[Oil & Gas Updates]: Weekly Roundup 14/01

Lebanon – Cyprus:

The President of Cyprus, Demetris Christofias, paid an official visit to Lebanon on 09-11/01 (arriving late in the evening of Wednesday 09/01 and leaving in the morning of 11/01), responding to an invitation by the President of Lebanon Michel Slaiman following his official visit to Cyprus in February 2010.

Christofias was accompanied by an important delegation which included: the Minister of Foreign Affairs Erato Kozakou-Marcoullis, the Minister of Commerce, Industry and Tourism Neoklis Sylikiotis, the Minister of Defense Demetris Eliades, the Head of the Defense Policy and International Relations Directorate in the ministry of defense Georgios Georgiou, and the Director of the Office of the President of the Republic Christos Christofides. The delegation reflected what both countries sought to highlight before and throughout this visit: that energy affairs are just one of many important issues for both countries.

This is the latest of a series of visits by Cypriot officials to Lebanon recently, including the Minister of Defense Demetris Eliades (22-23/09), ahead of the Argonaut 2012 international military exercise that was held in Cyprus, with the participation of the Lebanese Armed Forces [Link in French], Parliament Speaker Yiannakis Omirou (3-5/12) and the Director of the Energy Service Solon Kassinis (3-4/12), who announced during his visit that his country offered to mediate between Lebanon and Israel to settle the maritime border dispute.

Regarding energy affairs, the purpose of the visit was two-fold: to boost bilateral cooperation in the exploitation of offshore resources, and to speed up the delimitation of their maritime borders, a dossier that also includes a Cypriot attempt to mediate between Lebanon and Israel to settle their maritime border dispute. The Cypriot leader sought to downplay the issue of border delimitation, stating that the dispute is limited to Lebanon and Israel and that there is no problem between Lebanon and Cyprus [although the Israeli-Cypriot maritime border agreement was concluded in December 2010, ignoring the geographical coordinates that Lebanon had submitted to the UN in July and October 2010, defining the western and southern limits of its Exclusive Economic Zone]. According to Lebanese daily Assafir, Lebanon did not respond favorably to the Cypriot offer to manage negotiations with Israel in order to rectify the Cypriot-Israeli agreement, since Beirut “does not negotiate with a State which it does not recognize,” leaving the matter in the hands of the US, given its “influential role in the UN Security Council,” in yet another setback for European diplomacy (Cyprus was, until 31/12, holding the presidency of the Council of the European Union).

On a more positive note, the Lebanese and Cypriot leaders agreed to boost bilateral cooperation regarding the exploitation of natural resources. During his visit, Parliament Speaker Yiannakis Omirou insisted on bilateral cooperation, especially in the exploitation of common gas fields. No decision has been taken during President Christofias’ visit, but there is a firm conviction from both sides that cooperation in this field should be strengthened. The Cypriot exploration blocks that are adjacent to the Lebanese borders are blocks 3, 9 and 13. The latter is the smallest block and did not receive any bid in Cyprus’ second licensing round. The government is currently negotiating with an Italian-Korean consortium made up of ENI and KOGAS for exploration rights in Block 3, and Block 9 (after negotiations with the French-Russian consortium, made up of Total, Novatec and GPB Global Resources BV, over Block 9 were suspended), which might indicate a potential interest from these two companies in Lebanese gas exploration blocks along the Cypriot borders (knowing that Lebanon did not define its offshore blocks yet). It is worth to note in this regard that Block 12, adjacent to the Israeli borders, was awarded to the American company Noble Energy (which later transferred 30% of its rights to Israel’s Delek Group), all of which are operating the adjacent Leviathan gas field in Israel.

Several agreements were also signed during Christofias’ visit, including: Agreement on the Mutual Protection of Classified Information, Memorandum of Understanding between the Ministry of Commerce, Industry and Tourism and the Lebanese Ministry of Industry on industry matters, and Memorandum of Understanding between the Cypriot and Lebanese Defense Ministries on defense and military cooperation.

Besides his meetings with President Michel Slaiman, Speaker Nabih Berri, PM Najib Mikati and a number of ministers (including the Minister of Energy and Water, the Minister of Foreign Affairs, the Minister of Defense, the Minister of Justice, the Minister of Industry and the Minister of Telecommunications), the President and his delegation also held a meeting with the business community. A meeting was organized by the Beirut Chamber of Commerce, Industry and Agriculture, in cooperation with the Cypriot Embassy and the Cyprus Chamber of Commerce and Industry, which focused on strengthening bilateral relations, particularly in light of offshore gas discoveries in both countries. Unlike Omirou, the President did not meet with opposition leaders.

Suggested reading list:

Gas in the eastern Mediterranean, Drill, or quarrel?, The Economist, Jan 12 2013.

Cyprus and Lebanon deepen ties, Cyprus Mail, Jan 11 2013.

Cyprus Helping with Israel-Lebanon Maritime Dispute, WINEP, Jan 10 2013.

Beirut, Nicosia plan coordination in bid to expedite gas exploration, The Daily Star, Jan 11 2013.

ترسيم الحدود البحرية بين لبنان وقبرص – تابع: مقاربة استباقية للحلّ السلمي بديلاً من التهديد العسكري، النهار، 2013-01-10.

ترسيم الحدود البحرية بين لبنان وقبرص – تابع، آليات وتريليونات من الموارد تنتظر الضوء الأخضر، النهار، 2013-01-11.

Lebanon – Offset:

At the legislative and regulatory level, the regime governing oil and gas activities that is (still) being laid out has so far neglected to address what should be an important element accompanying foreign investments: offset agreements. Borrowing from a common practice in the defense industry, offset agreements can be viewed as a form of counter-trade, to help the country improve its balance of trade. However, the practice is not limited to buying products from the country a big company is investing in, but goes beyond that and touches on creating partnerships by leaving a positive impact on the host country. The advantages that a company suggests as part of a package-deal are often equally, if not more motivating for the host country than the primary investment, and involves a wide-range of measures that could go from transfer of technology, to funding specialized academies or institutes to build and train local skills, to strengthening the local industry and creating new job opportunities etc. In order to shield them from corrupt practices, offset policies should have a legal base that indicates, among other things, the threshold beyond which there is a request for offset and specifies the extent or the “amount” of offset (in terms of percentage of the contract value).

Lebanon – Energy infrastructure:

The Ministry of Energy and Water is supposed to launch a project to build a 173 Km coastal gas pipeline in 2013, stretching from the northern city of Beddawi to Al-Zahrani, in the south, connecting the major power plants along its way. The project falls within the Ministry’s plan to cut the electricity bill by increasingly relying on natural gas for energy production, instead of fuel, as it is currently the case. The pipeline network will be connected to Floating Storage and Re-gasification Units (FSRU) for treating imported LNG at a later stage. The funding of the project should be detailed by a law that has yet to be adopted by the Parliament. As a result, the construction of the pipeline, which is expected to extend over a period of 28 months, may have to be delayed.