Walid Nasr’s eyes rolled so far back his head, Executive worried he was having an episode. The Lebanese Petroleum Administration (LPA)’s head of strategic planning was clearly disappointed. Only a few moments into an event organized by the Lebanese Forces, the emcee had wasted no time in estimating the value of Lebanon’s undiscovered offshore oil and gas. Whether she said it was hundreds of millions or billions USD, Executive forgets, as any such forecast is not worth remembering. As promising as Lebanon’s offshore may be, (with each new discovery in the east Mediterranean only adding to the hype), only actual drilling brings any certainty.
That said, revenues are no doubt the first thing to come to mind when one thinks about the oil and gas industry, followed closely by images of a country and economy transformed (think back to the billboards promising bullet trains built with resource money peppering Beirut in 2013). In an interview with Executive, however, Nasr explains, “To get an answer on all the [economic] impacts [the industry could have], you need four important factors: the volumes (discoveries and how large they are), the cost of production, the market price and your actual market. Those four variables are totally unknown.” The LPA, he says, has done scenario planning based on a variety of estimates, but “those series of results are not actual numbers that will be published because they are based on a lot of estimates and assumed values.” And this is only measuring the direct economic impact from the sector (i.e., revenues and employment). The LPA is also embarking on an exercise to estimate the multiplier effect the sector would have throughout the economy. “To have an actual number in ripple effect, you have to know all the variables I talked about [on] one side, plus you need data from the country itself, like the national accounts, economic indicators, facts and figures about other relevant sectors. This is what we are trying to collect, and you know the challenges regarding accurate data and the availability of data,” Nasr says. A sober and pragmatic economic approach to building an oil and gas industry is key, he argues, pointing to a problem already manifesting itself in the education sector.
[pullquote] A country can wait more than a decade between signing an oil and gas contract and the first revenue flows [/pullquote]
Lebanon’s first offshore licensing round opened in 2013, with an expectation for exploration and production sharing agreements to be signed in the first quarter of 2014. Many of the country’s universities took this deadline seriously – even if if its politicians did not – rolling out courses and majors in fields like petroleum engineering and the like. “This is a major problem,” Nasr says, “because the students that have already graduated can’t even find [local] training opportunities, since the industry doesn’t exist. We need to go step-by-step and be really gradual in thinking and moving forward.”
A slow start
Oil and gas is a long game. Contracts tend to last 30 years or more. For offshore acreage like Lebanon’s – which has never been drilled – this means that if contracts are actually signed as planned in November 2017, the country’s economy is still many years away from an oil and gas boost. An October 2014 guide from the United Kingdom’s Department for International Development estimates that – at the long end – a country can wait more than a decade between signing an oil and gas contract and the first revenue flows, as companies decide where to drill (exploration phase) and evaluate any discoveries made (appraisal phase). The guide states, “It is important to note that in the majority of instances, [oil and gas] activity is unsuccessful at the explore and appraisal phase – no potentially viable oil/gas sources are found, or when exploration wells are drilled no oil/gas is discovered or the reserves are not sufficient to justify the size of investment required to extract them. The majority of projects will therefore not reach stages three [development], four [production] or five [decommissioning] of [a typical project] life cycle.”
In Lebanon’s case, keeping its first offshore licensing round open for more than three years has given it a data advantage. It is not uncommon for a country to open a licensing round on acreage that has never been surveyed. Nearly all of Lebanon’s offshore, however, has been covered by 2D and 3D seismic surveys, with the data being interpreted and reinterpreted over the years. This means that the companies that win contracts will start with a pretty good idea of where they might want to drill. Some additional surveying may still be needed, but the bulk of the work that can make the exploration phase take up to five years has already been completed.
Lebanon’s exploration phase, by law, can last up to 10 years. However, the model contracts the state hopes to sign soon narrow that timeframe to five years, divided into two periods (the first a three-year period, and the second a two-year period extendable for another year with sufficient justification, according to the model contract). Companies are obliged to drill at least one well in each of the periods, though they can opt for more. An exact work program (drilling plans and other components) during the full exploration phase is one of the items (with multiple sub-components) companies bid on when submitting an offer. While this seems a strategy in part based on the aforementioned wealth of data and designed to get the sector moving relatively quickly, the actual impact on the economy in the first years after the contracts are signed is likely to be minimal.
Zooming in a bit, as soon as contracts are signed, the winning companies will have to open branch offices in Lebanon. With a theoretical maximum of five contracts being signed, this translates into some very minor FDI flows into real estate (it applies to each company in a consortium, so if two contracts are signed – each with a three-company consortium – that is six branch offices). On employment, it’s impossible to guess at this point, but it seems clear that a few branch offices will only require limited staff. And while the model exploration and production sharing agreement includes a much-talked-about requirement for contractor staff to be comprised of 80 percent local citizens, Nasr stresses this a target and “a gradual thing.” “Knowing the situation and to be very pragmatic, we know that we cannot supply 80 percent of professional Lebanese experts from day one, it’s not something doable. However, we kept this target so that companies make every effort to recruit as many Lebanese as possible,” he explains. “Every year the companies will have to submit a recruitment plan – what they need in terms of human resources – and they also do public recruitment, so they would announce the professions needed and Lebanese can apply. If they have the qualifications and skills needed they receive preferential treatment, if they don’t, companies are not obliged to recruit any Lebanese who doesn’t fit the criteria.”
Additional surveys that companies may want to conduct will only have a limited economic impact. An offshore geological survey can cost millions of dollars, but most of that would not actually enter the local economy. However, Nasr notes that for past offshore surveys, “when those [survey] companies were working here, they used some Lebanese services like legal firms, logistics, whatever they needed to actually implement the survey, but of course this is a small percentage of the total investment.”
Feeding the beast
In an effort to pull maximum investment into Lebanon, the rules call not only for hiring locally when possible, but for sourcing goods and services locally as well. In fact, the model contracts give local companies an advantage, requiring oil and gas corporations to use a public procurement procedure when contracting and subcontracting for every good and service, and demanding locals be given preference even if their prices are slightly higher (10 percent for services, 5 percent for goods) than an equivalent foreign supplier. In the earliest days this might not amount to much in terms of opportunity for the private sector, but if commercially viable discoveries are made, the opportunities (and revenues) will begin flowing. Again, Nasr will not put any numbers on what the future might hold, but notes, “I think with a few efforts from the Lebanese private sector, they can start getting involved.”