scale drilling and extraction projects.
Seismic studies conducted by British Spectrum Company and Norwegian survey company PGS (Petroleum Geo-Services) in Lebanese territorial waters in 2002 and 2006 respectively indicated the presence of gas and oil deposits in the Lebanese territorial water. The seismic data showed that offshore Lebanon has a favorable petroleum geology including source rock, reservoir and seal development. Water depths in the region could reach more 2000 meters.
On the other hand, in 2010 the US Geological Survey estimated that the whole of the Levant Basin contains around 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of recoverable gas. Subsequent 2D/3D surveys have consistently confirmed that there are significant oil and gas resources offshore Lebanon.
The Lebanese government has in 2010 approved the Offshore Petroleum Resources Law 2010/32 to administer the country’s oil and gas wealth, but launching the exploration phase was only decided yesterday when the Lebanese government approved the long-awaited oil and gas exploration decrees.
Some history
To date, there are no wells drilled in the area offshore Lebanon. However, seven wells have been drilled onshore in the 50s and 60s. But these exploration attempts didn’t penetrate the required dept. The seismic survey was not formed then, but experts note that even the old method of drilling utilized at that time was not used correctly and probably not in the right places.
Between forties and mid-fifties, seven wells were dug in the regions of Qa’a (east Lebanon), Tal-Zanoub (Mount Lebanon), Sohmor, Yohmor, Adloun (South Lebanon), Abreen and Terbel (North Lebanon). The attempt has given some hint for some oil evidence, even though it wasn’t worthy.
In 2000, Spectrum made an offshore survey outside the Lebanese territorial borders. The outcome was encouraging. The year 2000 could be considered the turning point when the prospects of finding oil and gas in Lebanon became real. In 2002, the Lebanese government entered into an agreement with Spectrum Geo to perform a two-dimensional seismic survey off the coast of Lebanon to supplement the work started in 2000. The agreement has given Spectrum Geo the right to gather data off the Lebanese coast at its own cost and to later sell the data to prospective oil companies. Spectrum made a two-dimension survey over the whole Lebanese shore. Survey lines covered about 20 thousand kilometers east the Mediterranean. Some of these lines were along the beach, while the others were vertical. The survey reached a distance of 160 km inside the sea depth between Lebanon and Cyprus. The agreement itself, however, ended in 2007, and the Spectrum Geo has requested another five-year agreement with the Lebanese state.
According to figures provided by the Ministry of Energy and Water (MoEW) and based on the Spectrum and PGS estimates, 10% of surveyed Lebanese waters show 30 trillion cubic feet of gas and 660 million barrel of liquid oil. “However,” says George Sassine, an energy and public policy expert from Harvard University, “optimism should be balanced with a degree of caution. Lebanese citizens and politicians need to be aware that the exact amount of oil and gas in our waters will not be known for sure until exploration and drilling start.” “Israel started drilling and did find large deposits, but contrary to expectations they drilled dry holes in two offshore sites where they were expecting to find natural gas,” he adds.
On the way to becoming a gas producing country
The Offshore Petroleum Resources Law 2010/32 was ratified by the Lebanese Parliament in January 2011. “In terms of legal framework this law is applicable for offshore discoveries and explorations. Moreover, this law is supplemented by 28 governmental decrees for the detailed implementation of the law,” says lawyer Malek Takieddine, an oil and gas consultant.
The same law also suggested the formation of a Petroleum Administration to oversee the pre-qualification and bidding processes. On 7 November 2012, the Lebanese cabinet officially appointed the six members of the Petroleum Administration Board (PAB), enabling Lebanon to proceed with its first round of offshore oil and gas licensing. Article 10 of this law notably provides for the Petroleum Administration’s crucial role in the preparation for bidding and in the pre-qualification phase, while Article 13 defines how invitations to submit applications should be managed by the Board. The six members of the Authority are Nasser Hoteit, Walid Nasser, Wissam al-Zahabi, Assem Abu Ibrahim, Wissam Shbat, and Gaby Daaboul.
In February 2013 the Lebanese Council of Ministers approved (with one amendment) a draft decree detailing the pre-qualification requirements ahead of the bidding phase, and also clarifying aspects of the latter process.
On February 15, 2013 the Lebanese Minister of Energy and Water (MoEW) held a press conference launching the pre-qualification process for oil companies to bid on offshore oil and gas exploration. The Minister outlined the timeline and next steps in Lebanon’s offshore oil and gas sector.
On April 18, 2013, the Ministry of Energy announced that Lebanon has selected 46 international oil companies to bid to explore for gas in its Mediterranean waters. The Ministry said 12 of the companies had been selected to bid as operators and the other 34 could bid as non-operators in the licensing round. The dozen companies which were pre-qualified to bid as operators are: Anadarko Petroleum Corp, Chevron Corp, ENI, ExxonMobil, INPEX, Maersk, Petrobras, Petronas, Repsol, Shell, Statoil and Total. The licensing and bidding phase was expected to take a year to complete. Contracts were expected to be signed with winning international oil companies in February 2014, but everything was put on hold due to political skirmishes.
Otherwise, the development phase was expected to take its course this year before full and the first commercially extracted oil and gas was expected between 2018 and 2020.
All these have changed now….
Legal and transparent?
“All procedures were transparent during the prequalification bid,” says a reliable source at the Ministry of Energy and Water who preferred to stay anonymous. “The renowned multinationals would have been cautious if the process of the bid was not transparent. The ministry’s step to explain all reasons why some companies were not prequalified for the exploration bid was highly praised as a transparent move,” adds the source.
Takieddine agrees. “As a start if we look at the companies that were prequalified, the vast majority are internationally renowned companies. This proves that there’s an efficient process in place, and the Ministry and the PA are doing a good job providing a transparent process of selecting the companies. I hope that this transparent process will continue in the course of signing the contracts in the future,” he says.
The exploration and the extraction contract, which would decide the shares of revenues for each party, is not disclosed yet. “According to experts, exploration is very costly, so the winning companies have to form consortiums, a condition that is mentioned in the law, and they expect a good share of the return from the revenues in the future,” says Nassib Ghobril, head of economic research and analysis at Byblos Bank. The estimated cost of exploration is $100 million per well.
There are 10 blocks and each block will be given to consortium of companies.
Takieddine gave some details of the contractual procedure. “In terms of the legal structure created by the exploration law, some kind of production sharing system is revised, whereby international companies would be retained by the state to invest in exploration. Should there be discovery made, the investments put by the companies then will be recovered up to a certain ceiling, and then some royalty will be paid to the state in terms of revenue sharing. The production should be divided between the companies out the state based on a certain ratio to be agreed upon in the Exploration Production Agreement,” he says.
According to Takieddine, the regulations needed to implement the law are mostly ready. “Some of them are approved, and we are still waiting for some decrees that are crucial for the first licensing round,” he says. The role of the PA during the licensing round is to screen the applications that decide which of the companies meet the requirement to be prequalified.
Companies will have a uniform contract. “There would be few elements that could be negotiated. As now there’s no revealed official draft. It’s still confidential. There will be a template agreement where only certain elements could be subject to negotiation but not the entirety of the agreement,” says Takieddine.
Optimistic or realistic?
Scientists say that no one can give real estimates before exploration. Even at the first stages of the explorations, figures would not be real. Surveys give an idea but not real figures, but sources at the MoEW believe that they are so promising that multinationals wanted to get involved in the explorations. Estimates show 600 trillion cubic meters of gas, but no one can tell how much would be extracted before exploration.
But as scientists expressed cautious optimism, economists seemed to be less sure.
“When it comes to the oil and gas, we should keep our expectations low,” says Ghobril.
“The geological surveys talk about technically recoverable estimates and they don’t talk about economically recoverable reserves,” says Ghobril. “There’s great difference between the two. Economically means how much is the extraction cost, for how much the extracted gas will be sold in the market? If you extract the gas and the international prices are lower than the extraction cost, then you cannot sell it in the international market and only use it domestically.” “We also should keep in mind that there’s enough supply of gas in the international market. New wells are discovered not only in the Arab world but also in the pacific, Indian oceans and other places in the world,” he added. Using the gas domestically for energy production implies transforming the gas into LNG plus infrastructure is needed to replace diesel with gas.
“We are at the beginning of a long process,” says Ghobril. The question is how much time we need to start the exploration. There’s a process to take its course. I believe it will take at least 7 years to start extracting for commercial use in the best case scenario. 10 years is more realistic,” he adds.
“Lebanon will get a share of oil and gas revenues per the commercial agreement it reaches with international oil companies. These revenues will depend on four key factors,” says Sassine and explained: “The first one is the volume of oil and gas that can be economically extracted and produced. While seismic studies indicate that Lebanon could potentially have large petroleum reserves, the only way to confirm is to start the exploration process. The second factor is Lebanon’s ability to monetize the oil and gas it produces. This will require proper planning, and efficient building and operation of LNG facilities, as well as a coherent oil and gas export strategy. The third factor is global and regional oil and gas prices. The changes in commodity prices will impact Lebanon’s oil export strategy. Then the fourth factor is ensuring that these revenues are not siphoned away. This is a serious issue in Nigeria and Iraq, for example, where 40-50 percent of the total oil produced is illegally smuggled and traded in the black market. This is easy to do when extraction figures are not monitored and disclosed, and citizens are not aware of fraud. Strong transparency measures will be required to guarantee that our future oil and gas revenues are fully accounted for.”
An energy independent country in the end
Explorations could transform Lebanon into an exporter of natural gas, with the benefits set high, for a country with one of the highest debt rates in the world. Lebanon can access more reliable electricity supplies, improve its public finances, trade balance and its GDP.
The production of gas will eventually lead Lebanon to energy independence, which would transform the country's fiscal and economic dynamics.
“If the estimates are real, in the scenario where we can extract gas and get the revenues, the benefits will be enormous. The outlook of the economy will be completely changed,” says Ghobril. “We will stop importing our energy needs which will reduce the balance of payment benefits, reduce the public debt, increase foreign currency reserves, we will have money for public expenditure, construct infrastructure for household gas usage, but unfortunately the oil and gas business is not very labor intensive sector. It is more capital intensive sector,” he adds.
Ghobril believes that revenues from oil and gas will create a construction boom in terms of hydrocarbon related infrastructure like ports, pipelines, and compounds for workers, but real estate, especially the residential sector will grow indirectly. “When GDP per capita is increased, obviously the ability of consumers to buy will increase, and you would expect demand for real estate because people will be able to afford it,” he says.
The benefits are not only economic says Sassine, where potential revenues can be used to reduce the public debt and invest in other sectors of the Lebanese economy. “Lebanon can potentially become energy independent as we import today about 95 percent of our energy needs. Gas discoveries can also help Lebanon move away from its expensive and polluting fuel-oil powered electricity generation to a gas fired power generation. Given that gas is considered to be a bridge fuel for renewables, it could potentially enable Lebanon to develop more efficiently its renewable energy resources, leading to environmental benefits down the line,” says Sassine.
Establishing an oil and gas industry in Lebanon will also create jobs for local Lebanese and draw on the expertise of many Lebanese expatriates working in this industry, and adjacent sectors. “However,” says Sassine, “Lebanon needs to pay more attention to the negative impact of the oil and gas industry. If not well managed, and corruption is not controlled, oil and gas can turn from a blessing to a curse. Lebanese policymakers need to pay special attention to avoiding the fate of countries like Nigeria, Sudan, and Angola. We need to incorporate lessons from the successes and failures of other resource-rich countries, and set up the right laws and regulations to efficiently govern our oil and gas sector. Part of developing a healthy oil and gas sector will need to include Lebanese citizens as active participants in the process and keeping them informed of developments,” he underlines.
Where will the money go?
According to the MoEW, the revenues from the production and sale of the gas will be shared between the companies and the state of Lebanon according to the exploration and extraction agreement. “The Lebanese share will be kept in a sovereign fund not to be touched,” says the source at the Ministry. “It’s set for future generations and not for paying the public debt, which will be paid as the GDP grows due to the impact of the oil and gas on the economy,” he adds.
But actually this fund hasn’t been created yet. The law stipulates the formation of such fund, “but we don’t have a separate law for the fund yet. It is not clear how the fund will be governed and by whom,” says Takieddine. “It is suggested that the money will not be included in the balance sheet of the government. This is good, but how the proceeds of the fund can be used, it is not clear yet,” he adds.
Sassine noted that there have been no official decision or policy earmarking funds for future needs yet. “Some policymakers have been debating the establishment of a sovereign wealth fund but it remains to be agreed upon and passed in parliament,” he says adding that, “the government wants to use the oil & gas wealth to reduce the public debt to 60 percent of GDP – from the current 135 percent – before fulfilling other expenditures. Ideally, the state is responsible for saving part of the oil revenues for future generations. And a stabilization fund would also need to be set up to cushion the economy and avoid deep cuts in government oil revenues in case of sharp declines in international oil and gas prices.”
Varouj Tenbelian
5 December
