Because of strong adversity on the political front, both domestic and foreign, Lebanon will have to wait until the middle of 2020 before closing the gap in terms of domestic gas supply and turning into a net importer of natural gas. In the picture, the Beirut seafront.
Lebanon’s exclusive economic zone (EEZ) forms part of the Levant Basin, which has been estimated to hold up to 122 trillion cubic feet (tcf) (3.45 trillion cubic meters [tcm]) of recoverable natural gas, in addition to some 1.7 billion barrels (bbl) of recoverable oil. Lebanon’s seabed could contain significant hydrocarbon potential, with an initial estimate of up to 30 (tcf) of natural gas (around 850 billion cubic meters [bcm]) and 660 bbl of oil. Jibran Basil, then acting minister of energy, raised these estimates to 95.5 tcf of natural gas and up to 865 million barrels (mbl) of oil in October 2013, although no exploratory drilling had been conducted. Meanwhile, Spectrum, a Norwegian company that carried out Lebanon’s first 3D seismic survey in August 2012, has estimated the country’s recoverable offshore gas reserves at 25.4 tcf. Clearly these different estimates reflect a high degree of uncertainty. The development of its hydrocarbon reserves would enable Lebanon to reduce its dependence on imports of oil products, which constitute more than 97% of its total primary energy supplies. The government is keen to diversify Lebanon’s energy mix away from oil to strengthen its security of supply, reduce its bill for imports, and to reduce air pollution. But gas production is not likely to begin before the mid- 2020s. Until then, Lebanon would need to import all its gas requirements in order to increase the share of natural gas in the energy mix. Currently, the share of natural gas in the fuel mix of the power sector has fallen to zero.
The strategy of small steps
The discovery of gas deposits offshore Gaza, Israel, and Cyprus over the past decade prompted Lebanon to conduct comprehensive 2D and 3D seismic surveys of its own EEZ. Israel’s discovery of the 9 tcf Tamar field in 2009, followed by the 19 tcf Leviathan field in 2010, as well as several smaller fields, and Cyprus’ discovery of Aphrodite in 2011, probably containing up to 4-5 tcf, prompted Lebanon to accelerate exploration. Lebanon adopted the Offshore Petroleum Resources Law in August 2010 (Law 132), which provides the legal and institutional framework for the exploration and exploitation of offshore oil and gas resources in Lebanon. This was followed in April 2012 by Decree 7968/2012, establishing the Lebanese Petroleum Administration (LPA) as the body responsible for the management, monitoring, and supervision of petroleum activities, including the issuing of licenses and the implementation of agreements. The LPA, however, is not an autonomous body and falls under the control of the Ministry of Energy and Water Resources and, indirectly, is reliant on the Council of Ministers for key decisions regarding the hydrocarbon sector. Thus the LPA has been unable to perform its tasks without interference and is affected by the country’s political deadlock. After months of political infighting between the various factions, the government eventually appointed the 6 members of the LPA in December 2012. They were chosen along sectarian lines. In February 2013, the government issued Decree 10289/2013, setting out the Petroleum Activities Regulations for Lebanon, which provide the basic guidelines for Lebanon’s hydrocarbon sector. The decree stipulates requirements for license applications and the scope of agreements with energy companies. The appointment of the members of the LPA and the passing of these decrees paved the way for the launch of a prequalification round at the beginning of 2013. The response to the government’s call for expressions of interest demonstrated the commercial attractiveness of Lebanon’s potential offshore energy resources for international investors. Some 50 international companies registered interest, including several major oil companies (IOCs), such as Total, Eni, Shell, Statoil, Chevron, and ExxonMobil. Forty-six companies were qualified, including 12 operators.
The headwind has not yet subsided
The outlook for Lebanon, however, is highly uncertain. Delayed decision-making and inadequate admin­­istrative capacity cast doubt on the goal of starting production by the middle of the next decade. The prolonged failure of the Lebanese parliament to elect a new president and the formation in February 2014 of an unstable government made up of rival political groups has paralyzed the decision-making process. As of the date of writing, the Lebanese government has failed to pass 2 decrees that are essential for tendering Lebanon’s offshore acreage. One of the missing decrees would delimit Lebanon’s territorial sea and exclusive economic zone, an awkward matter as some blocks straddle a disputed area between Lebanon and Israel. The other decree would stipulate the provisions of future Exploration and Production Agreements (EPA). The EPA determines the way in which future revenues are to be shared between the state and the investors that provide capital, technology, and expertise. The failure to pass these two decrees illustrates Lebanon’s complex domestic political landscape, which affects the decision-making process, the quality of institutions, the efficiency of public administration, and the business environment, and the difficulty of delimiting Lebanon’s EEZ, in light of the dispute with Israel, which could escalate if either country decided to award blocks in the disputed area.
The complexity of the national administrative framework
Lebanon’s political scene is dominated by continuous conflict over the distribution of political power and economic resources among sectarian groups. This often paralyzes most parts of the political system, including the legislative body, resulting in long delays in decision-making. The Lebanese Parliament may delay voting on key issues for years until consensus is reached. Similar delays occur within the Council of Ministers, the executive body responsible, inter alia, for adopting and implementing decrees related to the energy sector. Lebanon’s first bidding round was delayed as no stable political coalition could be formed in 2012-13. A new government took office early in 2014, but has so far failed to approve the decrees indispensable to launching the first bidding round. The sectarian political system permeates all institutional structures and administrative bodies, which are populated by politically appointed bureaucrats, eroding public trust in the state’s institutions and limiting their effectiveness. As a result, Lebanon suffers from a poor institutional framework, a weak business environment, administrative inefficiencies, lack of accountability, and political deadlock, even where vital interests, such as exploration for oil and gas resources, are at stake. This political structure also encourages corruption and rent-seeking behavior. Transparency International’s Corruption Perceptions Index indicates the widespread nature of corruption among Lebanese government institutions, public and private sector enterprises, and society at large, with a continuous deterioration in recent years. The weak institutional and administrative framework also results in a wide gap between declared government plans and actual delivery. The parliament and government have been slow to adopt and implement legislation to kick-start the sector but Lebanese politicians have created exaggerated expectations over the future of oil and gas in Lebanon. Billboards sponsored by the Ministry of Energy and Water have been erected along highways promising better transportation networks, a better healthcare system, more jobs, and even a better-equipped army, all to be funded by hydrocarbon wealth.
The weight of the cross-border issue
The overlapping Lebanese and Israeli maritime claims over some 854 square kilometers are another potential constraint on exploration and production, and carry the risk of escalation. If exploration were to go ahead in this disputed area, and especially if significant resources were discovered, incidents at sea and further escalation could occur. There are precedents for trans-boundary natural resource sharing initiatives concerning oil and natural gas. However, such options do not apply to states that do not recognize each other’s borders and are technically at war. Lebanon still does not recognize the state of Israel. There have been informal efforts by the United States to prevent the delimitation dispute from becoming an additional source of tension between the 2 countries. US diplomatic efforts have centered on discouraging Israel and Lebanon from exploring the disputed area until a solution is reached. So far, both countries have avoided exploring or awarding contracts in the disputed area, reflecting their desire to avoid escalation. However political developments could reignite the dispute at any time.
Imports come first
Given these strong headwinds, the development of Lebanon’s gas reserves is many years away, leaving a domestic gas supply gap that may turn Lebanon into a net importer of natural gas well into the mid 2020s. The Lebanese government has very ambitious plans to increase the share of gas in the power generation mix. A 2010 policy paper for the electricity sector prepared by the Ministry of Energy and Waters proposes a diversified fuel supply, with an ambitious plan to increase the share of natural gas from its current level of zero to two-thirds of the fuel mix by 2030. This, however, requires major investment, not only in the construction of new gas-fired plants, but also in changing the configuration of existing power plants and the construction of new pipelines. Also, since gas demand is strongly linked to electricity demand, it is essential that the government embark on the reform of the power sector and of electricity prices. Électricité Du Liban (EdL), the public monopoly, suffers from large financial and operating losses, which constitute between 20 percent and 25 percent of the government’s primary expenditure. EdL also suffers from chronic underinvestment, which has prevented it from modernizing its grid and expanding power generation capacity.
The main historical barrier to raising the share of gas in Lebanon’s energy mix has been access to gas supplies. Natural gas entered the energy mix for the first time in 2009 when the Arab Gas Pipeline (AGP), which also supplies Jordan, started supplying some 200 million cubic metres (mcm) of Egyptian gas to the Beddawi power plant in the north of the country. The entry of natural gas, however, was very brief. Since 2009, the flow of Egyptian gas has been subject to frequent disruptions due to delays in payments and more recently due to a series of explosions targeting the AGP. The last delivery of Egyptian gas to Lebanon was made in November 2010, while Jordan has since been subject to frequent delivery cuts, reductions in contract volumes, and parallel price rises. Egypt’s growing domestic demand for natural gas has since cast severe doubt over its capability, or indeed willingness, to continue supplying regional partners with low-cost pipeline gas over the short and medium term. Other neighbouring countries seem increasingly short of gas themselves. In 2003, the government of Lebanon signed a 25-year contract with Syria to import about 1.5 bcm/y of natural gas (World Bank, 2004). The Gasyle pipeline, a 32 km pipeline with capacity for 3 mcm/day connecting the Syrian border to the Beddawi power plant, was completed in 2005. However, Syria has not been able to supply Lebanon with gas, as its production has not been sufficient to meet domestic consumption, and the country’s gradual disintegration into persistent civil conflict at the time of writing casts substantial doubt over Syria’s ability to significantly change its natural gas supply picture within the next decade. Lebanon’s lowest-cost option in commercial terms is to secure pipeline gas from Israel. Despite the theoretical availability of next-door gas reserves already earmarked for regional supply, this option is not politically feasible, as there are no direct trade ties or diplomatic relations between Lebanon and Israel. A pipeline project carrying up to 25 bcm of Iranian gas to neighbouring Iraq and Syria (the ‘Islamic pipeline’) could also have turned into a lifeline for Lebanon’s gas industry. However, since its announced construction launch in November 2012, the project has suffered from a series of funding issues and from practical above-ground problems related to the continuing complicated security situation in Iraq and, since 2011, the deteriorating political and security situation in Syria. Given the current lack of regionally available pipeline gas supply options, importing liquefied natural gas (LNG) is the most realistic and practical option. The government has announced plans to import LNG to replace fuel oil in power generation, although at present the country has no regasification terminal and no contract to build and operate one has been signed.
Working towards exports
Assuming that Lebanon does eventually develop its natural gas reserves and meets its domestic demand, the country faces an array of choices as to how to monetize its hydrocarbon riches via gas exports. Lebanon’s eventual export strategies will to a large extent depend on the eventual size of its reserves, its production targets, and the cost of Lebanese gas production, which will impact the price range that Lebanon needs to secure as well as external factors such as gas price levels in potential export markets. So it will depend on timing. Lebanon’s already much-delayed offshore bidding round and tendering process, and the time gap between initial exploration, appraisal drilling, production, and eventual export imply that current predictions of Lebanese gas exports being merely some four years away are indeed highly unrealistic. The Lebanese government’s more recent discussion of an eight-year time frame, with exports starting during the early 2020s, seems slightly more realistic, but may be delayed by further political stalemate. By that time, Lebanon will likely find itself in a fundamentally different market than it is today. Traditionally the first option considered for exporting natural gas has been via regional pipeline exports to neighboring countries in the vicinity of natural gas producers. Lebanon is not short of gas-hungry neighbors. Particularly favorable in terms of low initial infrastructure costs could be the markets of southern neighbors Jordan and Egypt, both of which are already connected via the Arab Gas Pipeline to Lebanon. However, the option holds costs and complications. In addition to the fact that the route is long and subject to disruptions, the potential of regional exports to Egypt and Jordan is so attractive that Israel has been seriously considering the option–a development which, if it materializes, may yet prove to render all talk about Lebanese gas exports to these countries redundant, as Israel will have captured these markets by the time Lebanon may be in a position to export. Also both Egypt and Jordan have advanced plans to increase imports of LNG. Eni’s supergiant gas discovery at its Zohr Prospect in Egypt is also expected to reduce the country’s supply-demand gap once the field is developed.
The Turkish option with its European link may also prove highly attractive but also comes with its own complications. European and Turkish gas demand constitutes a big source of uncertainty given the range of other supplies (both pipeline and LNG options) that will appear on the horizon during the early 2020s. Pricing mechanisms, including Europe’s accelerated moves towards gas-to-gas pricing, may turn out to offer small gas exporters more variable, and possibly, lower returns, an issue particularly acute for Lebanon whose offshore gas reserves may yet prove to have a higher cost than those of alternative European gas providers such as Russia. Lebanon could consider its own LNG export strategy which remains the most flexible option to export its natural gas, allowing access to extra-regional markets such as Europe and current premium-markets in East Asia. The LNG export option however remains subject to many uncertainties. One of the key uncertainties is the actual size of Lebanon’s gas reserves. LNG will require sufficient reserves, sufficient production, and sufficient production allocations of Lebanese natural gas to export markets, under long-term contracts that will lock Lebanese gas for about 15 to 20 years into exports. The timing of such an option will also be critical. By the time Lebanese LNG might be ready to be exported, Lebanon will be competing with a number of new market entrants, many of them with considerably more market weight over key markets in Asia/Pacific and Europe, primarily Australia, East Africa, and North America. Lebanon may consider other options for exporting LNG – not from its own coastal liquefaction facility, but by making use of existing, or likely upcoming, regional export hubs. An option worth considering is the export of LNG via shared facilities with Cyprus, Lebanon’s regional East Mediterranean gas neighbor. Sharing LNG export facilities with Cyprus could offer significant cost savings if technical, commercial, and political obstacles could be overcome. Lebanon faces both external and internal challenges in realizing the commercial advantages of the various export options. But for now, the key challenge lies within Lebanon itself; primarily in Lebanon’s ability to provide a domestic contracting framework to foreign investors, competitive and stable enough to allow for the development of gas resources; and, on the other hand, the stabilization of the domestic political situation and Lebanon’s gas contracting frameworks that render Lebanon a desirable, reliable, and stable gas exporter to potential regional and international clients.