In an effort to maximize the benefits for the local economy from the oil and gas industry, the Lebanese Petroleum Administration (LPA) has included provisions in the model exploration and production sharing agreements to help domestic companies. The contracts state that when oil and gas companies need to procure goods, they must give preference to qualified local suppliers, even if the suppliers’ price is up to 5 percent more than a foreign providers’. For services, local contractors will get preferential treatment, even if their prices are up to 10 percent more than a foreign supplier. Executive sat down with Walid Nasr, the LPA’s head of strategic planning, to take a closer look at how a Lebanese oil and gas sector might impact the private sector.
E Take us to Day 1, the contracts have been signed, what happens next?
In the contract, the companies are required to operate from Lebanon, and are required to open a branch locally. This is where the first activity starts; they have a branch, they recruit [a] few people to work at the branch, and then what we mean by operating from Lebanon is that they need actually to do the services and logistics from Lebanon – unless there’s big justification not to do so. But, in principle, this is what the contract says. And then, they need to use as many goods and services from Lebanon as are available, and this will grow gradually, of course because we don’t have an existing oil and gas industry in the country. But, we have the potential to have one, and it depends on which services we are talking about. For example, for legal and financial services, shipping, transportation, communication, I think with some effort from the Lebanese private sector, they can start getting involved. In the contract, we have a provision to give incentives for local goods and services, so if the Lebanese companies offer the quality and the services required by the operator, they’ll get preferential treatment. It’s also in the regulation that all contracting and subcontracting has to be done by public procurement. This is extremely important because the operators will have to procure every single thing they need [publicly], whether it’s goods or services, and Lebanese will have the opportunity to apply, compete, and get those contracts.
E And will that be done via the LPA’s website?
No, this will be done by the companies directly. We’re working on [the details of what this will look like], but definitely [all procurement notices] will be public. The tools and the [exact mechanism are] being designed now and will be agreed upon with the operators. But, the important fact is that it [will be done publicly]. Everyone will have the opportunity to see what’s required, and apply if they have the services and can compete.
E Aside from contracting and subcontracting incentives for local businesses, is the LPA working with the private sector to prepare for the birth of this industry?
It’s not our job to do it, and the operator will have to [contract out various goods and services]. I think the Lebanese private sector is good enough to grasp opportunities, establish itself, and provide these services. Of course, we would encourage that, but it’s not the LPA’s job to [get the private sector ready]. So, the operator will have to say, ‘We need such and such services,’ and any company that can provide [them], Lebanese or non-Lebanese, they can compete and get it.
E When it comes to project finance, are there are big opportunities for local banks or will most of the operations be financed from abroad?
Typically the operator [will finance the project] because we require a consortium with a minimum of three companies [one operator and at least two non-operators] for prequalification, and the financial requirements are high. The operator needs to have, at minimum, total assets of $1 billion, and non-operators [must have] $500 million, so already the consortium will have a lot of capital available. And, those three companies – they may be more, but at least three – usually have their own funding sources. But, of course, as with all the services these companies will need, if Lebanese banks wish to, they can provide certain financing for these companies and agree on some things. But, by law nothing is mentioned, the operator is free to get its funding from anywhere.
E Oil and gas projects, especially in the exploration phase, tend to be valued in the hundreds of millions of dollars. In other emerging markets, do local banks play a big role or does the finance come from abroad?
I’m not aware of the specific cases of local banks. But, what I know is that which is usually industry practice for any business – the operator will search for the least expensive source of funding. So, I presume they are open to getting funding at the cheapest rate. If Lebanese banks are willing to get into this venture and provide cheap financing, or at least competitive financing, I think they have an opportunity. But, we need to always emphasize that exploration is risky. If the bank or the operator wants to get into an agreement on funding this risky operation at a competitive rate and they both agree, they can do that.
E What about local insurance companies, I know they were asking for regulations allowing local insurers to pool capital and requiring contract winners to insure projects locally. Did that ever get written into the rules?
No, they have to compete. If they can provide the operator with the coverage that operators need at a competitive price, why not? But, that’s their job.
E One could argue a Lebanese oil and gas industry could boost the country’s dormant capital markets. The model contracts require each company that is part of a winning consortium to open a local branch office. Did you consider requiring companies to turn the consortium into a locally registered company, some or all of which must be floated on the Beirut Stock Exchange?
I think it can be done in the future. But, we need to start somewhere. It’s a frontier area, it’s our first licensing round, first well to be drilled, so let’s take it step-by-step.
E Finally, should natural gas be found offshore, as many expect, what are the plans for using it domestically?
We’re planning, with the ministry of energy, to start increasing the demand for natural gas in Lebanon. First, it’s environmentally better, not as much as renewables, but it’s much cleaner than using fuel oil or diesel oil, and it’s relatively cheaper. If we manage to extract our own gas, we’ll be using indigenous gas and ensuring energy security. We did studies on this. The first client [for local gas] will be the power generation sector. Of the [country’s] current [electricity] generation capacity, around 60 or 65 percent could be generated using natural gas, and [any] new plants will all be operating using natural gas.
The next client after power is the industrial sector. Today the industrial sector is facing difficulties, especially as they can’t compete with industries in other countries, and the main factor [behind this] is [the high] energy bill [they pay because of generation shortages from the public utility, Electricité du Liban]. If we can provide the industrial sector with a cleaner, cheaper, more sustainable source of energy, they may be better able to compete. [Down the road, we may have] an opportunity for new industries to be established that depend more on energy [like petrochemicals].
So, the short-term is power, the medium-term is industry, and the longer-term is [getting] the commercial residential sector to be able to use natural gas. Here, you have two options, either you gasify the commercial residential sector [which requires building a residential pipe network to deliver the gas] or you [encourage more residential electricity use] and the electricity will be [generated from] natural gas, which is more reasonable and cheaper to do.