[Oil & Gas Updates]: Weekly Roundup 11/02

Lebanon – First licensing round:

In its 06/02 meeting, the Lebanese cabinet adopted the much-awaited decree specifying the conditions for qualifications for companies wishing to bid for an offshore exploration license, in a move that shows the government is determined to press ahead and not stall the process, as it was feared last week when the cabinet failed to issue the relevant decree (see “Lebanon – First licensing round” in our 04/02 Roundup), but in line with our initial assessment that it is in the interest of the current political class to move forward in this sector. The decree sets the bar high for the operating company. Among the conditions it imposes, the operating company must have $10 billion of assets and experience in drilling in waters more than 1500m deep. Energy Minister Gebran Bassil is confident that these measures will instill confidence in the way the government is managing the issue, and will strengthen the quality of the tender by shunning companies that do not meet these requirements. He went as far as saying that the country’s first licensing round will attract companies of a higher caliber than those that placed bids in Israeli and Cypriot tenders.

According to previously set deadlines, a list of pre-qualified firms is expected to be announced by 31/03 and these can place their bids starting 02/05. Over 40 companies have reportedly bought the data from Spectrum ASA, which conducted 3-D surveys off the Lebanese coast. But it remains to be seen how many will actually be placing bids in May, bearing in mind that Lebanon has yet to define the blocks that will be placed for bidding and their coordinates.

Cyprus – Second licensing round:

On 06/02, Cyprus issued two licenses to France’s Total for offshore hydrocarbon exploration in Blocks 10 and 11 (to the west of Block 12 where a major gas discovery was made by US-based Noble Energy), concluding a particularly successful second licensing round, after delivering three licenses on 24/01 to a consortium made up of ENI (Italy) and KOGAS (South Korea) for exploration rights in Blocks 2, 3 and 9. The strategic importance of signing agreements with three major companies should be highlighted, as Cyprus looks to secure its rights in the face of Turkish threats, and could be a source of inspiration for others in the region. This is not to say that Cyprus is ignoring the security and military dimension, and indeed Nicosia seems determined to revamp its navy to ensure the security of its EEZ (see our 08/02 analysis: “Méditerranée – Chypre: Le contrat Total profitera-t-il aux industriels français de la défense à Chypre?”).

Lebanon – Strategic reserve:

Energy Minister Gebran Bassil launched a project, on 07/02, to build an oil storage facility in the northern city of Tripoli. Bassil referred to it as a strategic reserve to secure supply and reduce dependency. 38 new reservoirs will be constructed to store oil derivatives, in addition to related infrastructure and pipes. Tripoli might seem like an odd choice for such a strategic project, given the regular violence and the difficulties encountered by the State to ensure security and to control rival armed groups who often resort to violence. But Tripoli is also the site of important energy installations, including an oil refinery [Link in French] and a pipeline originating from Iraq. Tripoli is also one of the most impoverished cities in Lebanon and is expected to be the scene of an intense electoral battle for Sunni leadership, between Prime Minister Najib Mikati (who hails from Tripoli) and his allies on one hand, and Saad Hariri’s Future Movement (FM) and his allies on the other. With this in mind, the news that former FM Prime Minister Fouad Siniora and businessmen close to the 14 March Alliance are also preparing to unveil a major development project in the city, on land reclaimed from the sea, does not come as a surprise.

The long-neglected city is now expected to host two ambitious projects. Whether any of these projects will get to see the light remains to be seen.

Lebanon – Norway:

A Norwegian delegation visited Lebanon and met with Aouni Ramadan, head of the Court of Audit, on 07/02, to discuss possible cooperation in the organization of the nascent petroleum sector, particularly the Court’s oversight role, covering the whole spectrum, from awarding of licenses, to investments all the way to the production phase. Cooperation between Lebanon and Norway in the oil and gas sector dates back to 2007, when they launched the Oil for Development cooperation program to support Lebanon in the management of its potential resources, by assisting in the preparation of a legislative framework and training key personnel.

Lebanon – Country risk:

On 05/02, Bulgaria accused Hezbollah of being behind the bombing that targeted a passenger bus in Burgas on July 18, 2012, carrying mainly Israeli tourists. The explosion killed five Israelis and the Bulgarian bus driver. Hezbollah denied any involvement in the bombing, and the Lebanese PM Najib Mikati immediately declared that his government, which includes Hezbollah members, is ready to cooperate with Bulgarian authorities in the investigation.

This is a new parameter that companies wishing to invest in Lebanon need to take into consideration. Following the Bulgarian accusations, calls for labeling Hezbollah a terrorist organization have multiplied. Until now, the European Union has refused to follow the US lead, and Israeli calls to label Hezbollah as a terrorist organization, and we believe it is unlikely to do so now, unless it finds a more subtle procedure to impose sanctions on the Lebanese group. Previously, the Special Tribunal for Lebanon responsible for prosecuting individuals involved in the assassination of former PM Rafic Hariri submitted four arrest warrants to Lebanese authorities to individuals believed to be Hezbollah members.

Lebanon – Economic prospects:

According to Citigroup, Lebanon faces two possible scenarios if it is to exploit its offshore wealth. A positive scenario, according to which the availability of a cheap domestic  gas source would have a major impact on the economy, particularly the electricity sector and public finances, given the high reliance on energy imports that characterizes the current state of affairs (the energy imports bill accounts for around 25% of total imports, and amounts to roughly 10% of the country’s GDP). However, the Citigroup report does not believe that 2017 is a realistic deadline for the exploitation of offshore resources, given that things tend to take longer the initially planned in Lebanon, and added that 2020 would be more likely.

A negative scenario is also possible. Citigroup warned that excessive delays in the exploration of the country’s resources, whether due to the political deadlock or to a regional crisis, would mean that the benefits will remain beyond reach. It noted that internal political dysfunction has prevented the country from something as basic and important as a national budget in the past seven years and may as well influence the exploitation of the country’s wealth.

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