[Oil & Gas Updates]: Weekly Roundup, April 8, 2013

Lebanon – Cyprus:

Cyprus minister of Energy, Commerce, Industry and Tourism Giorgos Lakkotrypis arrived to Beirut on 03/04, in his first official visit since he was appointed, to discuss cooperation in the energy and water sectors. Lakkotrypis held talks with President Michel Slaiman, Speaker Nabih Berri, caretaker Prime Minister Najib Mikati and caretaker Energy Minister Gebran Bassil. The minister discussed the need to establish a framework for a joint exploitation of common gas fields. He also sought to revive mediation efforts to settle the maritime border dispute between Lebanon and Israel. The previous Cypriot administration had repeatedly tried over the past few months to contribute to a solution to this problem, in which it is partly involved, and which has prevented the ratification of a Lebanese-Cypriot agreement on border delimitation. The issue was brought up during the visit of former President Demetris Christofias on January 9-11, 2013, Parliament Speaker Yiannakis Omirou’s visit on December 3-5, 2012, and the Director of the Energy Service Solon Kassinis’ visit on December 3-4, 2012, without much success.

Despite regular bilateral visits, the traditionally excellent Lebanese-Cypriot relations have somewhat cooled down following a Cypriot-Israeli maritime border delimitation agreement, concluded in December 2010, which completely disregarded Lebanon’s delimitation of its own exclusive economic zone (EEZ) and the geographical coordinates that Beirut had submitted to the UN in July and October 2010, defining the western and southern limits of its EEZ. From a Lebanese perspective, Cyprus’ choice of deepening its ties with Israel appeared to come at the expense of its relations with Lebanon.

Lakkotrypis’ visit comes a couple of weeks after the resumption of contacts between Israel and Turkey, with energy cooperation as one of the main motivations behind Tel Aviv and Ankara’s rapprochement. Israel, which was considering treating its gas at an LNG facility to be built in Cyprus in the coming years, may now consider exporting it through pipeline to Turkey and from there to world markets, casting doubt on Nicosia’s project of building an LNG facility, the cost of which would not be justified if it is to treat Cypriot gas only. Lakkotrypis, who will visit Israel on 08/04, ahead of a visit by President Nicos Anastasiades in May, declared on 27/03 that Israel’s apology to Turkey over the raid on the Turkish ship Mavi Marmara and the resumption of ties between the two countries had been “anticipated”. Cyprus is now looking to Lebanon, and its natural gas resources, as a possible replacement for Israeli gas in case Israel decided to pipe its gas to Turkey. Lebanon, for its part, is still undecided on what to do with its natural gas once it reaches the production phase. Treating it in Cyprus and exporting it from there to European markets was always an option, but not the only one. Transporting via pipeline to neighboring countries is another. Even the development of a floating LNG facility has also been considered.

Lebanese media (and certain politicians such as caretaker Energy Minister Gebran Bassil) did not fail to note, and highlight, the fact that Lakkotrypis is a Maronite Christian, a community that is spiritually bound to Lebanon, seat of the Maronite Patriarch and home to the largest Maronite community in the world. Bassil, himself a Maronite Christian, considered it an opportunity to strengthen energy cooperation between Cyprus and Lebanon.

Lebanon – Internal politics:

Lebanese President Michel Slaiman appointed MP Tammam Salam – an independent MP allied with the Future Movement – as Prime Minister-designate on Saturday 6/04, following two days of parliamentary consultations, frequent shuttle visits between Beirut and Riyadh, and an intervention from Bandar bin Sultan, Director General of the Saudi intelligence agency (and particularly active in the Syrian conflict), marking a firm return of Saudi Arabia to the Lebanese political scene (a prelude to what is expected to be a more active involvement in other fields as well, including the economy, and possibly, the energy sector).

Despite securing 124 nominations out of a total of 128, Salam will face considerable challenges in his attempt to form a new cabinet. The Prime Minister-designate will hold a round of parliamentary consultations on 9-10/04 to discuss the formation of the new cabinet with MPs and parliamentary blocks. The type of government (national unity, technocrat etc.), the distribution of key ministerial portfolios – including the much sought after Ministry of Energy and Water – in addition to the role of the national resistance and the position to adopt regarding the Syrian conflict will be the main talking points in the country in the next few weeks.

The Ministry of Energy and Water continued to be at the heart of the debate this week, particularly after Progressive Socialist Party (PSP) leader Walid Joumblat, seen as kingmaker in Lebanese politics, demanded that Gebran Bassil and other Free Patriotic Movement (FPM) candidates be excluded from the ministry. As we mentioned in our April 1^st, 2013 roundup, there are several reasons that could explain Joumblat’s position, and among these is securing his interests in the Lebanese oil and gas business. Indeed, among the names that are circulating to head the Ministry of Energy and Water is Bahij Abou Hamze, a close aide, suggested by the PSP leader. However, the FPM seems to be determined to hold on to it. For the moment, it has responded by highlighting Gebran Bassil’s achievements as Minister of Energy and Water. Bassil himself is responding by actively pursuing his work at the ministry, at a pace that has surprised many, given that the country is presently run by a caretaker government. On 05/04 he laid the foundation for the construction of a new power plant in Jiyyeh, on 06/04 the Court of Audit announced that the ministry’s controversial decision to relaunch the tender for the construction of a power plant in Deir Amar was legal, and on 07/04 he laid the foundation for the construction of a new water dam in Jiyyeh. On 03/04 he signed an agreement with the American hydrocarbon exploration company ION Geophysical to conduct seismic surveys over 1650 Km in Lebanese waters. In a single move, Bassil managed to court the Americans, and to adopt a political discourse that will please his allies on the other side of the political spectrum, hoping to win the backing of both to retain his position at the ministry. The FPM’s tone is expected to rise if it is indeed cornered and pressured to abandon the ministry. In 2009, the party obstructed the formation of a cabinet for weeks, after many in the parliamentary majority at the time sought to exclude it, and Gebran Bassil in particular, from the Ministry of Telecommunications. After two months of obstruction, a compromise was reached allowing the FPM to retain the ministry as long as Bassil did not head it, and the latter was appointed as Minister of Energy and Water instead. It is hoped that a similar scenario does not occur again. There are important deadlines related to oil and gas exploration, that the upcoming cabinet, and the Ministry of Energy and Water in particular, are required to respect. Whoever is chosen to head the ministry is expected to respect the previous commitments taken by the former government, and to quickly signal his or her intention to ensure continuity by proceeding with previously established programs rather than interrupting them and starting all over again.

Eastern Mediterranean – Security of offshore resources:

The Ministry of Energy and Water and the Petroleum Administration unveiled a new set of ads displayed on roads and highways since 04/04, announcing the beginning of the exploration phase and illustrating how revenues collected from offshore petroleum activities could (or must?) be spent. The main message on these ads is “Our country now has oil.” Below the main message is another one, in smaller fonts, that changes from one ad to another, showcasing how the revenues could be spent. Among these: “to develop the transportation network”, “to arm and support the army”, and a third one lists different types of social spending (health care, education and an old-age pension system).

The role of the army and the importance of providing it with better equipments, a topic that is often debated in Lebanon, is now repeatedly brought up, in the context of potential oil and gas discoveries as well. The army itself prepared a 5-year plan that includes boosting the navy’s capabilities and providing it with the means to control and monitor its territorial waters and protect its maritime borders. the $1.6 billion plan was approved by the government in September 2012. On November 26, 2013, it acquired a 43m long fast patrol vessel, Trablous, the biggest and most advanced ship in the Navy’s fleet [see “Lebanon – Maritime Security” in our December 10, 2012 roundup]. Some, in the political class, are also calling for supporting the poorly-equipped army to better enable it to fulfill its mission. In addition to local actors, and as we have noted in previous roundups [see “Lebanon – Hungary” in our March 4, 2013 roundup; and “Lebanon – United States” in our March 18, 2013 roundup] an interesting pattern seems to be emerging, this time coming from foreign countries interested in the Lebanese oil and gas sector: Associating military assistance and energy cooperation, largely motivated by a will to ensure the security of their companies’ investments in a relatively stable environment.

Other countries in the region are also looking to boost their navy’s capabilities, aware of the security threat that might scare away foreign investors. Israel’s up until recently underfunded navy (compared to other branches of the Israeli Army, and not to other countries in the region, whose navies are much less developed, or virtually non-existent in some cases) has found a new mission, and new arguments to draw additional funding. The navy is seeking over $700 million to acquire new offshore patrol vessels, radars, unmanned aerial vehicles and defensive missile systems. However, its demands are not likely to be met entirely in a country facing sharp spending cuts and which must slash its defense budget. Cyprus, motivated by the same desire to ensure the security of its offshore resources and platforms, is also looking to develop its navy’s limited capabilities. Unconfirmed reports by Cypriot media claim that Cyprus is looking to acquire two heavy offshore patrol vessels from France [Link in French].

Lebanon – Pre-licensing round arrangements:

Rosneft’s president Igor Sechin announced on 03/04 that the Russian State-owned company and ExxonMobil agreed to bid jointly in Lebanon’s first licensing round for offshore oil and gas exploration. Lukoil’s CEO Vagit Alekperov had announced back in March 2013 that Russia’s number two oil producer, has partnered with France’s Total for a joint bid in the first licensing round. It is interesting to note that, according to the list of companies that have participated in the pre-qualification round provided by the Ministry of Energy and Water [click here to view the list], none of the Russian companies have applied to qualify as operators. In a country that has traditionally been more open to western rather than Russian economic influence, teaming up with western companies might be the approach adopted by Russian companies to set foot in Lebanon.

In a potentially related news, the recent move by Australian firm Woodside Petroleum to acquire a stake in Israel’s Leviathan gas field may push its minority owner Royal Dutch Shell PLC to reconsider its 23.1% stake in the company to avoid repercussions on its businesses in the Arab world. Shell is among the companies that are seeking to qualify for Lebanon’s first licensing round.

Lebanon – Academic formation and programs:

After the inauguration of the “Maroun Semaan Chemical Engineering Building” in the University of Balamand on 01/03, and the introduction by Université Saint Joseph of a Master’s degree in oil and gas as of September 2013, in collaboration with Total and l’Institut français du pétrole (IFP), the American University of Beirut, which is considering to offer an advanced Master’s degree in Energy Studies, announced on 26/03 that it has received a $1.7-million reservoir simulation software. ECLIPSE and Petrel, as these applications are known, were donated by Schlumberger Information Solutions, and will allow engineers to model oil and gas fields and reservoirs on their computers in order to predict the flow of oil or gas through layers of porous rock. Confirming a rising interest in the petroleum sector, a panel discussion on oil and gas was also held at the university, on 02/04, targeted towards students interested in aspects pertaining to oil & gas: environmental, geological, and legal.