The impact of Covid-19 on the Lebanese oil and gas sector

The coronavirus pandemic has rattled global oil markets in unprecedented ways. First, the failure of OPEC+ to agree on a collective response to the crisis early March drove a wedge between Saudi Arabia and Russia and threatens to flood the oil market further at a time demand was already faltering. Second, Covid-19 containment measures later in March have led to a global economic slowdown, which translated into a severe drop in energy consumption and demand.

According to Rystad Energy, global oil demand is expected to fall by 4.9m b/d in 2020 to reach 95m b/d (down from 99.9m b/d in 2019), a direct result of the global slowdown in economic activity following the outbreak of the coronavirus pandemic.

This unprecedented collapse in oil demand overtakes the oil price war as the major headline in global oil markets. Goldman Sachs expects demand to fall by as much as 18.7m b/d in April and adds that “a demand shock of this magnitude will overwhelm any supply response”.

Major oil and gas companies such as BP, Chevron, Eni, Exxon and Total have announced major cuts and other austerity measures this week, and the outlook for high-cost producers is grim.

But what impact could the coronavirus outbreak potentially have on the nascent sector in Lebanon over the coming months?

The first deadline looming ahead is the closing date of the second offshore licensing round, for now scheduled on April 30, 2020. Can this date be maintained? The deadline to submit bids was originally set for January 31. It was postponed to April 30 “at the request of international companies” to allow them more time to prepare their applications. Despite considerable expressions of interest throughout 2019, there were also some doubts, at the time of the decision, over companies’ willingness to bid. Unless Energy Ministry officials are firmly confident that a number of bids will be received this time around, it is hard to see how the deadline can be maintained, in light of (1) prevailing global market conditions, which will certainly affect companies’ interest for offshore exploration and (2) the lockdown that Lebanon has imposed in response to the Covid-19 outbreak. The lockdown is in place until April 12, but may well be extended. At the very least, this could mean that application packages cannot be submitted to the Lebanese Petroleum Administration.

For now, drilling operations in Block 4 have not been affected. Despite closing the Beirut airport for most travelers on March 18, exceptions were granted for certain activities, including for crews working on drilling operations in Block 4. Additional complications further down the road are not excluded if the situation continues to deteriorate. Once drilling operations are completed in Block 4, the Tungsten Explorer will head to Cyprus for a series of drillings before returning to Lebanese waters to drill in Block 9 towards the end of the year, if there are no delays. Delays spurred by Covid-19 are not excluded. Some aspects of the work on Block 9’s environmental impact assessment may also be affected. Generally speaking, the coronavirus outbreak and collapse in demand will also reflect on companies’ exploration budget, especially offshore exploration in deep and ultra-deep waters, and their enthusiasm for developing newly discovered fields in high cost environments.

To conclude on a positive note, the steep fall in oil prices is not all bad news for Lebanon. “Dollar-strapped” Beirut will spend less on fuel purchases. The 2020 budget included a cap on Treasury transfers to Electricité du Liban, which threatened more power cuts in 2020. This may be alleviated if prices are lower for longer.

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