Complex Made Simple

Lebanon hopes to join oil producing countries but is it an oil pipe dream?

A new player is hoping to join the club of oil producing countries in the region.

Lebanon’s cabinet awarded on December 14, 2017 exclusive licenses to French Total, Italian ENI and Russian Novatek to start oil and gas exploration on its offshore in 2019.

Bids will take place on blocks 4 and 9.

The prospects of earning $billion to prop up the Lebanese economy was premised on a promise of offshore reserves. Is this dream real?

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Initial steps

It all started after the Cabinet passed on Jan 4, 2017 two long-awaited decrees, one defining the 10 blocks for bids and the other specifying the tender protocols after which the energy ministry adopted a bidding and exploration roadmap.

Lebanon also passed the right legislation when last September a petroleum tax law, including taxing the profits of companies that take part in exploration and production, as reported by Reuters.

So how will the sector’s revenues be managed and what effect will this sector have on the economy?

Economic implications

Lebanese energy and water minister Cesar Abi Khalil Abi Khalil refused to speak of revenues insisting that any such talks are too early. “What’s for sure is that funds from offshore oil and gas exploration will find their way into a Sovereign wealth fund as stipulated by law 132,” he said.

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However, a survey by the Lebanese Petroleum Administration (LPA) in Lebanese waters indicated vast natural gas deposits beneath the seabed, potentially as much as 25 trillion cubic feet (TCF) or some 0.36% of world gas resources, against Lebanon’s own estimates that there was a 50% chance it had 96 TCF of natural gas reserves and 865 million barrels of oil offshore.

If at production, 5-7 years down the road, gas prices are at around $5 per TFC, these resources’ worth would vary between $125 bn and $480 bn.

Considering oil price at $50 per barrel at production stages, the Lebanese share of the resources would be worth anywhere between $22bn and $33.7bn.

The IMF estimates oil and gas revenues could represent about 9% of government income at the peak. The Lebanese government’s take from production under the various options can vary between 57% and 78% of total revenues in line with international standards.

But what is going on in the region in terms of exploration?

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Regional prospects

Lebanon is behind neighboring countries such as Cyprus where the recent discovery of hydrocarbons within Cyprus’ EEZ has attracted a lot of attention internationally where 13 blocks are delineated in an offshore area 51,000 km² wide.

Noble Energy discovered the Aphrodite Field offshore of Cyprus in 2011. The field was estimated to hold between 5 and 8 TCF of natural gas reserves.

Also, MENA Business Intelligence MEEDS, says that Abu Dhabi saw its oil rig count hit an all-time high of 47 in August, one up on the previous record of 46 hit in November 2015, as it pursues capacity gains.

“Abu Dhabi is increasingly focusing its gas drilling offshore. The number of offshore gas rigs outnumbered those onshore in August for the first time since September 2013,” it said.

Italian company Eni discovered Egypt’s Zohr field in August 2016. It is considered the largest natural gas discovery in the Mediterranean Sea.

However, the drop in oil prices and oversupply in the market prompted other countries to drop their budgets for oil exploration.

Analysis by consultancy Douglas-Westwood has found that, although investment in new offshore production remains low, compared with pre-2014 levels, the outlook for maintenance, modifications and operations is ‘notably more positive’.

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Oil demand

The oil oversupply and the big drop in oil prices in addition to expectations that electric vehicles will dominate the market in several years raise the question of whether Lebanon is entering the oil market at the right moment.

Industry experts have on many occasions urged Lebanon to start its offshore gas and oil exploration in a bid to be able to compete with its regional peers in finding export markets for its production in addition to benefitting from the currently prevailing low cost of oil services.

A report by BofAML says that British Petroleum is expecting that oil demand will increase 15mbpd between 2015 and 2035 with an annual growth rate of approximately 750,000bpd.

Also, data from Facts Global Energy reports that most of the world’s cars will continue using gasoline fuel for the next 20 years as a minimum, which will increase demand for oil.