The oil & gas waiting game

Can Lebanon or Israel replicate the success of Cyprus’ third offshore licensing round?

On June 22, Israel’s energy ministry announced that the deadline to place bids in the country’s first offshore licensing round would be pushed back until November 2017. This is the second time the bid round, which opened in November 2016, saw its end date postponed.

With the second extension, it became harder to believe the Israeli energy ministry’s repeated claims that the decision was motivated by an outpouring of interest from international companies and the need to provide them with more time to prepare their bids. A few companies appear to be interested, notably Italy’s Edison and Greece’s Energean, in addition, it seems, to Indian companies, as reported by the Israeli media after a meeting between Yuval Steinitz, Israel’s energy minister and India’s Minister of State for Petroleum and Natural Gas Dharmendra Pradhan, on the sidelines of the 22nd World Petroleum Congress in Istanbul on July 12.

This is in stark contrast with Cyprus’ most recent licensing round, which closed in July 2016 and attracted interest from some of the largest international oil and gas companies, including bids from Italy’s Eni, France’s Total, Norway’s Statoil, and America’s ExxonMobil with partner Qatar Petroleum. This interest is no doubt owed to the “Zohr effect.” The 2015 discovery in Egyptian waters of the largest gas field yet found in the Eastern Mediterranean, dubbed “Zohr” by Eni, has revived interest for exploration in the region. A combination of factors, including location, stability, and regulatory certainty, put Cyprus at the forefront of East Med countries that could benefit from this renewed interest.

Choppy waters

Israeli authorities were hoping that the discovery of Zohr, in addition to the resolution of local anti-trust issues that had hobbled the sector for more than a year, would encourage companies to take part in the first offshore licensing round. But it looks like companies’ interest in the tender was below expectations, prompting a second extension of the deadline to place bids. They hope that this latest four-month extension will change that. We will know more in November, provided the tender is not postponed again.

Lebanon is also currently holding its first offshore licensing round. Over 50 companies qualified for the tender, which will close on September 15. Authorities here are also banking on the “Zohr effect” but might end up attracting an interest that is, in this case as well, below their declared expectations.

That is because companies have not entirely recovered their appetite for offshore exploration yet. Although some of the factors that have contributed to temper international companies’ interest in Israel’s bid round are country specific (regulatory hurdles, a certain apprehension to invest in a country that could impact their activities elsewhere in the region, etc.), others are common to both Israel and Lebanon (global market conditions and difficulties monetizing discoveries).

In a previous article, published in February 2017 after Lebanon announced a new roadmap for the first licensing round, Executive signaled that future interest will depend on two things: global market conditions, and what we offer investors. There isn’t much we can do to affect the first, but there are some things we can do to attract investors — finalize our legal and regulatory framework, offer a competitive fiscal regime, and actively and aggressively promote our energy potential where it matters.

We have yet to finalize our legal framework and adopt the petroleum tax law. And, although the Parliament might adopt it before the bids are due, we are already several months late. It is true we can proceed with the tender through the legislation already in place, but authorities have insisted for years that a new tax law applicable to petroleum activities is in the works; failing to follow through sends the wrong signal. Besides the inadequacy of launching a tender under one set of legislation and completing it with another set, it confirms high-level decision making vis-a-vis Lebanon’s oil and gas sector moves at a slow and erratic pace. This is a risk companies are aware of, but which authorities have yet to fully consider and attempt to mitigate.

Hopeful horizons

On the marketing front, the strategy to promote the tender appears to be more confident than aggressive, relying on the availability of an extensive set of seismic data, which is hoped to de-risk investments. The focus on seismic data, while reasonable, ignores that there are a multitude of other types of risks that may discourage foreign companies.

Furthermore, we took a risk by modifying the blocks on offer, which might affect some companies’ interest in the bid round. Lebanon launched the tender back in 2013 with blocks 1, 4, 5, 6, and 9 open for bid, yet will be completing the round (hopefully on time) with another set of blocks (1, 4, 8, 9, and 10) on offer, mirroring the uncertainties we have seen with the legal framework governing the tender. Not only did this change confuse companies in their preparations (some allegedly gave up after the alteration), but, in a surprising move, four out of the five blocks picked for the auction include areas, of various sizes, that are disputed by neighboring countries (one in the north and three in the south).

Still, authorities appear to be confident that at least two or three operators, out of the 13 operators that pre-qualified for the tender, will be placing bids, including, it seems, India’s ONGC, according to a tweet posted by Minister Pradhan, on July 10, following his meeting with Energy and Water Minister Cesar Abou Khalil at the same conference in Istanbul. If their hunch is confirmed, the tender will indeed be a success, especially as this is Lebanon’s first licensing round, and even more so if we take into consideration the unpredictability, repeated delays, and political deadlock the entire process has experienced. If interest is below expectations, Lebanese authorities and decision-makers must more seriously devise and implement a strategy for the second licensing round.

Mona Sukkarieh is the cofounder of Middle East Strategic Perspectives (http://www.mesp.me), a Beirut based political risk consultancy

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