Gas Up and Govern

A seismic vessel is pictured off the coast of Lebanon on September 24, 2012. Seismic surveys of Mediterranean waters off Lebanon's southern coast suggest they contain 12 trillion cubic feet of natural gas. (-/AFP/GettyImages) A seismic vessel is pictured off the coast of Lebanon on September 24, 2012. Seismic surveys of Mediterranean waters off Lebanon's southern coast suggest they contain 12 trillion cubic feet of natural gas. (-/AFP/GettyImages)

A seismic vessel is pictured off the coast of Lebanon on September 24, 2012. Seismic surveys of Mediterranean waters off Lebanon's southern coast suggest they contain 12 trillion cubic feet of natural gas. (-/AFP/GettyImages)

Until recently, Lebanon was better known for its frequent blackouts and heavy reliance on imported oil and gas than for its hydrocarbon reserves. Based on a 2012 study, Lebanon’s government estimates that there could be more than 30 trillion cubic feet of natural gas in its offshore reserves—enough not only to end its blackouts, but to transform its flailing economy. And with no proven reserves to its name, exploring those offshore sites has become one of the fragile Lebanese government’s top priorities. But the explorations process has been plagued with delays, first in passing a hydrocarbons law and now in an auction of exploration blocks to gas majors. An auction of exploration rights has been scheduled for August 10, but given that it has been delayed four times due to divisions within the Lebanese government few would be surprised if it were delayed yet again.

“The development of the oil and gas sector is among the top priorities on the current government's agenda,” UK-based energy economist Carole Nakhle told The Majalla. “However, as this government has a short life span, it may not have sufficient time to finalize all the legislation and decrees needed for such a major undertaking,” she adds, referring to the fact that Lebanon is currently led by a caretaker government with a mandate that doesn’t cover much beyond the holding of (also-delayed) general elections later this year.

The Levant Basin, offshore of both Lebanon and Israel, is believed to hold some 1.7 billion barrels of oil and 122 trillion cubic feet of natural gas. In a presentation released in 2012 by Spectrum, a company specializing in seismic imaging, Neil Hodgson described the deposits: “Early success in the Lower Miocene Play offshore Israel has shown remarkable results, discovering >30 tcf [more than 30 trillion cubic feet] of biogenic gas. To the north, offshore Southern Lebanon, we see the same excellent potential—however with some subtle and intriguing differences.” Among the key differences between Lebanon’s potential gas reserves and Israel’s are the thick sands, generally believed to yield good, commercial and developable reservoirs, which, along later 3D scans shows, Hodgson wrote in a February 2013 report, that “offshore Lebanon will be a major new oil and gas province” with “compelling reservoir case, suggesting that exploration drilling should provide good results.”

Yet 3D studies alone cannot prove the existence of oil and gas deposits, which can only be confirmed by exploratory drilling, generally considered a risky process. However, this particular risk seems to be lower in southwest Lebanon. After all, the region is very close to the gas discoveries of the Southern Levant Tamar Reservoir. Tamar, discovered in 2009, is estimated to hold more than 10 trillion cubic feet of gas. It began production last March. Given the proximity of the Tamar field, it is very likely that Lebanese discoveries will result in a similar type of gas, explains a source within Lebanon’s Petroleum Administration, speaking on the condition of anonymity.

“There is a wide spectrum of possible outcomes, depending on the size of potential gas discoveries and more importantly on what the government wants to achieve from the sector and on whether the right legislative infrastructure is in place to reach those objectives,” explains Nakhle, the energy economist.

For years politics, has complicated the management of the country’s potential reserves. The Offshore Petroleum Resources Law passed in August 2010 names the Minister of Energy and Water and the Petroleum Administration as the authorities in charge of the sector. According to the Petroleum Administration source, it is also to be supplemented with two new decrees—still currently under review by parliamentary committees—on tender protocol and model exploration agreements, delineating the fiscal framework of exploration contracts. But that is not all: “When the bidding process starts, it will also need to get the stamp of [approval from] the Minister of Energy before getting the approval of the Council of Ministers,” a process that may take further time, says the PA source.

With Israel already leading the regional hydrocarbon race, Lebanon needs to get up to speed on this sensitive dossier. The discovery of gas alongside the Lebanese shore would be a godsend for cash-strapped Lebanon. The country has been plagued by instability since the 2005 assassination of former prime minister Rafik Hariri, a situation exacerbated by the deadly conflict across the border in Syria. Gas discoveries could shore up the Lebanese economy and revert the negative atmosphere in the country. Local growth figures in 2013 were estimated at about 1 percent, and foreign direct investment has dipped due to a political crisis and a spate of car bombings in Beirut and the Beqaa Valley.

There are also regional geopolitical risks: the Levant Basin includes the exclusive economic zones (EEZ)—offshore areas where a country is given sole rights to exploit the resources therein—of Israel, Cyprus, Syria and Lebanon. “Disputes over maritime borders are common in the oil and gas sector, but in the case of the East Mediterranean region they can amplify existing tensions and therefore increase the perception of political risk,” explains Nakhle. Israel signed a maritime agreement with Cyprus in 2010, indicating that the Leviathan and Tamar fields fall within Israel’s EEZ. The Lebanese government claims that agreement contradicted one Lebanon had reached with Cyprus in 2007.

Lebanon and Israel are still officially at war. The last fighting was in 2006, between the Lebanese Hezbollah movement and Israel, and resulted in about 1,125 deaths. Since then, the situation between the two countries has remained tense. Israel and Lebanon currently do not have an agreed maritime border, and mediation led by the United States to resolve a dispute between Lebanon and Israel over their EEZs has reached a deadlock. The US is holding on to a proposal to establish a “maritime Blue Line” that would help both countries control any violation of their territorial waters, according to local media. It seems that the dispute between Lebanon and Israel on Block 9—the section for which Lebanon plans to auction off exploration rights—is delaying the matter.

Lebanon’s northern borders with Syria are another problem for the Lebanese government, as boundaries between the two countries are still under negotiation. However, there is little hope of progress being made here in light of the conflict in Syria.

While the ongoing tension with Lebanon and the war raging in Syria do complicate the issue and heighten political risk for investors, this does not mean the end of exploration in that particular region. “Any major oil and gas activity expected to be conducted in the coming few years would be concentrated offshore, which means that, to some extent, it will be less directly affected,” says Nakhle.

“The discovery of oil and gas in Lebanon would attract investors and international companies, boost employment, restore consumer confidence, which would in turn stimulate spending,” says economist Ghazi Wazni. Gas extraction would also have positive repercussions on related industries. Gas pipelines, for example, could lead to the conversion of existing power stations from oil to natural gas and allow for significant cost reduction. In the longer run, local production of hydrocarbons would reduce oil imports and boost power generation capacity if the volumes discovered were commercially viable. “It would also shrink Lebanon’s ever-growing debt,” which is estimated this year at 65 billion US dollars, adds Wazni. Tax revenues from the exploitation of this resource would beef up the Lebanese state’s coffers, while revenues generated through profit-sharing schemes and royalties would go to the sovereign wealth fund envisioned in the government plan, says the Petroleum Administration source.

And the gas majors, long used to operating in unstable political environments, do not seem to be deterred. After all, there is treasure to be had: Some 46 companies including ExxonMobil have expressed interest in exploratory drilling in Lebanon. As Nakhle explains, “Oil and gas companies take a long-term perspective, given the long-term nature of oil and gas projects. These companies are also accustomed to operating in risky environments, but risk is only one of the many factors they take into consideration to assess the overall merit of an investment.”