The oft-touted promise of great gas wealth under the sea floor off Lebanon’s coast has recently compelled the nation’s eyes toward the western horizon. There is a slowly growing sense of inevitability building around Lebanon’s potential hydrocarbon windfall, which was further accelerated by the appointment of the board for the Petroleum Administration in late 2012. In the coming year Lebanon intends to open a tender round for the exploration and production agreements that will legally enable International Oil Companies (IOCs) to tap into the ocean floor in search of oil and gas. But this industry is a game of patience, and assuming there are commercially viable finds down there, no chips will likely be cashed for around seven to 10 years.
A sober assessment of how the country might benefit from access to this newfound resource requires a refocusing on the foundations that need to be laid. Even while teams of engineers are busy searching for hidden riches in the years to come, there is a gargantuan task back on shore, which may grab fewer headlines but is certainly no less important.
The challenge will be to implement major infrastructure developments that will enable Lebanon to wean itself off expensive fuel oil and diesel, and shift towards cheaper and cleaner natural gas, whether the explorations at sea prove successful or not.
“We need the natural gas now. The power plants need it now, the industry, the businesses. We cannot wait,” explains Saad Merhej, general manager of B.B. Energy, a global energy trading company with its management headquarters in Beirut. His sentiments reflect those of Neemat Frem, president of the Lebanese Association of Industrialists, who said in a 2012 interview with Executive that the benefits for Lebanese industries of shifting energy supply toward gas could “not be overstated”.
Clearly a better deal
Lebanon has long courted a policy of moving towards a greater reliance on gas but virtually no progress has been made. The primary motivation for such a shift is simply cheaper fuel and lower operation and maintenance costs, as Lebanon currently uses an expensive combination of heavy fuel oil and diesel to feed its electrical powerplants. The price of natural gas ranges from between $300 to $500 per ton, making it around a third cheaper than the price of heavy fuel oil (HFO), which is typically around $700 per ton and considerably cheaper than diesel, which trades for around $1,100 to $1,200 per ton. The gap in prices is only expected to increase in the future as crude prices rise with global economic growth.
The inefficient and expensive production of power in Lebanon is the third largest drain on the public coffers, after debt servicing and public sector wages. From January to August 2012 the total fuel bill for the national power utility, Électricité du Liban (EDL), was $1.45 billion, of which the Ministry of Finance covered 96 percent. Even if Lebanon has to import its gas, this burden on the state’s finances would be significantly reduced, and if offshore drilling proves successful then the fuel bill could potentially be self-financed altogether.
The savings on fuel costs are the easy sell but there are other benefits too. Natural gas has a burning capacity of 11,464 kilocalorie per kilogram (Kcal/kg), which is higher than fuel oil or gas oil, at 10,035 Kcal/kg and 10,350 Kcal/kg, respectively. This means more energy per unit, or essentially more bang for your buck. Natural gas turbines also have a longer life span and lower maintenance costs than other fuels, reducing long-term overheads. Finally, while burning natural gas contributes to greenhouse gas emissions and can’t be compared to carbon-free energy sources, it is nonetheless cleaner and more efficient than other hydrocarbon fuels such as diesel and HFO, and therefore has a lower environmental impact.
Previous pipe dreams
Although Lebanon has a long history of trying to move towards a greater reliance on gas, the fruits have been pitiful. “Politics, greed and discord are at the heart of our failures,” says Chafic Abi Said, who formerly held posts as director of studies at EDL and advisor to the Ministry of Energy and Water (MoEW).
The first major step towards bringing gas into Lebanon’s energy mix date back to the mid 1990s, when two combined-cycle turbines were bought for power plants at Beddawi in the north and Zahrani in the south. The turbines were meant to run on natural gas, but the policy makers had put the cart before the horse and once the turbines were operational, they found themselves without a secure and regular supply of gas. Consequently, light modifications were made to the turbines and they were converted to using more expensive and dirtier gas oil.
A number of pipe plans and import schemes for Lebanon were discussed but none of them made it off the ground in those early years. The Egyptians had planned to build a pipeline through the Mediterranean to Turkey and then into Europe, to which Lebanon hoped to establish a connection. However, the pipe was rerouted overland through Jordan and the Lebanese dreams were dashed.
In December 2001 the government signed a 20-year deal with Syria to import some 1.5 billion cubic meters per year of natural gas, at a price that was roughly two-thirds the existing cost of fuel imports for power production.
By 2005 a pipeline with a capacity of 3 million cubic meters per day was built connecting Syria’s gas infrastructure to the Beddawi plant in northern Lebanon and it finally seemed the gas tap could be turned on.
However, Syria reneged on the deal and — according to Abi Said, who had been party to the negotiations — blamed technical problems and then gave a “hazy answer”. In light of the assassination of former Prime Minister Rafiq Hariri and the subsequent withdrawal of Syrian troops from Lebanon many argue this was as much, if not more, politically motivated as it was technical.
It was not until 2009 that natural gas entered into Lebanon’s energy mix when the 1,200 km Arab Gas Pipeline, linking Egypt’s natural gas facilities to Jordan, Israel, Syria and Lebanon, started supplying the region. It was a short-lived affair. The flow of gas was subject to frequent disruptions, first over pay disputes and then due to a series of explosions targeting Egyptian gas infrastructure in the Sinai. The last delivery of Egyptian gas to Lebanon was made in November 2010.
More recently plans have come to the fore to build a $10 billion pipeline through Iraq and Syria to enable the supply of Iranian gas to Lebanon’s power plants. Iran currently consumes almost all of the approximately 600 million cubic meters of gas it produces daily, but is hoping to double its production to export some 250 million cubic meters of gas per day in 2015 by developing a massive offshore gas field that it shares with Qatar. The odds, however, are stacked against this particular proposal being realized in full and the gas making it to Lebanon. In the first instance, it is hard to imagine the proposed pipeline making it past the Iraqi-Syrian border while the civil war next door burns unabated. What is more, even if the pipeline were to be completed, Iran’s influence in Lebanon is such a politically divisive topic that domestic opposition to a reliance on Iran for fuel security would surely be fierce.
Lebanon’s ambitions to bring gas by overland pipelines to alleviate the burden of its decrepit power sector have clearly floundered, but an alternative plan is still very much on the table. “Liquid Natural Gas (LNG) is my preferred option, even if it is a bit more expensive,” explains Abi Said. “It gives you a strategic edge because you don’t rely on politics and you don’t rely on anybody.” In 2010 the incumbent Minister of Energy and Water, Gebran Bassil, unveiled a policy paper for the electricity sector in which gas, and specifically LNG, feature prominently. With characteristic grandeur and unfettered optimism, his team’s strategy envisages a diversification of the fuel supply that will see gas increasing from zero percent of the fuel mix today to two-thirds by 2030, as well as an increase in the share of renewable energies to 12 percent.
While the ambitions are commendable, the means by which this minister hopes to achieve them are essentially old policies rehashed. The same questions over why projects that have resurfaced for nearly 20 years have not succeeded are still as relevant today. “During the previous administration in 2006 we signed a memorandum of understanding (MOU) with the ministry including all the contractual agreements, such as cost, supply, location… Unfortunately politics got in the way,” says B.B. Energy’s Merhej. The company agreed to build a floating regasification storage unit (FRSU), which would have been able to receive and store LNG before turning it back into gas for delivery to the power plan at Zahrani. With a change of government came a reshuffling of the ministerial deck and the deal was scrapped. “We could have had it built by now and we would have saved hundreds of millions of dollars for the country,” laments Merhej.
This aborted attempt to open Lebanon up to the global LNG market is one of many such debacles. Between 1996 and 1998 preliminary efforts were made to market LNG in Lebanon, most notably through a joint consortium of energy companies, consisting of France’s Elf, Italy’s Ansaldo and the United State’s Kellogg, yet the deal never came to fruition. Then in 2000, the Kellogg Brown & Root company completed a study on the installation of a terminal in Salaata, northern Lebanon, on EDL-owned land, where LNG would be imported, stored and regasified. Again, the proposal never made it beyond EDL or the MoEW. In the following years other LNG proposals were pursued, including the B.B. Energy FRSU plant, but none saw the light of day.
A broken record
The current plans for the power sector outlined in the 2010 policy paper have revived many of these major infrastructure proposals that have been often debated and never realized. The two most important of these are an FRSU and a coastal gas pipeline to connect all of the power stations from Beddawi, north of Tripoli, to Tyre in the south.
“The pipeline is the backbone for the Lebanese coastal gas supply to the different power plants and eventually out to industrial and residential and commercial areas,” explains Zaher Sleiman, advisor to Minister Bassil. The ministry announced in December 2010 that it was ready to launch the gas pipeline tender, but a lack of foresight over how the government was going to pay the projected $450 million (LL675 billion) price tag precluded that from happening. “Due to the financial difficulties that the Lebanese government is facing, we have not been able to finance such a project,” concedes Sleiman.
If the minister’s plans for a significant gasification of Lebanon’s power sector — which involves building or converting all the power stations to make them gas compatible and developing a gas pipe network to industrial, commercial and transport hubs — are to be realized, the coastal pipeline is essential. In April last year the Council of Ministers, Lebanon’s cabinet, agreed on a three-year program law that would enable the private sector to participate in the financing of the project. “Although this law has passed the Council of Ministers it still needs to be ratified in the Parliament, so unfortunately we are still not able to launch the project,” says Sleiman.
The other major component of the onshore gas strategy is the FRSU at Beddawi power plant, which would be the portal for LNG to enter into the Lebanese network. The ministry has been working with the consultancy firm Potten & Partners to devise an import strategy and Sleiman says that requests for proposals will be sent to pre-qualified companies in the first quarter of this year.
Show me the money
If, and it is a very big ‘if’, these infrastructure projects are actually realized then Lebanon will have the framework on which to build the functioning and well-supplied gas infrastructure that has eluded policy makers and technocrats for many years. However, many of the reasons for previous failures still exist today, which does little to inspire confidence. “This kind of infrastructure requires billions of dollars of investment over a number of years. There is no way the government can deliver this. They need to bring in private investment and enterprise,” says B.B. Energy’s Merhej.
Many industrialists and investors share these frustrations, having witnessed successive ministers at the helm of the energy sector flirt with the idea of greater involvement from private enterprise but never follow through.
In 2002, Law 462 was adopted with the intention of modernizing the electricity sector so that the government would set policy and strategy, the private sector would implement that strategy where possible and an independent regulator would oversee the private sector. However, more than a decade later private enterprise remains begrudgingly fenced out while the government oversees the continued demise of the country’s power sector; meanwhile, installed capacity almost stagnated from 2000 to 2009, increasing marginally from around 2,292 megawatts (MW) to 2,313 MW, amounting to an average growth rate of 0.25 percent during this period. Over the same period the average growth in net electricity consumption was in excess of 5 percent.
“[Law] 462 has been resisted by the ministers and the high officials within the MoEW because they say it removes part of their prerogatives,” explains Abi Said. Under the current arrangement, extensive power falls under the minister, giving him great influence, over areas such as the awarding of contracts and offers of employment.
Reforms that may in some way alter or weaken this grip, whether through establishing independent regulatory bodies or handing greater power to private enterprise, have been largely resisted. “They pay lip service to [greater private sector participation] but in reality they want the minister himself to decide to which company they outsource a particular function,” says Ziad Hayek, secretary general of the Higher Council for Privatization. “They don’t want to have an actual partnership with the private sector. They want to give the private sector some kind of modified version of a management contract or an outsourcing contract."
Beyond sector specific reforms, the passing of the public-private partnership (PPP) law would go a long way to enabling private capital and expertise to advance the gas infrastructure. “The problem is financing for the projects,” says the ministry’s Sleiman. “We need to approve the PPP. If you don’t have the money then let the private sector share in the investment and the profits of the project.”
The law, however, has ground to a halt in Parliament, effectively barring Lebanon’s banks from putting their vast wealth to work in the majority of infrastructure projects.
“What are the banks financing? Cars and flats, that’s what,” says Merhej. “I want them to finance industrial and infrastructure projects.”
It is not only cash, but also lack of continuity, that threatens the ministry’s ambitious plans.
“Every minister brings with him a team of advisors, neglecting the permanent employees, and then he prepares a plan for the electricity,” explains Abi Said. “The government stays for a couple of years and then they go before they can implement anything because they need the approval of the Council of Ministers or the Parliament. The new minister comes and starts afresh.”
The fate of B.B. Energy’s agreement with the ministry to develop an FRSU is a case in point and we see several years down the line that the ministry, under a new minister, is courting companies once again. One cannot help but wonder if the 2010 plan for the electricity sector is destined for a similar fate.
“We will be lucky if the minister comes from the same political side as his predecessor,” says Sleiman. “He can help him continue with the plan, as we saw in the telecommunications sector, and this is what we hope will happen here in the MoEW.”
The minister’s designs to develop the electricity sector, including the realization of an expansive onshore gas infrastructure, are comprehensive and ambitious. What is more, he clearly has some very talented and diligent workhorses pushing the policy forward.
But if the cabinet ministers and their political masters continue their resistance to meaningful participation of the private sector in infrastructure projects then the same problems that beset previous plans threaten to strike again. The government clearly does not have the financial wherewithal or political unity to deliver on its grand schemes. Partisans of one political party may keep hold of the reins at the ministry for one or two terms, but can they expect to see this through to 2030?
“The more you bring politics into infrastructure the more dysfunctional it becomes,” reasons Merhej. Unfortunately, resistance to the PPP legislation and the creation of regulatory bodies or commissions independent of the executive branch seems as strong as ever. That spells less cash, less transparency and less longevity for even the best laid plans.