Lebanon Returns to East Mediterranean Gas Game
Gary Lakes
January 2017

Lebanon’s new government dealt the country back into the East Mediterranean natural gas exploration game on January 4 when it approved two long-delayed decrees needed to proceed with the stalled 2013 offshore licensing round.

Meeting for its first time since passing a parliamentary vote of confidence in mid-December last year, the government of Saad Hariri passed one decree endorsing the delineation of Lebanon’s 10 offshore blocks as devised by the Lebanese Petroleum Authority and another concerning the model licensing agreement and tendering procedure. Both decrees were necessary for Lebanon to set a closure date for receiving bids, but their approval will not lead to the automatic resumption of the round. Having taken this step, the government now seeks the passage of a new petroleum tax law before the licensing round is fully revived.

Lebanon launched a pre-qualification round in February 2013 in which 12 international oil companies – among them ExxonMobil, Chevron and Shell – were selected as operators and another 34 okayed as consortium partners. The round was officially opened in May of that year with a closing date tentatively set for the following November.

In the meantime, the government of Najib Miqati resigned in March 2013 and in its caretaker capacity did not have the authority to approve the decrees. Subsequently, the government formed by Tammam Salam in February 2014 was unable to secure approval due to Lebanon’s numerous internal political differences. The situation was complicated further when Michel Suleiman’s term as president expired in May 2014.

Political differences prevented parliament from electing a new president until October 2016, when Michel Aoun was elected during the parliament’s 29th attempt to hold a quorum. Saad Hariri, son of assassinated former prime minister Rafiq Hariri, shortly thereafter agreed to form a government, his second time as serving as the country’s prime minister.

The government’s failure to pass the decrees proved frustrating to the qualified bidders and local businesses seeking a role in the new economic sector. Initially there was considerable interest in the Lebanon offshore, especially in light of the 35 trillion cubic feet of gas (991 billion cubic meters) that had been discovered offshore Israel, and the 4.5 tcf (127 bcm) Aphrodite discovery offshore Cyprus, but repeated postponements of the closing date left qualified companies believing the emerging Lebanese energy sector would be a non-starter.

During the sixth postponement of the closing date in August 2014, then Energy Minister Arthur Nazarian said the closing date for the round would be six months after whenever the government endorsed the two decrees, effectively suspending the round indefinitely.

But that will not be the case now. The passage of a new petroleum tax law, in which the government will look to secure a 25% tax on profits, will first be reviewed by the cabinet and then presented to the parliament for approval. The cabinet is expected to take three weeks to review the law, but there is no guarantee of quick passage through parliament despite the growing momentum now that the government has made this progress.

Lebanon’s new Minister of Energy and Water Cesar Abou Khalil, a member of Aoun’s Free Patriotic Movement and former advisor to the two previous energy ministers, said last week after the government approved the decrees that Lebanon would tender five of its 10 blocks when bidding reopened. He did not identify those blocks, but he told a press conference that it is possible that exploration contracts could be signed before the end of this year and that drilling might begin in mid-2018. This could be possible due to the fact that Lebanon has had extensive 2D and 3D seismic work carried out within its 22,000 square kilometer exclusive economic zone (EEZ). According to the Lebanese government, there is a 50% chance that its EEZ contains up to 96 trillion cubic feet of natural gas and 865 million barrels of liquids, but at this point this figure is regarded as speculation. Only drilling will tell. Furthermore, it will likely be the mid-2020s before an energy industry is producing gas or liquids, but considering the rate at which neighboring Israel and Cyprus have been moving, Lebanon will not be that far behind.

A source close to the Lebanese Petroleum Authority told this correspondent that a new pre-qualification round is expected to be held in parallel with the reopening of the licensing round. According to the source, those companies already qualified will not have to re-apply for qualification but some that were qualified as partners may wish to apply for operator status. A determination on qualification will be made regarding new participants after their bids have been received.

“Bidding will be carried out over a six months period,” the source said, “so the idea is to carry out the pre-qualification evaluation of companies new to the process during the six-month bidding timeframe, or it can be a post-qualification option.” He added, “a number of new companies have shown interest.”

Lebanese parliamentary elections are due to be held in May, but the source said that the Hariri government is planning to reopen the licensing round before then and that the election should not interfere with the procedure. The post-election government is expected to look very much like the one that has just taken office.

One other problem facing Lebanon’s nascent energy sector is a dispute with Israel over an 854-square kilometer wedge of offshore territory along their common maritime border that effects Lebanon Blocks 8, 9 and 10. Israel has awarded no exploration licenses within the disputed area. The US has attempted during the last several years to negotiate a compromise over the territory, but with no working government or president in office, talks with Lebanon on the issue were essentially put on hold.

Like the passage of the decrees and a new tax law, it would be in Lebanon’s best interest to resolve the maritime dispute before the licensing round opens. If Beirut should choose to tender any three of those blocks, it could find a reluctance from participants to bid for the licenses, even though the seismic data shows them to be highly prospective. Given the fact that the two countries technically remain at war, compromise might not come easy. Yet both Lebanon and Israel well know that war is not a healthy environment for emerging, or even established, energy sectors. There are plenty of examples throughout the Middle East and North Africa that prove this.