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Gambling on Lebanon’s High-Stakes Oil & Gas

With its first-ever bidding round for offshore oil and gas exploration blocks opened as of 1 May and licensing scheduled for November, Lebanon is now initially estimating that its Levant Basin territory has 145 million barrels of oil.

On Thursday, the Lebanese Energy and Water Ministry revealed the results of a preliminary survey of its offshore fields and suggested that production could begin in 3-7 years, depending on the speed of exploration and well installation. 

With 70% of the territory, or around 15,000 sq km, now surveyed, the Ministry said that only 10% of that area shows as estimated 30 trillion cubic feet of gas and 660 million barrels of oil.

The government—and potential investors—are indeed hoping to fast-track things here. Spectrum has launched another multi-client 3D seismic survey in Lebanon’s Levant Basin, covering around 2,200 sq km (849 square miles) in the northern part and the margins of the basin. This is the second 3D survey by Spectrum offshore Lebanon. Last year, it completed its first multi-client 3D survey covering 3,052 sq km. The second survey will cover licensing blocks 1,3,5 and 6, and the survey should be completed by June and available by mid-July.

Related article: Middle East Oil Markets Contracting

In April, 46 companies qualified for bidding, with 12 companies qualifying as operators. Bidding will close on 4 November, and contracts could be awarded in February 2014.

There are, of course, a few spoilers including a maritime border dispute with Israel, which has made some major Levant Basin discoveries recently, the destabilizing conflict in neighboring Syria, and a fairly fragile caretaker government at home.

Lebanon’s own version of its maritime boundary, set in stone by a parliamentary law from last August, challenges Israel’s version, which was established by colonial forces in 1949. There is a lot at stake: The disputed part of the territorial waters is about 854 sq km and—looking at geological trends—is likely to hold some significant hydrocarbons.

What also has some worried is that these licenses will be handed out by a caretaker government led by Prime Minister-designate Tammam Salam. However, Salam has broad cross-party support and has a fairly decent chance of forming a cabinet of consensus--eventually.

The key exploration and production players aren’t flinching over any of this. Maritime borders and instability are par for the course these days in the deep-water business, and when a lot of money is at stake, investors stand a good chance of influencing the resolution process.

So far, the bigger players who have obtained tender documents to bid on Lebanon’s offshore blocks include Royal Dutch Shell PLC, ExxonMobil Corp, Italy’s Eni SpA, Chevron Corp., Anadarko, Repsol SA, Statoil ASA, AP Moeller-Maersk A/S, Petroliam Nasional Bhd, Petroleo Basileiro, France’s Total SA and Inpex Corp.—all of them having qualified as operators.

Among the non-operator qualifiers, we have the ambitious Anglo-Turkish Genel Energy, which is hitting the scene hard in Iraqi Kurdistan and Africa, along with Marathon Oil Corp., Austria’s OMV, Russia’s Lukoil Overseas Lebanon, OAO Rosneft, Dragon Oil Plc., and others.

Related article: Don’t Count your Chickens or your Oil Wells Before they Hatch

The competition is stiff, and in the end, the Energy Ministry says that only four blocks will actually be awarded in this first round, despite the fact that all the blocks are up for bidding. This is Lebanon’s attempt to boost its negotiating power. Once oil and gas are discovered in the initial four blocks, the others will become more valuable and generate higher bids for the government based on the lower risk associated with exploration.  

A handful of pending legislation is the concern now, in terms of the caretaker government, which lacks the power to push it through to the finish line. It’s not enough of a concern, though, to thwart investor optimism.

The blocks up for licensing still need to be demarcated and production-sharing contracts (PSCs)—read: revenue-sharing--and tender protocols have not yet been established. This could delay the closing date for bidding. If the caretaker government hasn’t accomplished this by the first week of September, we will likely see bidding extended beyond November. This, in turn, would push the official contracting of the blocks now scheduled for February 2014.

The thing to watch now, then, is the formation of a new consensus cabinet that can make this happen. Right now, there’s a bit of a stalemate on this. There is a solution, however, should the stalemate continue: Lebanese President Michel Suleiman and Parliamentary Speaker Nabih Berri could authorize the caretaker government to pass the laws. The precondition for this is a determination that fast-tracking oil and gas exploration and production is in the national interest—and certainly it is.

By. Jen Alic of Oilprice.com




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