This article was written for the February 2017 edition of Executive Magazine.
On January 4 2017, the Lebanese government approved what many observers have been waiting for since March 2013: two oil and gas decrees, without which the country’s first licensing round could not proceed. One delineated offshore blocks, another detailed the model exploration and production agreement and set out the tender protocol.
To signal its determination, the government passed the decrees on the first meeting since gaining Parliament’s confidence. This was a remarkable achievement on the surface, and marketed as such by the government. For others, it was perceived as a long overdue fix.
With the decrees ratified in late January, the Ministry of Energy (MoE) announced which blocks will be open for bidding, as well as a roadmap outlining the steps for Lebanon’s long-delayed offshore licensing round. Block one in Lebanon’s northern waters, block four in the center, and blocks eight, nine and ten in the south will be open for exploration companies to bid on.
According to the roadmap, as Lebanon moves toward accepting bids it will first allow new companies to pre-qualify. That process will take around 60 days, from the February 2 to March 31. Companies that had already pre-qualified back in 2013 remain eligible, provided they still fulfill the criteria. All eligible companies will be announced on April 13. Bids are due by September 15, and by mid-November 2017, the cabinet is scheduled to sign exploration and production sharing agreements with the winning bidders.
The government is also expected to examine the Petroleum tax law and submit it to the Parliament for final approval. Hopefully, the political class will not be tempted to drag the process out. It should be noted that Parliament is in session until March 20. Actual gas or oil production will depend on how successful the companies’ exploratory work is. In case of a commercial discovery, the consortium must submit a development plan that is subject to approval by the government. If granted, the consortium can proceed with development and production.
The pre-qualification round in early 2013 exceeded all expectations. Fifty-two oil and gas companies sought to pre-qualify for Lebanon’s first licensing round. Forty-six of them were successful. But the tender has been postponed five times and was on hold since it was launched in May 2013, due to an incomplete framework. This has affected the initial enthusiasm witnessed in early 2013.
It is essential now to do things right, even if that means taking the time needed. The entire legal and regulatory framework must be complete before inviting companies to place bids, so as not to repeat the same mistake made in 2013. A competitive fiscal regime, in addition to regulatory and fiscal stability are key to gain back investors’ confidence.
This must be coupled with targeted campaigns to promote Lebanon’s potential among investors, including organizing roadshows and official participation in major oil and gas events around the globe.
Lebanon retains an interesting energy potential. This largely explains the success of the pre-qualification round in 2013. Future interest will depend on two things: global market conditions, and what we offer investors. There isn’t much we can do to affect the first, but there are some things we can do to attract investors – Finalize our legal and regulatory framework, offer a competitive fiscal regime, and actively and aggressively promote our energy potential where it matters.
Beyond the sector, it is important for the government to address and at least contain – if tangible progress is too ambitious at this stage – two impediments that have long hindered investments in Lebanon: corruption and the difficulty of doing business. Currently, Lebanon ranks poorly on both fronts, but the government is determined to improve conditions for doing business in Lebanon. A new portfolio has been created in the current cabinet charged with combatting corruption, and an anti-corruption institution is also being considered. The government has also announced its request to join the Extractive Industries Transparency Initiative (EITI), a global standard promoting transparency. Time will tell how effective these measures will be. At times, country risk might be high, but that does not entirely conceal Lebanon’s energy potential. Oil and gas companies are used to operating in areas where political and country risks are high.
After a few difficult years for the industry, with a sharp decline in oil prices that has affected appetite for exploration in certain areas, including the Eastern Mediterranean, a soft price recovery is generally expected by analysts in 2017. Although exploration and production spending is expected to increase by 7% in 2017, according to a report by Barclays, offshore exploration and production will still suffer (though on a smaller scale compared to 2016), ahead of a more positive outlook for 2018. On the other hand, with more and more LNG projects coming online, the LNG glut is expected to continue until the early 2020s, likely keeping gas prices low. A challenge for companies operating costly and complex projects.
Lebanon will also have to compete with other players in the Eastern Mediterranean that are several steps ahead. The third licensing round in Cyprus attracted six bids from eight companies, drawing some of the biggest names in the industry – no doubt lured in by the discovery of Zohr in Egyptian waters, not far from the three Cypriot blocks on offer. A consortium made up of Eni and Total was preselected for negotiations for exploration rights in Block 6; Eni for Block 8, and ExxonMobil and Qatar Petroleum for Block 10. An exploration license will be awarded if negotiations are successful. Final results are expected in the first quarter of 2017.
Israel’s first offshore licensing round, which opened in November 2016, is also an opportunity to assess foreign companies’ interest in being involved in the region at this stage. Twenty-four blocks are on offer. They do not include northern blocks running along the Lebanese-Israeli borders. The bid round will close in April 2017 and results are expected three months later. Beyond assessing foreign oil and gas companies’ interest in the Eastern Mediterranean, the Israeli tender might also be of relevance to Lebanon, as, in principle, companies operating in Israel cannot operate in Lebanon.