Exploration Held Up By Politics

BMI View: P olitical infighting regarding the passage of critical legislation for Lebanon's oil and gas development , as well a s Maritime border disputes continue to hinder the award of offshore acreage in the country . This indicates further downside risk to the pace of developmentforLebanon's fledgling oil and gas industry, delaying itsparticipationin the region's energy transformation .

The Eastern Mediterranean has proved a fruitful hunting ground for natural gas with Israel and Cyprus making sizeable discoveries in recent years . Israel in particular has benefited, managing to change from a gas importer to being self-sufficient in just five years, and will likely export from 2017. Turkey has also made recent amendments to its petroleum laws in order to entice international oil and gas companies into its offshore acreage , and promote domestic exploration and production. Lebanon has however failed to take advantage and appears to continue to lag behind its regional peers as political infighting inhibits progress.

In April this year, Lebanon announced its first offshore licensing round and around 52 companies are thought to be involved in the bidding process . Among the companies , majors Shell , Chevron and Total are qualified to bid , a long with a joint bid between Rosneft and ExxonMobil . Interest from the supermajors magnifies the level of interest and expectation for Lebanon's offshore . Initial plans call fo r production sharing contracts to be formalised from February 2014, however this appears increasingly likely to be delayed.

The Lebanese Cabinet must endorse two decrees in order to assign the 10 blocks offered to foreign oil and gas companies and set out licensing terms . The first decree covers tender protocol and the outline of the production sharing agreements, while the second demarks 10 blocks within Lebanese waters. However, indications point to a lack of consensus in the Cabinet on whether or not to pass the decrees. Supporting this view , c aretaker Prime Minister Najib Mikati recently refused to hold a special session to endorse the law as he fel t it would create a further dispute to the numerous crises already faced by the country. The oil and gas auction has now been setback to January 10 th 2014 , after the failure to pass the decrees. Th is delay will therefore postpone any developments in the countr y' s offshore as license awards are unlikely to be made until critical issues are ironed out.

Maritime Border Dispute Adds Further Downside

One reason delaying the passing of the oil and gas decrees relates to the maritime border dispute between Israel and Lebanon. The border is still yet to be officially demarcated and Israel claims that Lebanese Blocks 8 & 9 encroach on its Exclusive Economic Zone (EEZ). Around 850 square kilometres remains in dispute.

Maritime Border Dispute Remains A Challenge
Levantine Basin Discoveries

Lebanon therefore remains in a difficult position. Seismic surveys in the southern part of Lebanon's offshore indicate the p otential of around 25 trillion cubic feet of gas (700 billion cubic metres), yet part of th i s are the very waters that conflict with Israel i claims . Israel has refrained from award ing exploration license s in this area due to the lack of a legal boundary, though the recent Karish discovery falls close to this area.

It therefore appears that the issuance of Lebanon's offshore blocks will continue to be delayed until either the maritime boundary is legally demarcated, or the decree establishing the boundaries of the Blocks is amended to exclude the intrusion of Blocks 8 and 9 into the disputed area . With the current political challenges being faced by Lebanon and its difficult relationship with Israel, neither of these options appears likely to happen at the current time. I nternational oil companies may also be dissuaded from investing in Blocks 8 and 9 if the bidding round was to go ahead without a solution.

The political wrangling and maritime border dispute indicate the high level of risk associated with investment in Lebanon. The continued delays serve to confirm existing concerns about Lebanon's stability and business environment that could impede the country's nascent oil and gas industry development . While Israel and Cyprus are forging ahead with exploration and development of their respective resources , Lebanon is increasingly being left behind and could suffer as a result .

This article is tagged to:
Sector: Oil & Gas
Geography: Lebanon, Cyprus, Israel, Turkey

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