[Oil & Gas Updates]: Weekly Roundup 04/02

Lebanon – First licensing round:

A reassessment of data collected from the latest 3-D survey conducted by Spectrum ASA showed that hydrocarbon reserves off the southern coast may be larger than previously thought. Initial findings in this area were estimated at 25 trillion cubic feet. However, these findings cannot be confirmed before drilling. David Rowlands, CEO of Spectrum ASA, who is holding regular meetings with international oil and gas companies interested in taking part in the first licensing round, said that the “list of companies which want to bid for the pre-qualification round is getting bigger all the time.” Lebanon is expected to invite oil and gas companies to pre-qualify for bidding in February 2013. In fact, the date that was suggested when the cabinet approved the launching of the first licensing round was February 1^st. However, the related decree that is supposed to set the criteria for the pre-qualification round has not been adopted yet. Energy Minister Gebran Bassil brought up the issue during the cabinet meeting on 29/01. But, in what seemed like an attempt to have the upper hand on the dossier, Prime Minister Najib Mikati invoked the need to submit it to the State Council, although the decree could be adopted first and then submitted to the State Council, especially if deadlines are to be respected. It was finally agreed the decree would be discussed at the following cabinet meeting.

Lebanon – Sovereign wealth fund:

Article 3 of the offshore petroleum resources law adopted in 2010 provides for the establishment of a sovereign wealth fund to collect the revenues arising from petroleum activities received by the government[1]. But, after arguing under which authority it should be placed, the political class took a step back and seems in no hurry to lay the legal foundations of such a fund, especially that no revenues are expected before the end of the decade. But the issue resurfaces occasionally. Just like the political class is playing the offshore resources card ahead of the elections, economists, particularly those aspiring for a political role, insist on highlighting the financial and economic dimensions of their program, integrating among others references to offshore resources and the need to establish a fund to collect the revenues. One such candidate is Neemat Frem, CEO of Indevco Group and head of the Association of Lebanese Industrialists, who held a large event on 28/01 titled “A Better Lebanon”, during which he painted a grim outlook for the Lebanese economy and presented a program to revive it [Link in Arabic]. Frem, of course, did not fail to mention the need to establish a sovereign wealth fund, the primary objective of which would be to pay off the country’s large public debt. In this aspect, he seems to be in agreement with Prime Minister Najib Mikati whose “Action Plan for Economic and Social Reform” have stated roughly the same thing. Others may not agree, and some even went as far as calling it “the looting of Lebanon’s natural gas”.

Eastern Mediterranean – Security of offshore resources:

Israel seems to fear that the events in Syria may encourage the transfer of advanced weapons to Hezbollah in a way that would alter the balance of power. Tel Aviv is particularly concerned weapons such as the Russian-made Yakhont anti-ship missiles that could theoretically reach the port of Haifa or offshore Israeli gas rigs, could end up in the hands of the Lebanese resistance group. According to an analysis published on 29/01 on Israeli news website Ynetnews, such transfer of advanced weapons may lead to an Israeli strike. Indeed, the Israeli airstrike on a target on the outskirts of the Syrian capital on 30/01 may have targeted a weapons convoy heading for Lebanon.

In contrast, the Jamestown Foundation, an American think tank, has suggested in one if its recent analysis that Lebanon’s political deadlock and sectarian rivalries, fuelled by the Syrian crisis, are a bigger danger to its offshore wealth than external threats, and could ultimately, “prevent it from benefiting from resource revenues.” The poorly-equipped Lebanese army, the report added, may not be able to protect offshore gas installations. The report, filled with factual mistakes, does not refer to Hezbollah’s ability to contribute to the protection of these installations as well, as has been suggested by its Secretary-General Hassan Nasrallah, and other Lebanese leaders.

Lebanon – Potential markets:

Once offshore findings are confirmed, and depending on the volume of these findings, Lebanon may become a natural gas exporter within a decade, or maybe sooner. This may be an optimistic statement, but much less so than statements made by Lebanese officials who swear the gas reserves are “large” and could be extracted within a few years “if we’re serious about it”. If we are serious about it then, and if the resources turn out to be larger than is required by the Lebanese market, what are the potential markets for Lebanese gas? This is a side of the question that has not been seriously tackled yet. With Cypriot (and most likely Israeli) gas headed to Europe, will Lebanese gas follow the same direction? The answer is Lebanon enjoys a wider range of options, starting with neighboring markets. According to an energy expert cited by Lebanese daily Al-Akhbar on 02/02, east Asian markets, particularly China, India but also Korea and Japan, could represent an interesting option to Lebanon, especially that their energy consumption is set to grow even further. But, to achieve this, Lebanon must seek the participation of oil and gas companies from these countries in offshore hydrocarbon exploration.