Oil and gas: Beirut’s blessing or curse?

As its first offshore licensing round gets under way, Lebanon has high hopes of striking oil or gas in its waters, but any success could prove problematic. Published in MEED, 13 March 2013

If ever there was a country that would test the theory of the ‘curse of oil’ – the idea that plentiful natural resources can generate more problems than solutions – it is surely Lebanon. The country has long been beset by sectarian divisions and conflict. Throwing oil into the mix could easily rekindle some old fires or even start some new ones.

Not that such risks will dissuade anyone from looking for hydrocarbons, and the government is now moving ahead with plans to explore for oil and gas, both onshore and offshore. The initial focus is Lebanon’s 22,730 square kilometres of Mediterranean waters. On 15 February, the recently formed Petroleum Administration launched the country’s first offshore oil and gas exploration round.

Until now, no one has looked very hard for hydrocarbons in Lebanon. Between 1947 and 1967, a total of seven onshore wells were drilled, but the exploration licences were cancelled by the government when civil war broke out in 1975. Although there have been a number of offshore seismic surveys conducted in the decades since then by Norwegian firms Petroleum Geo-Services and Spectrum among others, no exploration wells have ever been drilled offshore.

Strong evidence of oil and gas

However, there is some evidence to suggest that there could be meaningful amounts of oil and gas hidden under Lebanon’s section of the Mediterranean. The US Geological Survey (USGS) has estimated that the wider Levant Basin Province, which covers the waters of Cyprus, Gaza, Israel, Lebanon and Syria, has as much as 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of recoverable natural gas. That is not the same as economically-recoverable oil and gas, as some of the reserves may prove to be too difficult or expensive to extract, but it still points at the huge potential of the area.

If these estimates prove to be accurate, it would mean that the region has more proven oil reserves than Algeria which, according to figures from UK oil major BP, has 1.5 billion barrels of proven oil reserves. It will also hold a similar amount of natural gas as Iraq, which has 127 trillion cubic feet of proven gas reserves.

Backing up those USGS projections, neighbouring Israel has made a number of significant discoveries in its offshore waters in the past five years. Significant natural gas reserves were announced in the Tamar and Dalit fields in 2009 and the Leviathan gas field was discovered the following year. Cyprus also announced that it had discovered natural gas in the waters off its southeast coast in late 2011.

The US’ Noble Energy, which has an operating interest in the Israeli and Cypriot fields, estimates that the Dalit field holds some 500 million cubic feet of natural gas, with a further 9 trillion cubic feet in the Tamar field, 17 trillion cubic feet in the Leviathan field and 7 trillion cubic feet in the Cypriot field.

As a result of all that, optimism is high within Lebanon’s government that they could soon join the roll-call of oil and gas producing nations. In a speech at Georgetown University in Washington on 2 October 2012, Energy & Water Minister Gebran Bassil suggested that the strength of the geological data that the country has already amassed and assessed means that “we’ve reached a level of accuracy allowing a 25 per cent probability in drilling success. This should shorten and reduce the exploration phase and speed up the pace towards first production”.

Lebanon’s energy imports

There is no doubt that Lebanon could do with making a discovery. The country has no domestic energy sources and, according to the Geneva-based World Trade Organisation, fuel imports into Lebanon cost the country some £Leb3.67bn ($24.4m) in both 2010 and 2011. As the ongoing war in Syria has again demonstrated, Lebanon’s small size makes is very vulnerable to disruptions in its trade routes, something that Bassil has acknowledged.

“My country has been an energy importer as far as modern history has recorded,” he said in his speech in Washington. “Our energy bill stands today at 15 per cent of our gross domestic product (GDP). Our strategic location on the east Mediterranean has been a blessing and a curse at the same time. Maritime routes to the west and pipelines to the east have insured our supply in peace time and have threatened our energy security in times of crisis.”

Under the recently launched exploration and production licensing round, companies have until 28 March to submit their prequalification packages, either as an operator or non-operator. Any company wanting to be considered for an operating licence will need to have at least $10bn in assets and already operate at least one offshore oil or gas facility in water depths of more than 500 metres. Non-operators have to have assets of at least $500m. Energy & Water Ministry will publish the list of prequalified companies on 18 April.

Companies that are successful will then be able to bid for the exploration and production blocks. Contracts for an exploration phase of up to 10 years and a production phase of up to 30 years will be on offer. The bidding process is due to last from May to November, with the evaluation of bids completed by January 2014 and awards made the following month.

Ambitious timetable

The ministry has estimated that drilling could start before the end of 2015, followed by a development phase in 2016 and the start of production the following year. Others, however, suggest that such a timetable is far too ambitious and 2020 would be a more realistic target.

“Until the resources are determined to be economically recoverable, we need to be extremely cautious,” says Nassib Ghobril, chief economist at the local Byblos Bank.

“We are unlikely to have a clear cut answer before 2020 and therefore we won’t start seeing concrete hydrocarbon dividends before then. Any shorter timetable is too optimistic. That is without factoring in the domestic political divisions and geopolitical tensions that could delay or disrupt the process.”

Certainly, the recent history of Lebanon’s attempts to develop its hydrocarbons potential do not give much reason for confidence. It took many years for parliament to approve the Offshore Petroleum Resources Law, which it eventually did in August 2010. Even after that, it was not until January 2012 that the cabinet ratified the law and it took until November of that year before the cabinet could agree on the six board members of the Petroleum Administration.

The new body is spit into six units, with the position of committee leader rotating every year among the six members. However, the government was quickly forced to backtrack on the salaries it would pay to these six, following criticism from both inside and outside the cabinet. Among the critics was Ghazi Youssef, an MP for the Future Movement, who said the proposed monthly salaries of £Leb35m ($23,000) were far too high.

“These high compensations are not justified in comparison to the compensations received by the high officials in this field,” he told the Voice of Lebanon radio station on 27 December. The government subsequently cut the proposed pay package to £Leb25m a month.

If and when oil or gas does start flowing it will offer many more opportunities for disputes to emerge, both between Lebanon’s politicians and with its neighbours.

Domestically, local politicians have not been able to agree on a budget for the past seven years, so any surge of oil or gas revenues could prove difficult to manage, to say the least. “There is no guarantee whatsoever that this issue will be shielded from domestic political divisions,” says Ghobril.

“Much less significant economic, financial and administrative issues have been paralysed for years because of the sharp political divisions and polarisation.

“With all this irrational and premature expectation about hydrocarbon discoveries and revenues, politicians have even less incentive to reform. Some are already day-dreaming about Lebanon becoming an oil and gas exporter like Kuwait or Qatar.

“There are some politicians who are already making plans on how to spend the revenues. The dividends from potential hydrocarbon resources remain highly hypothetical until further notice.”

Border disputes

Internationally, Israel and Lebanon disagree about exactly where their maritime border lies, which could yet provoke renewed hostilities between the two countries if fresh finds are made in disputed territory.

Israel is not a signatory to the UN Convention on the Law of the Sea, which rules out the most obvious international forum for resolving any potential problems. In addition, the two countries do not have diplomatic relations with each other, which effectively blocks any clear route to a bilateral deal.

While the offshore licensing round appears to offer the greatest potential, Lebanon is also keen to carry out more exploration on land too. On 21 February, the Energy & Water Ministry announced a deal with Spectrum to acquire a further 500 kilometres of 2D data in onshore areas of Lebanon that had not been covered by surveys carried out in 1947 and 1968.

If any of this activity leads to significant finds of oil or gas then it could have a transformative effect on Lebanon’s economy, helping to narrow its fiscal and trade deficits and reduce the reliance on energy imports.

In a research report published in late 2012,  the local Bank Audi suggested that a significant hydrocarbons find could prompt several years of double-digit growth, leading to a rapid expansion in output levels and per capita income.

But for all those benefits to accrue, it will also require the country’s political class to act in a selfless, cooperative way that has often eluded them in the past.

In any case, it will be several more years before it is clear whether they have anything to get excited about.