Build & Reform pillar, #ReformStateInstitutions, #ReformRegulatoryFramework, #BuildCorporatePurpose, #ReformPoliticalEconomy, Strategize Pillar, #StrategizeEnergy, #StrategizeWater, Develop Pillar, #DevelopCompetitiveness, #DevelopLabor

Q&A with LPA

Discerning the next steps of oil & gas

by Jeremy Arbid

Lebanon is approaching a milestone nearly eight years in the making. In December, cabinet awarded two separate exploration licenses to a consortium of three companies: France’s Total (the operator), Italy’s Eni, and Russia’s Novatek. Contracts were signed at the end of January, leaving the consortium and the government about one year for preparatory work ahead of the first exploratory drilling in 2019. Executive met with Walid Nasr, president of the board of the Lebanese Petroleum Administration (LPA), the sector’s regulator, to find out what comes next.

E   At the end of January, the government signed exploration and production agreement (EPA) contracts. What happened between awarding the licenses and signing the contracts?

Finally, we have reached a point to start operations. After the approval of the cabinet to award the two blocks to the consortium, the companies are requested to provide the work commitment guarantee and parent company guarantee. These are two very important documents required to have [the] full commitment of the companies to actually implement their programs through the work commitment guarantees. And the parent company guarantee is very important because if anything goes wrong, the mother companies, who are fully in line with the prequalification requirements in terms of their financial capacities, would actually cover any losses or damages or anything coming up from operations. This is a safeguard to the government that we have such guarantees. The guarantees are uncapped.

E   Can you outline the aspects of the work commitment guarantee?

The consortium has proposed a technical offer with an exploration program with minimum work commitments, and the LPA has put in the tender protocol. It is published and known that there is a minimum commitment of one well for every exploration period. We have two exploration periods, [the] first one for three years and the second one for two years. So companies were required to drill at least one well in every period, and this is what the companies have actually submitted.

The companies need to estimate a budget to be able to implement their exploration program, and that budget will be covered by a work commitment guarantee issued by their bank. So in case, for any reason, the companies do not fulfill their work commitment as agreed upon in the offer, and then in the exploration plan that will be submitted soon, the government will have access to the money and the work commitment guarantee for the government either to implement it itself, or to bring another company to implement it. This would safeguard the targets set by the government to actually drill. So if the consortium fails to drill, the government has access to funds that would enable the government to do the work.

E   Have the guarantees been finalized and submitted?

The guarantees will be provided very soon. After that, it’s administrative work, but also a lot of technical work and preparing logistics, because the companies will have to prepare themselves to be able to drill in 2019. We have a firm commitment from the consortium to drill one well in Block 4 and one well in Block 9 in 2019, meaning a lot of additional assessment, studies on the geology, on the technical side, on where and how to drill. Then, logistically, because based on the regulations the companies need to operate from Lebanon, they will need to open offices in Beirut or [elsewhere] in Lebanon … [and] prepare all the logistics needed, including a supply base in. So 2018 will be a very busy year for the government and the consortium to make sure that all the preparations are done in terms of permitting administrative work, technical work, logistics, and all types of studies to be able to reach our goal of drilling two wells in 2019.

E   Did the companies offer to conduct more seismic surveys in their bids—would they need more data to narrow down exactly where they will drill?

In the offers themselves, the companies didn’t provide additional seismic surveys, and this [is] a very good indication that the seismic surveys conducted by the servicing companies [contracted in the past] by the Ministry of Energy and the LPA, were satisfactory for the companies. The companies were required to buy licenses to use the data of the seismic [surveys], and they have done so. They prepared the offers based on the interpretation of the seismic surveys that they have done before, and they were very satisfied with the quality of the survey and their coverage.

All our blocks are covered with 2D and 3D data. Accordingly, they have done their assessment and the prospect of our offshore [fields]. That is why they applied and provided an offer for that. And they even provided details on how they want to drill and where. The companies did not commit to seismic surveys because they assessed they don’t need them. Now they still have the option to do seismic surveys if they think they’re needed to have a better exploration program. When they submit the exploration plan in the coming 60 days, then they will identify what type of studies they are doing and whether they need to do seismic surveys or not.

E   In December, Executive incorrectly reported that the strategic environmental assessment (SEA) was to be completely redone, and also incorrectly reported how it was to be contracted and carried out. Can you explain what is happening with the SEA in terms of an update and its expected completion?

The SEA was completed in 2012, before an SEA decree was [completed] by the Ministry of Environment, standardizing how an SEA should be done. The SEA has identified different scenarios [for] what may happen during the development of the petroleum sector in Lebanon, and it had a set of recommendations [for] what needs to be done next after preparing the SEA. The LPA had taken the recommendations of that study and has done a lot of work to actually implement these recommendations, for example, preparing a national oil spill contingency plan. Now, in 2017 and 2018, we thought it was time to update the SEA with anything new since 2012—most importantly, to include any additional environmental data available in our analysis. This will be done soon. It will also include environmental management plans for the sector.

E   A draft law for a sovereign wealth fund (SWF) has been submitted to a parliament subcommittee for debate. What role does the LPA have in contributing to this draft law?

The concept of the SWF is laid down in the Petroleum Resources Law 132, which says that all revenues coming from petroleum activities need to be put in the SWF. Now, the LPA is not an institution mandated to establish the SWF, nor to manage [it]. Our role is to basically give guidance to other institutions in the government related to the technical part of the input needed for the petroleum sector. So what we’ll be doing is that we’ve been coordinating with the Ministry of Finance and now, as you mentioned, this will be discussed in the Parliament and specialized committees. So the LPA will take part in those discussions in those parliamentary committees to provide any technical advice or input needed for the parliamentarians to discuss the SWF.

E   Are there specific revenues that have already incurred?

The revenues incurred so far are the revenues from sales of the licensing of the seismic data. And this is now put in a separate account in the central bank, [and] again this is a decision of the Parliament of how to use this fund, and whether this can be seed money for the [SFW].

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Jeremy Arbid

Jeremy is Executive's former economics and policy editor.

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