Potholes in the road to extraction

Lebanon’s progress towards extracting its offshore oil and gas in 2013 could perhaps be summed up by a version of the somewhat hackneyed phrase ‘one step forward and one (possibly two) steps back’.

The first six months of the year things appeared to be moving like clockwork. Energy Minister Gebran Bassil was powering (critics would say bludgeoning) ahead in his attempts to extract and the six-member Petroleum Administration — appointed in November 2012 — began its work in a positive fashion.

On March 28, just days after the government of Prime Minister Najib Mikati collapsed, Bassil publicly announced the names of the 52 companies from 25 countries that had submitted applications to bid on the country’s offshore oil and gas. Positively, he also announced clear criteria for determining which would be accepted. Operators — the largest companies in the three-company consortiums — were required to have total assets of at least $10 billion and ownership of at least one petroleum development in water depths beyond 500 meters. Non-operators needed total assets of at least $500 million and an established                 petroleum production.

On the 18th of the following month, Bassil returned to the media to announce that 46 of the 52 had been accepted. Among the companies disqualified were the only bidders from China and Iran. The world’s energy giants, including Total, Shell and Exxon Mobile, passed. This, coupled with newly released seismic data that indicated reserves were greater than previously thought, created an optimism that Lebanon’s march towards oil and gas prosperity would not be sidelined by the political chaos affecting the country.

Pitfalls

Yet, since the middle of the year, progress has ground to a halt due to a depressingly familiar phenomena for the Lebanese — political infighting. When Mikati’s government collapsed, it left two decrees unsigned — one specified the terms of the revenue sharing model and the other formally demarcated Lebanon’s offshore oil and gas blocks. They were largely formulaic, with the contents already widely circulated, but technically required a cabinet decision to come into force.

After a decision in the Shura Council — Lebanon’s highest legal body — it was concluded that all that was needed was for the caretaker cabinet to meet “for two minutes,” as Bassil told Executive in August, and sign the contracts. But this has not yet occurred and, as of going to print, looks unlikely to happen in the near future.

The reasons for this are largely political. The opposition March 14 movement, led by the Europe-based Saad Hariri, has gone on the attack — saying signing the decrees is unconstitutional without a new government. In a stinging attack, Tripoli MP Mohammad Kabbara, from Hariri’s Future Movement, accused Bassil of corruption. “We do not want the oil that the bloc of corruption claims to preserve,” he said. “We want our oil, but we prefer that it remains preserved at the bottom of the sea until a government of honorable [politicians] is formed to handle it.”

It is common in Lebanese politics for the opposition to accuse the government of corruption (often with good reason), but more worryingly for Bassil a number of people on his own side have also refused to back him. He has faced increasing hostility from other parts of the governing March 8 movement. In late October caretaker Minister of Economy and Trade Nicholas Nahas, a Mikati ally, declared that he also believed it to be unconstitutional to pass the two decrees. Until a new government was formed, he warned, there could be no progress.

There have also been major concerns around the way in which Bassil is leading the process ­­— with allegations of monopolization of power and a complete lack of transparency over funds, as revealed in Executive’s October edition. These doubts over his personal role have made rival political parties less willing to reach a compromise.

This dual process of politicization and personalization has created the general impression that meaningful progress on oil and gas is unlikely in the coming weeks and months. If the country remains without a government — and so far prime minister-elect Tammam Salam has shown few signs of being able to form a ruling coalition — it is likely that the delay will stretch on into 2014.

Trouble in paradise

As a short-term consequence of this the country is likely to fall further behind its neighbors Israel and Cyprus in the race to extract offshore resources. The two countries have moved closer in the past year, agreeing a memorandum of understanding to establish a joint liquefied natural gas plant in June. Both are several years ahead of Lebanon in their processes.

However, they have been having their own share of setbacks recently, suggesting the eastern Mediterranean may not be as lucrative as previously thought. In early October the Texas-based Noble Energy announced that the amount of gas found in an oil field off Cyprus was 5 trillion cubic feet (tcf), significantly lower than the 2011 estimate of 7 tcf. For Israel the news was worse still. In mid-October Israeli company Shemen Oil and Gas Resources Inc found that the Yam 3 well, previously estimated to contain up to 120 million barrels of oil, was all but dry. After an investment of over $170 million, the company looks set to abandon the project.

The two cases should serve as a warning that when Bassil makes statements — such as he did in late October — that Lebanon has discovered more gas than previously thought, he is not strictly in the know. While the seismic surveys have been largely positive, until drilling begins there are no guarantees Lebanon has enough hydrocarbons to make it financially worthwhile to extract them.

Yet the promise of oil and gas, however far away, is starting to have negative effects on already stalled attempts to push through much needed reforms to Lebanon’s distorted economy. “It is very misleading, the talk that we are about to turn into an oil or gas exporting country like Qatar. But that is what the politicians have projected onto the population,” says Nassib Ghobril, head of research at Byblos Bank. He cites in particular a government billboard campaign that included statements such as “Now we have oil, we can fund the army.” The promise of oil and gas money is encouraging a careless spending attitude, says Ghobril. “The worst part is you have ministers in this government that say ‘It is ok if you spend because we can make it up with oil and gas later on. There is no need for reforms now.’”

Looking ahead

Trying to stare into the crystal ball of Lebanon’s political future is notoriously difficult. Sometimes what may appear to outsiders as a stalemate can suddenly produce a constructive deal. Carole Nakhle, an energy economist specializing in international petroleum, points out that the fluctuating nature of Lebanon’s political sphere means that a deal is not impossible — if political interests align.

“The late [British prime minister] Margaret Thatcher once said ‘in politics expect the unexpected’. In the Lebanese context, this is doubly true,” she said. “I can’t guess what is happening in politicians’ minds especially in the light of the conflicting and diverging interests — both on an individual and political party levels.”

Nakhle stressed, however, that the longer the delay continues and politicians continue to fight for power, the more damage it could do to the country’s oil and gas bids. “The more the oil and gas sector becomes politicized, the worse the consequences will be.” The long-term goal, she argues, should be to “depoliticize the energy sector and take a national, long term perspective.”

Ghobril thinks a deal will be made at some point, providing the major political groups get their share. “Our political class have been dividing the economic pie for 30 years, but the pie has been shrinking because they have eaten it. The new economic pie is oil and gas — the politicians are looking at how to divide it…I suspect they will find a way [to make a deal in 2014] — their objectives meet when it comes to oil and gas.”