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Lebanese Centre for Policy Studies conference

Robin Mills Featured Speaker at The 6th Gulf Intelligence Energy Markets Forum on September 22nd, 2016, in Fujairah, United Arab Emirates

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Lebanon should relax bidding conditions to benefit from any deepwater gas finds

 

Snow fell across Lebanon over the New Year, and power cuts plunged towns in the Bekaa valley into darkness. Syrian refugees in Akkar huddled in their tents. Meanwhile, as Egypt and Israel forge ahead with developing their offshore gasfields, the inviting Mediterranean waters seem to hold the elusive solution to the country’s energy and economic woes.

Lebanon thinks the time has come for its own deepwater gas wealth. The election in October of a new president, Michel Aoun, after an interregnum of more than two years, has permitted the passage of two crucial decrees enabling exploration bids. Eni’s giant Zohr find off Egypt, less than 300 kilometres from Lebanese waters, has raised optimism about the area.

 

Beirut has divided its offshore into 10 blocks. Five will be offered in the initial round, with a deadline in September – numbers 8, 9 and 10, along the disputed maritime border with Israel, block 1 on the Syrian frontier in the north, and block 4 in the middle.

The bidding conditions are stringent. Applicants to lead a consortium have to have US$10 billion of assets and to operate at least one deepwater petroleum project. Qualification for a lesser role requires US$500 million of assets and established oil or gas production.

 

    Companies that qualified for the last, abortive round in 2011 include some impressive contenders – Shell, ExxonMobil, Chevron, Statoil, Total, Eni and others. Qualified non-operators featured the UAE’s Dragon Oil, Crescent and Dana Gas alongside a slew of local, Japanese, Russian, Turkish and other companies.

    But Lebanon’s ambitions face three serious problems: low oil and gas prices; politics; and the difficulty of marketing gas.

     

    The business environment is very different from 2011, when the world’s largest oil companies were sufficiently intrigued by Lebanon’s potential to qualify. Then, global LNG prices averaged about $15 per million British thermal units; today, even helped by high winter demand, they are at about $9 and a further glut is on the way.

    With the steep drop in oil prices, several of those previously qualified have gone bust, been taken over, or their assets have declined below the required limit. Others, conserving capital or concentrating on shale in North America, will not be interested in exploring hitherto untested waters up to 2,100 metres deep. Some Lebanese politicians act as though they can already spend the gas revenues; there is a real risk there may be nothing to find.

     

      The continuing war in Syria does not encourage investors to come to the region. Even more seriously, Lebanon has lost credibility after the long political stalemate that stymied the last bid round. In Israel, gas production was severely delayed by changes in tax and monopoly rules, and populist pressure.

      Oil companies will ask if they will invest millions of dollars in exploration, perhaps hundreds of millions in drilling wells, only to have development prevented by gridlock in the factionalised Lebanese politics. They will also be worried about the disputed borders of all the blocks except No 4.

       

      Lebanon is a small gas market, yet only large offshore finds will be commercial. Pipelines to take surplus gas to consumers in Turkey will have to cross the disputed waters of Cyprus, which wants to export its own gas, or across the seabed of war-torn Syria. Or perhaps, in partnership with Cyprus, gas could flow south to Egypt.

      Lebanon needs companies with the financial and technical strength to take on these challenges. But at the same time, it should not raise the bar too high and discourage hungry, capable mid-size players. The more competitive the bidding, the more likely it is to get a good deal and move quickly on to discovering whatever resources its waters hold. Only if it can then negotiate squabbling local factions and the intricacies of regional geopolitics will the residents of Lebanon gain some benefits.