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Follow-on effects

Banks are tentatively preparing to finance the nascent oil and gas sector

by Livia Murray

Lebanon’s banking sector is always on the prowl, searching high and low for new ways to expand and diversify its portfolio. From driving expansion into foreign markets to expanding its customer base at home, some local banks have already started to look for ways to expand in a whole new sector: financing to exploit Lebanon’s expected oil and gas resources.

Room for everyone

With another delay in the first licensing round expected, Lebanon’s oil and gas sector still has a somewhat uncertain future. Exploration is still waiting for the Cabinet to pass two decrees, one of which would allow the prequalified international oil companies (IOCs) to finally bid on exploration and production sharing contracts.

The development of Lebanon’s oil and gas sector could create many opportunities for various players in the economy, among them banks who would quickly jump at the chance to lend or raise money for new projects created by a new industry.

Lebanon’s conservative banks, however, are likely to avoid the risky, large ticket exploration projects led by IOCs. They will most likely find opportunities in financing the oil and gas service sector, once resources are proven, rather than financing high-risk exploration projects.

There would simultaneously be little demand from IOCs to finance exploration, which would mostly rely on their own internal cash flows. According to an Ernst & Young report, IOCs fund exploration projects primarily through the revenues they generate, maintaining a good equity to debt ratio, as ultimately their financial rating is one of their priorities.

Exploration projects aside, there are various areas of activity in which local banks can play a role. “There’s room for everyone,” says Julien Khabbaz, head of investment banking at FFA Private Bank. Lebanese banks could play a role in project finance by working with international banks, if they are dealing with large extraction projects that require a lot of capital. “It’s always a foreign bank that assumes the role of lead manager or placement agent, and then you have the local banks participating in the club deal,” says Fadlo Choueiri, head of economic research at Credit Libanais Investment Bank. The foreign banks would, in turn, benefit from the local banks’ knowledge of the Lebanese market.

Local banks will most likely play a larger role in the oil and gas service sector, raising money and financing companies that provide services to facilitate exploration and extraction. “I don’t think banks are going to play a role in long-term financing [but rather] operations, having short term facilities, and also for the supporting industries — because these companies have to construct things in the water, buy different types of equipment [and] transport. They will need financing in order to supply them,” says Saad Azhari, chairman and general manager of BLOM bank.

The usual setbacks 

According to Khalil Debs, the group head of corporate banking at Bank Audi, it is “too early to tell” what impact oil and gas financing will have on the banks’ balance sheets. There are still too many uncertainties surrounding Lebanon’s exploration for oil and gas.

The proposed model exploration and production sharing agreement, favoring local goods and services over foreign ones, might provide an advantage to the services offered by local banks, but the model contract is one of the two decrees still waiting to be passed by the Cabinet. According to the Lebanese Petroleum Administration, the model contract, which the Cabinet can modify, currently says local companies will have preferential treatment for the same quality services priced up to 10 percent higher and for goods priced up to 5 percent higher.

But beyond this there are no specific requirements for the use of financial services, and the business generated for banks will still depend on the oil companies’ management of local and foreign financial services. 

Another uncertainty is that while the current pending decrees would open five blocks, changes could mean anywhere between one and 10 blocks — covering all of Lebanon’s exclusive economic zone — may be opened for bidding.

These uncertainties and delays, when translated to the banks, mean that only a bare minimum of preparations are under way. While banks are beginning to show interest, no full-throttle preparations are being made. No bank that Executive spoke with on the topic was looking into setting up a specialized oil and gas department, and many were still holding out for a more concrete development in the sector — such as exploration and production-signed contracts between the government and the companies that are set to bid. “We will certainly do a special division once people are in place. But not before a year or two,” says Audi’s Debs.

 But banks are beginning to take some action. Some have sent their staff to attend expert trainings, recognizing the need to be prepared for oil and gas deals. A specialized training session took place in Beirut last year to instruct employees from a handful of banks — among them Bank Audi — in project financing. Other banks have started researching the sector: BankMed recently presented a report compiling information on Lebanon’s hydrocarbons sector. These moves, however, are more of an initiation than careful preparations.

Unfettered confidence

Such careful preparations are not currently in the offing. Most of the banks Executive spoke with voiced contentment with the experience they have in Lebanon and other markets.

“I don’t think we need to take concrete steps. It’s an industry like any other industry, it needs some specialty. We have some specialty; we do some oil and gas deals in Egypt, in Iraq, through Turkish and other companies. I think we’re well prepared and if there’s a transaction that requires more expertise, we’re ready to take experts — usually consultants —that do the work,” explains Debs.

 “Just to say that Lebanese banks, in their experience in Lebanon and abroad, we are ready to provide for what is the new oil industry in Lebanon. We definitely have what is needed. We have the expertise in terms of normal commercial banking and investment banking. So the knowledge is there,” concurred BLOM’s Azhari.

While some practices apply to every sector, there are certain things that require a learning curve. Reserve-based lending, for instance, is a method commonly used for financing extraction projects in the oil and gas sector where the loan is secured by undeveloped oil and gas reserves and the amount extended is based on the present value of projected future production. Any corporate lending department in a bank that wanted to lend through reserve-based lending would have to become familiar with details such as market prices for oil and gas, as well as profitability and operating expenditures of companies in the sector.

 Yet while banks will likely need more capacity building to take full advantage of the sector, perhaps they are simply taking their cue from the government, which continues to put the oil and gas sector on the back burner.

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Livia Murray

Livia covers business, finance and economic policy for Executive.

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