Is Lebanon Set for an Oil Bonanza?

  • Jan 2018

‘Congratulations to the Lebanese people (…) on Lebanon entering the club of oil countries,’ tweeted the country’s energy minister, Cesar Khalil, after Lebanon’s first petroleum licensing round finally took place last fall. On 14 December 2017, the Lebanese government approved the bid by a consortium of three companies – France’s Total, Italy’s Eni and Russia’s Novatek – for two offshore blocks, after process had been held up for three years while political parties were in deadlock over the nomination of the president and the approval of key legislation.

Political expectations are high that discoveries will be made and the legislature is reviewing draft bills establishing a sovereign wealth fund and a national oil company. But there is a risk that Lebanon overplays its hand.

Lebanon holds estimates of potential natural gas reserves of 25 trillion cubic feet (tcf) based on seismic studies, but these have not have been confirmed by drilling and may not amount to reserves that are commercially viable. The Lebanese public, which has expressed both frustration and apathy over the repeated delays and policy paralysis, will call the government’s bluff if there are dry wells, if future discoveries are not commercially viable or the sector does not deliver the transformative impact that was promised.

Managing expectations

A number of politicians have stoked hope in the power of the petroleum sector to change Lebanese lives. In December 2013, then-Energy Minister Gebran Bassil said oil and gas revenue would bring ‘economic independence’ to his country, covering the public debt, creating jobs and spreading wealth. A nationwide billboard campaign advertised these promises. Government officials have circulated figures of potential resources – in the order of 95.5 tcf of natural gas with 50 per cent probability, which were interpreted by non-experts as proved reserves. Any estimate of the petroleum riches of Lebanon is educated guesswork until a well is drilled.

The Lebanese government should be explaining to the public that the risk of exploration failure is high and the journey to production is a lengthy one. Exploration won’t start before 2019. The consortium has committed to drill two wells in 2019, one in each block. There will likely be dry wells. According to Richmond Energy Partners data, industry commercial success rates for exploration between 2012 and 2016 were 31 per cent overall and 7 per cent for frontier provinces such as Lebanon. If there is a discovery, revenues from production would likely not arrive until 10 years after the first bidding round.

If the long timeline to (possible) production and the roadblocks along the way are not explained, citizens might (reasonably) assume that the absence of transformative revenues is down to corruption. The World Bank’s Worldwide Governance Indicators put Lebanon in the 14th percentile globally in 2016 in terms of perceptions of ‘control of corruption’, which indicates a fertile ground for public mistrust in the government’s handling of petroleum revenues.

A government-wide coordinated public communication strategy on the petroleum sector would help to deliver a balanced message on the sector’s prospects. To regain trust, the government should also make contracts available to the public and introduce open competitive tendering processes.

Minimizing geopolitical risk

Lebanon’s exploration programme is taking place in a context of high geopolitical risk. One of the blocks awarded straddles an 860-square-kilometre zone of disputed waters with Israel. The border has been a hot button issue for years between the two countries, which are technically in a state of war. Israel and Lebanon each unilaterally demarcated their exclusive economic zones and neither can legally be considered as final.

When drawing the acreage map to include the disputed waters, Lebanese officials had rightly tried to contain tension by stating that this was aimed at asserting sovereign claims and companies might not explore in that area. But the December award introduces fresh uncertainties, because the winning consortium has committed to doing just that.

The geopolitical tension between the two countries draws on issues beyond resources and there has been an escalation of aggressive posturing between them in the past year. With the Syrian conflict drawing to an end and Saudi Arabia and Israel both trying to contain Iran’s expansion in the region, Lebanon may be a theatre for proxy wars. In such a context of heightened regional tensions, the development of resources in or near disputed waters could be used as a trigger for war.

Mitigating this risk at this stage is critical. To de-escalate tensions, the government of Lebanon or the consortium could clarify where exploration work will be confined within the awarded block. A longer term solution lies in the settlement of the border dispute through mediation. The legal courses of action – arbitration and bringing the case to the International Court of Justice – are problematic because they require a commitment from both parties to respect the decision and to recognize the court’s jurisdiction, and the latter option requires Lebanon to recognize the state of Israel.

Lebanon has overcome many internal challenges to get this far in the development of its petroleum sector; but the road to joining the ‘club of oil producers’ is long and perilous, and the real challenges are now starting to take shape. Mitigating regional risks and managing the public’s expectations are critical to set the country on the right track.