Country Report Lebanon April 2013

Update Country Report Lebanon 04 Apr 2013

Development of oil and gas resources at risk

The collapse of Lebanon's government is threatening the country's nascent oil and gas industry. Major international energy groups have expressed their interest in carrying out exploration work in one of the few Middle Eastern countries without a hydrocarbons sector. But political in-fighting over control of the critical Ministry of Energy and Water will make firms hesitant about bidding for exploration tenders. Lebanon's politicians, supportive as they may be of encouraging investment in the sector, will remain preoccupied with managing the fallout from the unrest in Syria and finalising an electoral law for an upcoming parliamentary poll.

At the end of March, Gebran Bassil, the caretaker energy and water minister, announced that 52 companies, including majors such as ExxonMobil, Chevron (both US) and Statoil (Norway), had pre-qualified to bid for exploration drilling in areas of Lebanese territorial waters where surveys have indicated that there may be large quantities of gas. One seismic survey suggests that there may be more than 25trn sq ft of gas in one 3,000-sq-km area.

Mr Bassil has said that that the Petroleum Administration, the state body overseeing the development of Lebanon's oil and gas potential, will announce the companies that have become qualified bidders on April 18th. Bidding would then be accepted from May 2nd, with the first exploration work expected in 2015.

No authority

The collapse of the government just days before the announcement and the likelihood that there will be no effective replacement for many months means the process will now be delayed. Cabinet decisions and approvals are required before the tender process can move forward. Two decrees, one to establish a model exploration and production-sharing contract and the other to identify the number of blocks that will be auctioned, await cabinet approval before licences can be issued. Mr Bassil has optimistically said that he does not expect this to be a problem and believes that a government will be formed that will be able to manage the bidding process. But his optimism is misplaced given Lebanon's current political instability.

The last time a government fell, in January 2011 when Saad Hariri resigned as prime minister, it took five months of negotiation before a new cabinet was formed. Complicating matters further at this time are the effects on Lebanon of Syria's civil war and an upcoming parliamentary election, scheduled for June. Lebanon's political and sectarian divisions have been entrenched further as the unrest in Syria has led to clashes in the country between supporters and opponents of the regime of Syria's president, Bashar al-Assad. The mood ahead of the parliamentary election points towards a return of the anti-Assad March 14th political alliance to the centre of influence in the country. With members of March 14th therefore expecting to return to cabinet and to assume control of a major structural change to Lebanon's economy, they are unlikely to acquiesce to attempts by Mr Bassil, who is part of the pro-Syrian March 8th alliance, to push through any hydrocarbons decisions in the interim.

Other priorities

With no government and a powerless caretaker minister, one chance for progress is if Michel Suleiman, Lebanon's president, can convene the "national dialogue", an unofficial body that pulls together the most senior powerbrokers in the country, to address the issue. The national dialogue, which meets occasionally, would have the political authority, but may not have the legal capacity, to deal with the hydrocarbons issue. Even so, if it convenes in the coming months, it is likely to be more concerned with the urgent need for a new electoral law for the parliamentary election, leaving hydrocarbons off the agenda. Moreover, relations between the rival political blocs have been poisoned in recent months as the impact of the Syrian civil war grows stronger, and a number of March 14th figures have been assassinated or victims of assassination attempts.

The start of production at the Tamar gasfield in neighbouring Israel in late March will be an unwelcome reminder for Lebanon's politicians of the potential hydrocarbons windfall they are delaying as a result of political instability. Companies may have pre-qualified, but are likely to hold back from tendering for work until the political climate becomes clearer. With no government, no minister and reluctant exploration companies, the outlook for progress in the sector appears uncertain.

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