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Lebanon – Ready, set, go?

Written by  Karen Boman Thursday, 31 August 2017 00:00

Lebanon views its potential offshore gas resources as key to meeting its domestic energy demand. However, current conflicts may keep Lebanon’s offshore oil and gas industry off the starting block. Karen Boman reports.

Open blocks for the first licensing round.

Lebanon hopes bidding activity in its first offshore licensing round will result in the nation’s first offshore commercial discovery by 2019, Lebanon’s Minister of Energy and Water Cesar Abi Khalil told a July roadshow presentation in Houston.

After repeated delays (OE: November 2015), caused by political instability, Lebanon finally launched its first offshore oil and gas licensing round this year.

The country needs its own resources to meet domestic demand for electricity production, and to fuel energy-intensive industries such as cement production, Khalil says.

By 2030, Lebanese natural gas demand is expected to range between 0.3 Tcf and 0.5 Tcf/year. While the country’s electricity sector and industrial hubs will present short- and medium-term demand for Lebanon, long-term potential exists for natural gas to power Lebanon’s commercial institutions, cities, and transportation, Khalil says. Using gas could also reduce Lebanon’s electric generation costs and reduce greenhouse gas emissions, he adds.

A total of 51 oil and gas companies are pre-qualified for Lebanon’s first offshore bidding round, bids for which are due by 15 September, Khalil says. The 51 companies include those pre-qualified for the planned, but delayed, 2013 bidding round, provided they still meet eligibility standards.

A further 10 submissions were made this year, including two as operators and eight as non-operating companies. These companies include ONGC Videsh as an operator, and Lukoil, Sapurakencana Energy, Sonatrach International Petroleum, Qatar Petroleum International, Petropars Ltd., JSC Novatek, and New Age (African Global Energy), as non-operators.

Lebanon plans to publish the list of bidders on 22 September, and to award blocks on 15 November.

Five offshore blocks – 1, 4, 8, 9 and 10 – are being offered. Lebanon plans to award no more than four blocks in the round, but even if only one block is awarded, the round will still be considered a success, Khalil says. Block 1 is in the far northwest of Lebanon’s maritime waters, in 1500m-2000m depth. The block is part of the Cypriot arc in the north, and is highly prone to gas and oil. Block 4 lies on the shallower side of Lebanon’s offshore waters, and is highly prone to gas. The three southern blocks, 8, 9 and 10, are prone to oil.

Initial exploration and production agreements (EPA), signed with the Lebanese government, will have an initial five-year exploration phase, which can be extended up to 10 years.

Development projects would be subject to a 25-year production requirement, with a five-year extension option, if additional investments are made. Royalty payments equal to 4% of gas production, and 5-12% for oil production are included in the EPA.

Source: Lebanese Petroleum Administration

Belief in prospectivity

To date, only a handful of wells have been drilled onshore Lebanon (the last was in 1966), with little success, and no wells have been drilled offshore, says Sarah Haggas, director – Middle East, Energy with IHSMarkit.

Previously, the Levant Basin had been underexplored due to high costs associated with deepwater exploration and production and lack of offshore infrastructure. Declines in deepwater exploration and production costs and recent large gas discoveries offshore Israel have changed that, Haggas says, driving investment in 2D and 3D seismic data acquisition.

Offshore Lebanon offers both proven and new concept exploration plays, said Wissam E. Chbat, chairman of the board and head of geology and geophysics for the LPA, during the Houston road show. Two new play concepts are Late Cretaceous 4-way dip closures, sourced by Jurassic thermogenic source rocks and Oligo-Miocene biogenic gas, and Oligo-Miocene 3-way dip closures and tilted fault blocks, sourced by Oligocene-biogenic gas. In terms of stratigraphic plays available offshore Lebanon, new play concepts include Lower Cretaceous sand pinchouts, sourced by Triassic and Jurassic thermogenic source rocks, and Oligocene and Miocene pinchouts, sourced by Oligo-Miocene biogenic gas.

“The number of companies that have prequalified for the Lebanon reflects the prospectivity of Lebanon’s unproven oil industry,” Haggas says. This is due to analogs from offshore Israel and the large discoveries there. Until a prospect is drilled off Lebanon, however, it’s hard to say how an industry in its infancy will develop, Haggas says.

Most production from the Levant basin has been mainly biogenic, or bacterially generated natural gas, but there is speculation that an oil leg may exist at a deeper depth, Haggas adds. The dynamic of the region could change if operators succeed in producing condensate and oil from the Mediterranean, says Bas Percival, senior analyst with Wood Mackenzie’s MENA upstream research team. Some companies such as Noble Energy are testing the deeper Jurassic horizons for oil.

Noble Energy drilled a test well, targeting oil, offshore Israel in 2012, but was not successful due to casing design. Oil prices in 2015 were hurting companies, but Wood Mackenzie thinks that Noble and others will return to take a second look at condensate and oil. Finding oil could draw a whole new set of companies, including American midcaps, but the oil play needs to be proven up, Percival says.

Ready for bidding?

Chbat says that the Lebanese government has taken several steps to increase transparency in the bidding process, including joining Extractive Industries Transparency Initiative, as well as seeking international assistance to develop its bidding round and fiscal terms, Chbat says. But, the process may need fine tuning, given that an offshore round hasn’t been done before.

A new petroleum law, with 20% corporate income tax and 10% dividend withholding tax, is due to be ratified in August, he says. It includes various tax exemptions for operators relating to offshore construction, installations and vehicles, as well as goods and equipment.

Risks and challenges

Despite the steps taken to provide clarity and incentives, the political risks facing oil and gas companies in Lebanon still exist, says Firas Modad, with IHSMarkit’s political risk team. Lebanon is part of a broader geopolitical competition between the Arab states on the one side and Iran on the other.

The increasing influence of Hezbollah – an Islamist political group operating in Lebanon that has its own health care services and construction arm, autonomy from the Lebanese military and control of access to ports – could pose a risk to foreign oil and gas companies doing business in Lebanon in terms of sanction violations, by interacting with these organizations, Modad says.

Corruption could also affect participation in the country. “You don’t have a strong law and order environment and strong legal protections of property rights, which will affect a company’s ability to function and operate and follow European and western norms [of business],” Modad says.

A further concern is the boundary dispute between Lebanon and Israel, which revolves around to what angle to the coast the maritime border be demarcated. Initially, only one block of the five offshore blocks being offered was thought to be in the disputed territory; instead, the three most southern blocks lie in this area, Haggas says.

But, Khalil doesn’t believe the border dispute between Israel and Lebanon has deterred operators’ interest in offshore exploration in Lebanon’s southern exclusive economic zone, saying that in particular, operators have expressed interest in the available blocks 8, 9, and 10, along the southern demarcation.

Expectations

The expectation is that gas exports will help Lebanon pay down its high levels of public debt. But, gas production offshore Lebanon isn’t expected for another decade, and how Lebanese gas would be exported remains a question. Discussions are underway to construct a pipeline connecting Israel with Europe via Cyprus, Turkey and Greece. But these plans are “very tentative,” Percival says.

“Lebanon has a small, limited market for gas, unless they convert all their industrial players and power generation to natural gas,” Percival notes.

Excluding Egypt, the Mediterranean region will face a challenge in finding enough market for natural gas. Demand for natural gas in Egypt’s domestic market (and lack of domestic supply since the Arab Spring) has surged to the point that the country, previously the world’s eighth largest exporter of liquefied natural gas (LNG), is now the fifth largest importer of LNG. As a result, gas found offshore Egypt will be monetized quicker than gas found offshore Israel, Cyprus, and Lebanon.

The “very tentative” Eastern Mediterranean Gas Pipeline, which would transport gas from offshore Cyprus to the Greece mainland via Crete, could serve as an outlet for any gas produced offshore Lebanon, Percival says. Pre-FEED studies for the project are underway and expected to be completed by December. The 1300km offshore pipeline and 600km onshore pipeline would carry an initial 10 Bcm/y of gas from offshore Cyprus and Israel.

But, with gas oversupplied globally, analysts such as Wood Mackenzie don’t see a medium-term market for new pre-FID LNG or pipeline projects.

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