A roadmap for 2018

Drilling will not begin until 2019—but this year is brimming with preparation

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This article was originally published in print on February 2, 2018 as part of Executive’s special report on oil & gas.

At the end of January, Lebanon signed oil and gas Exploration and Production Agreements (EPA) with a consortium of companies composed of France’s Total (as operator), Italy’s Eni, and Russia’s Novatek. The consortium had placed two separate bids on October 12, 2017 for Block 4 and Block 9, the only bids received in Lebanon’s first offshore licensing round. With the contracts signed, Lebanon can now look forward to the exploration phase. The consortium has committed to drill two wells in 2019, one in each block. But what can Lebanon expect prior to drilling?

The Council of Ministers approved the award of exclusive petroleum licenses for exploration and production in these two blocks to the consortium in a cabinet meeting on December 14, 2017. This is what the EPA refers to as the “effective date,” and our starting point to map out the road ahead in 2018.

Two separate issues will be dealt with in this article. The first, larger section focuses on the companies’ obligations arising from their exploration and production licenses; the second sketches out the Lebanese state’s petroleum program in 2018.

By the end of January, the three companies forming the consortium should have established a legal presence in Lebanon, each staffed and able to carry out its rights and duties. In addition, they should have established a management committee to authorize and supervise petroleum activities. Each one of the companies has the right to appoint at least one representative in this committee. Lebanon may also be represented in this committee: The energy minister and the Lebanese Petroleum Administration (LPA) are entitled to appoint representatives, though these will only have an observer status.

The exploration phase will extend over a maximum period of six years, divided into a first period of three years and a second period of two years, which may be extended for an additional year. The consortium is expected to submit the initial exploration plan to the energy minister and the LPA within 60 days of December 14, 2017 (the effective date). The plan should be approved within a maximum period of 60 days, if it meets all the criteria specified in the EPA. On the day it is approved, the exploration phase will have officially started.

On or prior to the signature date, the companies must have provided work-commitment guarantees to safeguard the state in case of their failure to fulfill the minimum work commitment specified in the EPA. These are the tasks that the consortium is required to perform (excluding an event of force majeure). In the first exploration period, which starts on the date the exploration plan submitted by the consortium is approved and extends over a period of three years, the required tasks include conducting surveys and drilling exploration wells, starting in 2019 in Block 4 and then in Block 9.

Within 60 days of the effective date, the companies must prepare a detailed work program and a budget for exploration activities, consistent with the requirements of the exploration plan, and submit it to the LPA. The regulatory body will either approve the work program and budget within a period of 30 days, or reject it, in which case the decision must be explained to the companies in writing so that the companies may submit a revised version.

The exploration and production agreements between the consortium and the state include local-content clauses designed to benefit the Lebanese economy. Among these is a requirement to give preference to Lebanese goods and services in awarding contracts, even if the local company makes offers that are up to 5 percent (goods) or 10 percent (services) more expensive then offers by foreign companies.

The consortium companies are also required to recruit 80 percent of their workforce from among Lebanese nationals. As it may be difficult to source talent at the beginning of their activities, the legislation allows a certain flexibility. The consortium is expected to devise a detailed recruitment and training program within six months after the EPA’s approval. An updated program for recruitment and training will have to be submitted to the LPA by December 31 of each year. If the consortium at first cannot meet the 80 percent threshold, they will be required to submit a written explanation on their own behalf, and on the behalf of their contractors, detailing the reasons and requesting an exemption. In addition, the companies are  expected to assign a budget for training public sector personnel working on the oil and gas sector, starting with $300,000 per year, with a 5 percent increase each year, until the beginning of the production phase, at which point the amount will increase. These costs are recoverable costs for the companies.

A state of affairs

For the Lebanese state, 2018 will be equally busy. Parliament will be busy discussing new oil and gas legislation, including an onshore petroleum resources law and a law codifying transparency measures for petroleum activities. These two pieces of legislation have a reasonable chance of being passed this year. Two other draft laws are expected to draw intense debate inside and outside Parliament this year: A law to establish a national oil company—although Article 6 of the 2010 Offshore Petroleum Resources Law provides for the establishment of a national oil company only “when necessary and after promising commercial opportunities have been verified” and indicates that the company would be established by the Council of Ministers—and a law to establish a sovereign wealth fund (see story page 50), in addition to establishing a General Directorate for Petroleum Assets within the Ministry of Finance. In both instances, as anyone would expect, the limits of the debate will not be confined to sectorial considerations, and are likely open to political meddling or outright obstruction.   

In addition, Lebanon is planning to update the 2012 Strategic Environmental Assessment, an environmental policy-planning tool to guide decision-making and predict how the environment is expected to be affected by different scenarios. An  updated version should be completed by end of Q2 2018.

In 2018, as in 2017, power generation is going to be among the government’s biggest concerns. Lebanon’s various political factions do not see eye to eye on this front, and progress has been painfully slow. Plans to acquire floating storage and regasification units and to import liquified natural gas for power generation, a project that has been repeatedly postponed since 2013, could be reactivated this year. Two tenders, one for the regasification units and another one for gas imports, are currently being studied, but there are no indications as to when exactly they will be launched.

A big question on everybody’s mind this year is the maritime border dispute between Lebanon and Israel. Despite the occasionally heated rhetoric, the area has been stable for over a decade. Is the US planning to resume mediation efforts? Is the United Nations considering an intervention on this front? By awarding Block 9, which includes an area that is claimed by Israel, Lebanon is once again bringing attention to this subject.

Another critical milestone this year is the expiry of the LPA board’s mandate in December 2018. The current board was appointed in 2012 for a period of six years, renewable once. It is not clear at this point if its mandate is going to be renewed or not. If it is not, it remains unknown how the next board will be selected. When the current members were appointed in 2012, local media reported that they had been selected according to a procedure valid once, suggesting that the appointment of the next board might not follow the same procedure. These questions should be clarified reasonably well in advance, because, whether the mandate will ultimately be renewed or whether a new board will be appointed, these are political decisions, and every step of the process requiring a political decision is a potential obstacle. More importantly, there are EPA obligations this year (see the timeline) and beyond that require LPA participation or oversight. Better to anticipate than defer.

If Lebanon wants to send a positive and symbolic signal early in the year, a good starting point would be to publish the two contracts that were signed at the end of January with the Total-Eni-Novatek consortium. Failure to publish the contracts would undermine efforts to build a clean and transparent Lebanese oil and gas industry.

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Mona Sukkarieh

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