Lebanon’s second licensing round: Lessons learned and the case for stability

Preparations for the launching of Lebanon’s second offshore licensing round have begun. The Lebanese Petroleum Administration has published a tentative timeline for the tender, which will be officially launched by the end of 2018. The process, including the pre-qualification phase, will extend over a period of one year.

The second licensing round is scheduled to start in January 2019 with the opening of the pre-qualification round. The legal, technical, commercial and QHSE criteria might differ from those imposed during the first licensing round in 2013. Given that the initial criteria were deemed too strict at the end of the first bid round, we might see some loosening in the second round. According to the 2010 Offshore Petroleum Resources Law, interested companies need to pre-qualify, either as operators or non-operators, to be eligible to place bids when the tender opens. Changing this prerequisite would require amending the 2010 law. In addition, and although the 2013 criteria were strict, a loophole was voluntarily inserted to allow companies that did not meet the criteria to qualify, if they partnered with a company that did. This is how a number of recently-established and “well-connected” Lebanese companies, with no prior petroleum activity, managed to qualify for the tender in 2013. None of them were able to place bids when the tender resumed in 2017, for various reasons. With a more robust civil society landscape in 2018 (including NGOs, media and opposition parties) compared to 2013, all eyes will be on that pre-qualification decree – if indeed there is going to be a new one – to make sure a similar loophole is not inserted again. It should be relatively easy for authorities to implement and earn credit for this reform. Some of these companies, though, are one step ahead of the authorities and civil society and have started consolidating their “petroleum activity”.

Offshore petroleum licensing timeline

The results of the pre-qualification round will be announced in May 2019. Pre-qualified companies will have six months, between May and October 2019, to prepare and submit their bids, and exploration and production agreements are expected to be signed by the end of 2019.

The process is designed in a similar way to the first offshore licensing round. But the first licensing round did not go as originally planned. It is important to recognize the main obstacles, at the organizational level, that hindered the first bid round in order to avoid repeating the same mistakes. The authorities, mainly the Ministry of Energy and Water and the Lebanese Petroleum Administration, this time around have a precious advantage over their mirror self in 2013: six years of first-hand experience filled with successes, drama and disappointments, and a better understanding of the dynamics that could obstruct their endeavors.

The most obvious obstacle when the first bid round was announced in 2013 was to launch it despite an incomplete legal framework. There are many political reasons that explain why it took over four years to close the tender, but the straightforward answer is missing regulations and legislation. The absence of three basic documents – a decree defining offshore blocks, a decree specifying the tender protocol and model EPA, and the petroleum tax law – made it impossible to pursue the tender, which had to be repeatedly delayed. Obviously, this lesson had not been learned by 2017 when the tender resumed after a four-year hiatus. At the beginning of 2017, the government approved the first two of these basic documents and announced the resumption of the bid round. The absence of the third document, the petroleum tax law, meant that the closing of the tender had to be extended once more until the parliament had approved the law. Fast forward to 2018, since there is an intention to amend some of the documents governing the second licensing round, ideally, it would be good to have a stable framework, if not on time for the pre-qualification round (logical and preferable), at least by the time companies are invited to submit their bids.

In fact, stability is preferable across the board. This includes the choice of blocks to put up for bidding. When the first bid round was launched in 2013, blocks 1, 4, 5, 6 and 9 were open for bidding. However, when the tender was resumed in 2017, blocks 1, 4, 8, 9 and 10 were put on offer. This confused and discouraged some of the companies that had initially been genuinely interested in the tender. In addition, four out of the five blocks on offer included disputed areas. Awarding Block 9 to a Total-led consortium was indeed a feat that few people expected, given that international oil companies typically are extremely wary of shaky legality. But this should not be taken as the norm. This does not mean that blocks along disputed borders should not be open for the tender. Rather, it means that more hassle-free options should be on offer alongside them.

Institutional stability (or continuity) is also essential. The LPA’s mandate expires in December 2018, the month that will supposedly see the official launching of the second licensing round. The lack of transparency and communication over the issue is disconcerting. The appointment of a new board is increasingly unlikely if we take into consideration that the selection process could extend over many months. The law allows renewing the mandate of the current board once, and given time constraints, this option appears to be increasingly likely. But this requires a political decision. Will it come on time to allow operations to proceed smoothly, or will there be a period of uncertainty?

On the marketing front, the process between 2013 and 2017 left much to be desired. At the time, some of the events and venues chosen to promote the tender were in fact modest platforms with limited outreach or visibility.

Lebanon opted to hold the second licensing round before the release of the results of initial exploratory activity—which will be conducted by the Total-led consortium toward the end of 2019—despite initially announcing that the second round would be held once these results were available. This is neither good nor bad in itself, as it is impossible to know beforehand what the result of next year’s drilling will be and so it is impossible to know if they will have a positive or negative impact on the tender. But it shows the uncertainties that sometimes characterize the decision-making process, announcing one thing and then doing another. It appears that one of the reasons for launching the second bid round earlier than expected was the intention expressed by other countries in the region to hold licensing rounds toward the end of 2018 and the beginning of 2019. Stability is also preferred at the rhetorical level. Sometimes, when there is no clear-cut decision, saying less is more.

Over the past few years, there has been a tendency to prefer big announcements over a more pragmatic and prudent approach. This included premature announcements of the launching of the first licensing round – despite an incomplete framework – and of key milestones afterwards. Probably the key takeaway from the first licensing round – from the local perspective and the handling of the tender – is that there is an order for things: Hopefully, both the legal and institutional frameworks will be complete and fully functional by the time Lebanon officially launches the second licensing round. Stability and the ability to anticipate the regulatory framework are vital for the sector and are the first key to the success of a licensing round.

This article was published in the September 2018 edition of Executive Magazine.

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