Regardless of what local banks keep proclaiming, Lebanon has no oil or gas. There’s reason to believe it does, but the process of finding out is only just beginning. On September 15, companies will bid for rights to explore for oil and/or gas offshore Lebanon. Executive takes a look at what that means, what to expect next, and answers other commonly asked questions.
How much oil do we have?
Only drilling will tell what Lebanon does or does not have. At the moment, it has blurry renderings of earth below the Mediterranean Sea. There’s much, “Wow, that could be something,” but until contracts are signed with companies capable of drilling to find out just what that “something” is, we simply will not know.
Why does everyone seem to think Lebanon is rich in oil and gas?
There is a lot of natural gas in the Eastern Mediterranean (East Med), and a general understanding of where it comes from (ancient sediments, and — only recently proven in this area — ancient coral). Huge natural gas discoveries (Israel’s Leviathan in 2010 and Egypt’s Zohr in 2015) have fueled and sustained interest in the East Med, despite a price environment over the past three years that is disfavorable toward drilling $100 million wells in “ultra-deep” waters. Lebanon can likely expect some big industry names to bid for drilling and production rights, but that has not actually happened yet. The country was supposed to accept bids in 2013, but the process got subsumed in political bickering until January of this year.
[pullquote]Only drilling will tell what Lebanon does or does not have[/pullquote]
Where are we now?
Fifty-one companies are pre-qualified to bid. A 2010 law requires they form partnerships of three or more companies to bid for exploration and production rights. This means they will offer the government a cut of revenues from whatever resources are found, in return for finding and extracting said resources. If the winners find nothing, the government will not have to reimburse the exploration costs incurred. Bids are due on September 15.
Will Lebanon get a good deal?
There is a lot of misinformation regarding what Lebanon might get from a revenue standpoint. Lebanon is following international best practice by using a model contract with certain specified criteria, related to the government’s cut of revenues. clearly defined. It is impossible to say now whether or not the country will secure a good deal, but it is on the right track toward doing so.
Who’s going to bid?
No one can predict the future. Some of the companies prequalified in Lebanon recently bid in a licensing round that Cyprus organized in 2016, which could indicate they will bid in Lebanon too. That, however, is far from certain, and will only be known when bids are submitted.
How public will the bid evaluation be?
In interviews with Executive in both January and April this year, Wissam Chbat, president of the Lebanese Petroleum Administration (LPA), said that once bids were received, the LPA would announce which companies bid on which offshore blocks (Lebanon has 10 offshore blocks, five of which can be bid on in the first licensing round). Chbat also said that the LPA would take one month to evaluate the bids (evaluation is based on technical criteria — further geo-physical studies like seismic surveys, the number of wells companies commit to drilling and the depth of those wells, and the companies’ financial offers).
The commercial offer is worth 70 percent of the evaluation, with the technical offer representing the remaining 30 percent. The commercial offer will be set in stone once submitted, but Chbat explained that the technical proposal can be subject to further negotiations (i.e., pushing companies to drill slightly deeper, for example). After the assessment and negotiations, Chbat said that the winners would also be announced publicly. Signing the final contract depends on a decision from the Council of Ministers. The political timeframe for the evaluation process sees contracts signed by November 2017, but the model contracts that will govern the relationship between contractors and government allow a total of six months between bid submission and contract signature.