Oil in Lebanon: Gift or Curse?

Oil in Lebanon: Gift or Curse?

In December 2009, a US energy company, Noble Energy, discovered oil and gas reserves in the Eastern Mediterranean Basin.  The area, dubbed the Levant Basin, spans 83,000 km2 and encompasses Syrian, Lebanese, Cypriot and Israeli maritime territory.  Since 2010, the Lebanese government attempted to protect any oil and gas reserves in its Exclusive Economic Zone (EEZ) i.e. its agreed-upon maritime borders and in August 2010, the government passed the offshore Petroleum Law that defined the Lebanese State’s legal right to manage its energy reserves.

For years the Lebanese government attempted to put forth a concrete plan for oil and gas excavation in the country; however, political unrest, domestic and regional turmoil stalled any moves in this direction.  It was not until early 2017 that Lebanon’s government began ratifying the decrees needed to begin offshore oil and gas development.

The discovery of natural reserves, particularly ones as lucrative as oil, can be a cause for celebration or concern.  In the case of Lebanon, it is a mixture of both. The small Arab country overlooking the Mediterranean Sea suffers from an infamous energy crisis with the state unable to provide electricity 24/7; it shares borders with an enemy state, Israel, and a country with which it has a very complex sociopolitical history; and lastly, Lebanon ranks rather low on a global corruption index, raising concerns about the government’s ability to navigate an industry known to have adverse effects on highly corrupt nations that lack transparency.

What do we know so far about a nascent oil and gas industry in Lebanon? What are the potential repercussions and how can we approach them?

History of oil excavation in Lebanon

Lebanon’s foray into oil and gas production is not novel, but one that dates back to the 1930s. The French Mandate over Lebanon drafted the first legislation for oil exploration in the country, and in 1938, the Iraq Petroleum Company (IPC) receives a permit to begin excavation fieldwork; however, these initiatives were suspended due to the outbreak of WWII. Following the end of the war, IPC began drilling an exploratory well near Jabal Tarbol in Lebanon’s northern Beqaa Valley, only to find that results were inconclusive i.e. no oil was retrieved.  In the few years that followed and up until 1963, the Lebanese Petroleum Company carried out five rounds of exploration north and south of the country, only for results to come back inconclusive.

The outbreak of the Lebanese Civil War (1975-1990) halted the process. In 1990, Lebanon and Syria signed a bilateral agreement called the “Committee of Cooperation between Lebanon and Syria for Oil Exploration in Lebanon”, yet the years that followed were rife with political unrest,  maritime border disputes with Israel, rising sectarian tensions, series of political assassinations, in 2005 the expulsion of Syrian forces from Lebanese territory during the Cedar Revolution, and the 2006 Hezbollah war with Israel.

An empty presidential seat left oil and gas negotiations stalled. To make matters more difficult, Lebanon faced difficulty demarcating its maritime boundaries, particularly with regards to the southern border.  Despite going to the United Nations multiple times between October 2010 and September 2011 with claims to its Economic Economic Zone[1] (EEZ), Lebanon — the country with a relatively weaker state and little to no leverage  —was unable to sway things in its favour definitively.

This time is different

Looking at things in context, Lebanon’s experience with oil and gas excavation has historically been unsuccessful.

So what makes this time different?

Firstly, from 2011 onwards, offshore gas fields were discovered in neighbouring Israel and Cyprus. Since all countries share the Mediterranean seabed, it is likely that oil and gas wells come from the same source, making it probably that Lebanon, too, has offshore oil and gas reserves.

Quotes

Share TweetThe geopolitical context in Lebanon may prove that the oil trove in the tiny country might be more of a curse than a gift. Here’s why:

Share TweetCorruption coupled with sectarianism that divides most industries among politicians make it difficult to envision a fair distribution of wealth from Lebanon’s new oil riches.

When Michel Aoun took the Lebanese presidential seat in 2016, the country entered a phase of relative political stability as compared to previous years, despite the escalation of civil war in Syria and Hezbollah’s involvement on the battlefield. The new government reopened the oil and gas dossier in early 2017 and in January of that year, the government ratified two needed decrees: block delineation and Tender Protocol and Exploration and Production Agreement (EPA) which highlight the areas to be excavated for potential oil and gas reserves and the process for exploring said reserves.

The Agreement

The total area of Lebanon’s maritime territory is approximately 22,000 km2, bar 854 km2 of disputed territory with Israel. The area was divided into 10 blocks for oil and gas exploration, based on seismic surveys that mapped out the overall shape of potential reservoirs. A buffer zone of approximately 5.5 km between the coast and offshore rigs is projected, where drilling for oil and gas is prohibited unless the Lebanese government agrees otherwise. Of the 10 blocks that make up the total area, five were put up for a bidding process (1, 4, 8, 9 and 10) through which international oil and gas companies bid for the right to explore for oil and gas in agreed upon blocks for a period of 5 years (extendable).

The Lebanese government agreed upon a consortium of three companies: the French TOTAL, the Italian ENI and the Russian NOVATEK to explore for oil and gas in blocks 4 (between 686 and 1845 m in depth) and 9 (between 1211 and 1909 m in depth), which lie off the north and south coast respectively. The former two companies are considered Right-Holders Operators i.e. joint-stock companies that conduct petroleum activities and have total assets in excess of $10 billion and are responsible for the design and execution of an exploration program and drilling and production processes. NOVATEK is a Right-Holder Non-Operator, which means it provides technical assistance, commercial and marketing services and assumes a regulatory role.

The companies that sign the Excavation and Production Agreement pay royalties to the state, amounting to 4% of the gas produced and between 5%-12% of the oil produced, depending on how many barrels are produced per day. In a press conference held on the 15th December 2017, Ministry of Energy and Water Cesar Abi-Khalil noted that the Lebanese state could earn between 65%-71% profit in block 4 and between 55% -63% profit in block 9.  Given that no oil and/or gas has been found in either of the blocks, it is incredibly difficult to obtain accurate estimates for total revenue.

Geopolitical Implications

Most news articles have been celebratory in tone, lauding Lebanon’s accession into the club of oil producers in the Middle East.  The fact of the matter remains that no oil or gas has yet been found, and the process of exploring for them is, at least, five years away. A more steady and balanced outlook is necessary in order to understand the broader geopolitical context within which this lucrative industry operates.

Firstly, Lebanon’s neighbours are likely to cause complications. Israel has been developing its own oil and gas industry both on and offshore, as several fields began producing natural gas between 2004-2013, while others have been discovered but are not yet in the production phase.  Israel is attempting to forge relationships with Europe, benefitting from its proximity to the continent in terms of exporting oil and gas. In December 2017, Italy, Greece, Cyprus and Israel agreed to back the construction of a gas pipeline from fields in the eastern Mediterranean to Europe.  The 2,000 km pipeline is projected to cost a whopping 6 billion euros.

Lebanon’s role in this mix remains unclear, and could be quite tricky should the country look to pursue the same or a similar pipeline export option, should gas be found.  First, the country does not enjoy the same political leverage, as it is an enemy state with Israel; hence, it is highly unlikely that it would have a share in the East Med pipeline project.  Secondly, with maritime borders still contested, it is likely that any gas or oil found in block 9 will be challenged by Israel.

The choice of the 3 countries in the consortium, especially the Russian NOVATEK can be read as an attempt to provide Lebanon with the political cover needed to manage such an industry.  Russia has been attempting to forge political ties with Lebanon, particularly with regards to solutions to the Syrian civil war and post-war rebuilding efforts.  Having its foot in the door in a potential oil and gas industry in Lebanon could be mutually economically beneficial. It can also provide Russia oil and gas drilling and exportation options in the Mediterranean Sea — something it has been looking to do for a while.

Economic & Environmental Implications

The geopolitical implications of such an industry are further compounded by economic and environmental factors.  Many analysts have noted that oil and gas revenues could help reduce Lebanon’s debt, setting it on a  course towards a positive balance of payments. Given that the country has a currency (Lebanese lira) that is pegged to the dollar and a strong financial system that has withstood economic shocks, it is likely that the country can weather economic malaise that afflicted other nascent oil and gas nations, such as the resource curse and Dutch Disease.

Given that Lebanon suffers from a well-known energy crisis, a domestic oil and gas industry could help remedy that problem.  Lebanon would no longer have to “import” its electricity from Turkish power-generating ships and could end up self-sufficient in that domain. Moreover, an oil and gas industry could have the potential to ease the country’s unemployment, which the World Bank estimated to be at 6.7% of the total labour force in 2017.

Yet the positive repercussions of a potential oil and gas industry are balanced by concerns regarding the management of revenues domestically. A high corruption rate, coupled with sectarianism that divides most local industries among politicians and political groups, make it difficult to envision how a fair distribution of wealth could benefit the nation as a whole, rather than a select few. Moreover, Lebanon’s weak infrastructure would need significant improvement so as to handle the multiplier effect of an oil and gas industry and the sister services such an industry would require.  While said business is likely to bring in foreign direct investment in infrastructure, it does not mean that an improvement is not required beforehand.

Lastly, the proximity of projected rigs to the shore is undoubtedly a cause for concern for environmental groups.  Both blocks 4 and 9 are located in relatively unspoiled beaches that are clean and accessible to the public.  Despite oil and gas industries and service companies spending billions of dollars to ensure the environment they work in is not harmed, it is likely that the rapid urbanization and privatization of unspoiled areas will ruin the landscape and the delicate ecosystems that they contain. Lebanon’s landfills and waste mismanagement is already a cause for concern in polluting Mediterranean waters — would an oil and gas industry result in more damage?

Conclusion

Lebanon has yet a long way to go in establishing a successful oil and gas industry. While the discovery of such resources can be beneficial to the country on economic fronts, the geopolitical context within which it operates and its repercussions may end up being more of a curse than a gift for the tiny country on the Mediterranean.

Sources:

https://www.reuters.com/article/energy-mediterranean-natgas/greece-italy-israel-and-cyprus-back-natgas-pipeline-to-europe-idUSL8N1O537F
https://www.reuters.com/article/lebanon-economy-energy/update-2-lebanon-gives-go-ahead-to-first-offshore-energy-exploration-idUSL8N1OE3LZ
https://www.creditlibanais.com.lb/Content/Uploads/LastEconomicAndCapitalResearch/150131113245106.pdf
http://blog.blominvestbank.com/wp-content/uploads/2018/01/The-ABC-of-Oil-and-Gas-in-Lebanon.pdf
www.dw.com/en/eu-to-cut-gas-dependency-on-russia-with-israel-pipeline/a-38269274
http://www.lpa.gov.lb/mapsgallery/Blocks%20areas%20and%20seabed%20depth.jpg
https://www.lcps-lebanon.org/featuredArticle.php?id=34
http://www.executive-magazine.com/economics-policy/18904
http://carnegie-mec.org/2016/11/16/lebanon-oil-and-gas-not-for-faint-hearted-pub-
https://www.lebanon2025.com/uploads/5/9/4/1/59410383/lebanon_oil_and_gas_sector_challenges_and_opportunities.pdf
[1] An exclusive economic zone is a sea zone prescribed by the UN Convention on the Law of the Sea, which states that a country has rights regarding the exploration of marine resources available in the area.

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