Political Uncertainty To Weigh On Upstream Potential

BMI View: Spectrum's new seismic survey of offshore Lebanon could boost already-high interest in the country if it further confirms its gas potential. Its first ever licensing round - which will open in May 2013 and close in November 2013 - will most likely be well received. Notwithstanding its below-ground potential, monetisation of Lebanon's gas riches - if and when found - could face serious regulatory roadblocks owing to the country's fragmented political environment. This could make Lebanon a more difficult operating environment compared to other countries sharing the Levantine Basin such as Cyprus and Israel.

The buzz surrounding Lebanon's offshore gas potential continues as t he country inches closer to the launch of its first ever licensing round in May 2013 . Spectrum , an Oslo-based seismic services company, will kick off another 3D shoot that will cover 2,200 square kilometres (sq km) in the Levantine Basin. This adds on to the existing 3,100sq km of 3D data it already has for offshore Lebanon , which it estimates could hold 840bn cubic metres (bcm) to 1.12trn cubic metres (tcm) in prospective gas resources.

Excitement All Around

Lebanon is enjoying the spillover effects of large discoveries made in the Levantine Basin by Israel and Cyprus in the past three years. The Tamar, Leviathan and Aphrodite deepwater gas discoveries opened up a new petroleum province in the East Mediterranean Sea to the benefit of countries with territorial rights to these waters ( see our online service, January 3 2012, 'Noble Makes It Three In A Row With Cypriot Gas Discovery ) .

Shared Fortunes
Discoveries In The Levantine Basin

Cyprus enjoyed a good reception to its Second Licensing Round ( see 'Aphrodite Brings Exploratory Interest', May 15 2012), while major oil companies such as Total, Gazprom, China National Offshore Oil Corporation (CNC) and Woodside had competed for a slice of the Leviathan field ( see 'Woodside Counts On Leviathan', December 4 2012). Lebanon also saw 52 companies submit an interest to participate in its first licensing round, of which 46 have obtained the right to do so ( see 'Early Indications Of Interest, But Risks Endure', April 4 2013).

Seismic Promises

This interest in Lebanon's offshore potential is good news for Spectrum, which has had a good start to the year thanks to announcements of new licensing rounds in prospective offshore acreage in Brazil and Lebanon. The Norwegian seismic firm stated in its latest company presentation that Q113 was the company's 'best quarter to date'. It has already made its first sale of seismic data on offshore Lebanon even before the launch of the round in May, and expects to continue reaping the benefits of this high level of interest in the country as firms tap Spectrum's data to help decide their bid offers in Lebanon .

3D seismic data is available for about 70% of Lebanon's offshore acreage. A full data set of the additional 2,200sq km it is surveying offshore Lebanon will be available by September 2013, bringing 3D data availability up to 95%, according to Spectrum's geoscience director Neil Hodgson. This will allow c ompanies sufficient time to look into them ahead of the close of the licensing round in November 2013. If interest in Lebanon's potential continues, Spectrum can definitely expect its Lebanon data sales to add to its profits for the year.

Interest in offshore Lebanon could even increase on the back of Spectrum's announcement that its newly collected 3D data suggest gas in offshore Lebanon could be easier to extract than expected. Geoscience director Hodg son told the Daily Star that Spectrum has identified a shallower layer than that drilled in offshore Israel ; not only does it have high prospects, companies may only need to d rill wells to half the depth of those in Leviathan and Tamar to reach the target , thereby increasing the commercial viability of projects. Like Cyprus, Lebanon's first licensing round could be a raving success, barring any unforeseen disruptions to the country's political stability.

The New Cedars Of Lebanon?

This seismic data certainly contributes to the country's prospectivity and could boost its hopes of starting offshore exploration by 2015. However, we maintain that political risks could reduce the upstream rewards in Lebanon. Unlike Israel, which has better institutions and a st able government , at the time of writing Lebanon remained stuck in a political gridlock. Although Tammam Salam has been appointed caretaker Prime Minister following the resignation of Prime Minister Najib Mikati in March 2013 , Salam has yet to announce his new cabinet.

Indeed, according to energy lawyers cited in the Lebanese paper The Daily Star , Lebanese law limits a caretaker government's powers to managing day-to-day affairs. Parliamentary elections are expected to take place in 2013, although their execution and outcome are far from certain. This is particularly true given that, at the moment, the country's main parties are still encountering difficulties in choosing what type of electoral system to implement ( see 'Key Risks To Watch' , March 15 2013 ).

Political risks alone will not deter the entry of oil companies into Lebanon, but it could bring about regulatory hurdles for firms if and when they proceed from exploration to production. Lebanon still needs to come up with a comprehensive set of regulations for its nascent oil and gas industry. A divided political environment will most likely see a delay in t he passage of such regulations. The d istribution of potential hydrocarbons wealth could prove a particularly thorny issue that could hinder negotiations as they seek to appease all segments of Lebanon's fragmented society.

Indeed, the handling of newfound hydrocarbons revenue has been particularly sensitive for new hydrocarbon s producers with relatively fragile political institutions - an issue that aspirant producers such as Uganda and Liberia have faced/are now facing . Lebanon may hold large below-ground promise, but monetisation of its gas resources could prove to be more politically difficult than in Israel and Cyprus.

Trailing Behind East Mediterranean Peers
BMI's Political Risk & Business Environment Ratings For Lebanon, Israel & Cyprus
This article is tagged to:
Sector: Country Risk, Oil & Gas
Geography: Lebanon, Lebanon

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