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Momentum behind Mediterranean LNG exports is slowing

While its neighbours push ahead with major developments, Lebanon lags behind

Output from Israel’s Leviathan gasfield has been delayed and will now come on stream in 2017. Reserves in Cyprus’s Aphrodite field have been lowered by 21%, to 4.1 trillion cubic feet (cf). The momentum behind east Mediterranean liquefied natural gas (LNG) exports is slowing.

But at least those two countries are moving ahead with their gas developments. The same can’t be said for Lebanon, the third major landowner in the Levant basin, where dysfunctional politics are thwarting any upstream progress.

Lebanese waters, smack in the middle of the basin, could be as prolific as the neighbours’. A 2010 survey from the US Geological Survey estimated the Levant held 122 trillion cf of gas and 1.7 billion barrels of oil. The Lebanese energy ministry, more bullish, says just 45% of its own offshore play holds about 96 trillion cf and 850 million barrels of oil. The reservoirs may be thicker and deeper than Israel’s or Cyprus’s. The ministry also thinks oil will be found onshore.

“Lebanon will definitely join the club of the oil states,” said Gebran Bassil, the country’s energy minister. His optimism was also behind a recent ministry-sponsored advertising campaign on the capital’s streets. It promised a slew of improvements, from a bullet train to free health care, all possible because “now we have oil”. Already, there is talk of forming a national oil company to take part in the energy boom. Petrodollars will help give Lebanon “economic independence”, says Bassil.

This is over-egging the pudding. Despite the best guesses, Lebanon’s real oil and gas endowment is unknown. UK firm Spectrum and Norway’s PGS have shot seismic, and southwestern maritime blocks are thought to be particularly prospective. Spectrum is also preparing to shoot more onshore next year. The ministry has pre-qualified dozens of international oil companies (IOCs) as part of a bidding round for offshore blocks 1,4, 5, 6 and 9. ExxonMobil, Shell, Total and other majors were among the IOCs to register their interest.

But no wells have been drilled and none will be soon. A deadline for the submission of bids, already twice delayed, has been set for 10 January. However, outside the ministry, no one familiar with Lebanon’s nascent upstream thinks the latest timetable is realistic.

No decrees, no contracts, no rigs

Politics is the obstacle. Last spring, the council of ministers, or cabinet, was to approve two outstanding parts of Lebanon’s 2010 hydrocarbons legislation. The decrees relate to the exploration and production contracts and to the delineation of the blocks. Israel and Lebanon both claim a small section of undemarcated water, and US mediation has yet to produce an agreement on where the border is.

In any case, both decrees were left unsigned when prime minister Najib Mikati’s government collapsed in late March. A caretaker government has been running the country, in theory, ever since. Tammam Salam, the prime minister-delegate, has tried repeatedly and unsuccessfully to form a government. In December, the parliamentary speaker, Nabih Berri, said the chances of a new one emerging by the end of 2013 were “virtually gone”.

Without the two decrees being signed into law, putative investors in Lebanon’s upstream are left with nothing to bid on, nothing to sign and no contractual certainty about the process. Bassil has several times also called on Mikati to convene a cabinet to do so. Mikati has refused. Instead, Bassil says, the caretaker government could issue the decrees. But it is unclear whether it has the authority to do so. Analysts say it would leave the legislation hanging in a legal grey area, subject to future challenges.

Bassil blames bureaucrats for the impasse. “It is a pity for us to remain under the yoke of some officials,” he said last week. “Lebanon is sitting on oil treasures, but lacks a plan to let its people benefit.” Delays, he added, would harm efforts to service debt and bring an economic recovery.

Others in Lebanon offer conspiracy theories to explain the lack of progress with the legislation. A popular one blames Saudi Arabia, which persuaded the previous government not to enact the decrees so as to preserve the kingdom’s influence in the Lebanon, a base from which it can support rebels fighting against the regime in Syria.

Whatever the geopolitics, Lebanon’s need to speed development of its upstream - or, at least, find out if there is one to develop - is plain. Groaning under the influx of around 1.3m Syrian refugees, which have strained everything from the school system to infrastructure, the economy is in a mess.

Lebanon’s debt ratio, at 135% of GDP, is among the highest in the world and is expected to keep rising. The state energy company, Electricité du Liban (EDL), is running out of money to keep buying oil and gas to keep the lights on. Anyone without his own generator in Lebanon suffers daily blackouts, which are expected to grow in duration. Imported oil products, meanwhile, account for 90% of the country’s primary energy demand, says the US’ Energy Information Administration.

Petroleum revenue would help with this. In Israel, with which Lebanon is still officially in a state of war, the government thinks natural gas development, including LNG exports, could contribute $60bn to the country’s GDP in the next 20 years. Lebanon’s GDP in 2012, according to the IMF, was just $41bn.

Pity the nation

The lack of an effective authority or legal framework to govern Lebanon’s offshore development is symptomatic of broader fragmentation. It is an even more serious obstacle for investors.

Bassil, a Maronite Christian and son-in-law of the Free Patriotic Movement leader Michel Aoun, has hardly charmed his many opponents, say insiders. Local journalists have raised questions about Bassil’s methods of negotiation with IOCs. A turf war over control of the energy sector - long ignored as a busted flush - is emerging, with rivals unwilling to see Aounists control what may eventually become a lucrative business. Sectarianism has already spread to the oil sector. To try to defuse it, the seats on the board of the Petroleum Administration, the body overseeing the upstream opening, were handed to each of Lebanon’s six biggest religious groups - a recipe for more bickering.

None of this will give confidence to foreign investors, especially those wary of Lebanon’s confusing factionalism and zig-zagging alliances.

Nor will the recent history of public-private projects encourage them to join a government-sponsored initiative in the upstream. A long-planned project to pipe gas supplied by the Arab Gas Pipeline from north to south Lebanon has gone nowhere. A bellwether for private investors’ risk appetite will come in the form of a proposed LNG import terminal, for which the ministry has invited bid from developers. But the omens aren’t good. Ziad Hayek, head of Lebanon’s Higher Council for Privatisation, points out that although the country has launched 15 public-private partnerships in recent years, not one of them has lasted, as investors fled the political risk. 

Those risks, and the divisions in Lebanese politics and society, grow more serious by the day. The sectarian war in Syria has reignited the long-standing sectarian divisions in Lebanon that were at the heart of the country’s 1975-90 civil war. It has also made the country, say some analysts, the locus for another proxy war as wider regional rivalries playing out in Syria spill across the border.

In November, a suicide bomber attacked the embassy of Iran, which along with Syria’s Baath regime is the main foreign backer of the Shia paramilitary group Hezbollah. Hezbollah blamed Saudi Arabia for the attack, which killed 22 people. In December, a senior Hezbollah attacker was assassinated. Hezbollah blamed Israel for that one. Israel denied it.

Whoever committed the acts, they and many other recent eruptions of violence reflect the conflict in Syria, where Lebanese Sunni militants are fighting alongside rebels and often against Hezbollah. Tripoli, in Lebanon’s north, has seen frequent eruptions of violence between the sides.

On a political level, the war has Syria has also deepened the rivalry between the March 8 and March 14 alliances - opposing blocks roughly defined since the Cedar Revolution of 2005 by their stance on Syria.

But the end of a war in its northern neighbour may not have repercussions in Lebanon, too, heightening the risk for foreign investors again. Victory for Bashar al-Assad’s regime will embolden Hebollah, which is fighting on its behalf, and bring reprisals against his opponents in Lebanon. The fall of the regime or partition of Syria, on the other hand, would leave a chaotic periphery on Lebanon’s borders.

Not all of the refugees will return, either way. Their impact on Lebanon will be as devastating for the country as 1948 was, says one regional analyst, referring to arrival of Palestinian refugees forced out of Palestine by Israel. Southern Lebanon became a base for Palestine’s resistance movement, dragging the country into wars with Israel, in turn fuelling Hezbollah’s rise. The US and several other Western countries still consider the group a terrorist organisation, despite its decisive role in Lebanese politics since 2005.

It all means that only the hardiest of investors will tolerate the accumulation of risks that accompany Beirut’s efforts to open the upstream. And even those kinds of investors will have to wait until a government is in place and legislation enacted to protect their contracts. However slowly things are moving in Israel and Cyprus, at least they are moving. Lebanon is missing its chance.

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