Lebanon signs first oil and gas exploration contracts

French Total, Italian ENI and Russian Novatek won Lebanon’s first tender for hydrocarbon exploration and production. Operations start in 2019 in two offshore blocks, including one disputed by Israel.

lebanon oil
(from left) Walid Nasser, Lebanese Petroleum Administration; Stephane Michel, Total; Fuad Krekshi, ENI; Vyacheaslav Mishin, Novatek

After years of putting it off, Lebanon finally signed its first-ever oil and gas contract. At the conclusion of a pre-licensing round that gathered 52 international companies, the winning bid came from a consortium of Total, ENI and Novatek in 40/40/20 split.

“We will start drilling in 2019,” ” says Stephane Michel, head of MENA exploration and production at Total. “Within a few months, we will know if there is gas or not and then, depending on the nature of the discovery, we will evaluate and develop the commercial potential­—if there is one.”

According to seismic studies, Lebanon has approximately 25 trillion cubic feet of offshore hydrocarbon reserves, mostly natural gas, in ten blocks. The current contracts offer exploration and production rights to Blocks 4 and 9.

Hydrocarbon reserves had already been discovered in the eastern part of the Mediterranean, also known as the Levant Basin. In 2015, ENI found 30 trillion cubic feet of offshore gas in Egypt.

“The recent discovery of Zohr in Egypt adds to our success rate in Eastern Mediterranean,” says Fuad Krekshi ENI’s MENA executive vice president. “Moving to Lebanon was the natural next step.”

Rising global demand for gas—often converted to liquefied natural gas (LNG) for transport—is the key motivation behind the tens of millions of dollars that will be invested in each well.

“In the MENA region only, LNG consumption will grow by 100% by 2030,” according to Vyacheaslav Mishin, head of Novatek Lebanon.

Exploration and Production Agreements

According to the Exploration and Production Agreement, the companies have a five-year exploration period, which can be extended to ten years by Lebanon’s Council of Ministers.

If the consortium partners discover resources of commercial value, they must then propose a plan to the Lebanese authorities. If agreed upon, the companies can then produce oil and gas for a period of at least 25 years.

Most details of the contracts have not been made public, beyond a statement from the Lebanese government that companies must pay 4% of the gas produced as royalties to the Lebanese State. The statement goes on to specify that a second percentage will be allocated to reimburse the companies’ costs and the remaining revenues will be split between the State and the companies.

According to Lebanese minister of Energy and Water Cesar Abi Khalil, the state’s share will be between 65% and 71% for Block 4 and between 55% and 63% for Block 9. Following Lebanese law, company profits will be taxed 20%.

Further deals are already in the pipeline. Lebanon has announced that it would launch a second licensing round for the remaining eight blocks after the first discoveries are made.

Disputed waters

The agreement raised not only hopes, but also diplomatic tensions, as Block 9 is located on the disputed Lebanese–Israeli maritime border.

Both countries have exchanged threats and accusations regarding the contract, with Israel claiming it has a right to these hydrocarbon reserves.

Israel and Lebanon are officially at war and have no diplomatic relations. The border between both countries has been under UN control since 1978.

“The Israeli enemy is trying to assault our sovereign rights,” says Abi Khalil. “They falsely announced that they are entitled to Block 9. We stress that Block 9 is entirely part of the Lebanese territorial waters.”

Despite the quarrel, “there is no reason not to proceed,” Michel says. Even so, Total announced it would drill 25 kilometers north of the border to avoid any conflicts.

A unique opportunity for Lebanon

For Lebanon, oil-and-gas exploration is an unprecedented economic opportunity that could help solve such financial struggles as its 156% debt/GDP ratio—the world’s third-highest.

“Foreign direct investment is a big sign for the Lebanese economy and good indicator for the future,” says Walid Nasser, chairman of the Lebanese Petroleum Administration.

To make sure the new energy sector will benefit the local economy, the contract requires the oil companies to hire 80% Lebanese staff and give preference to local vendors.

Officials appear unconcerned about distribution if and when hydrocarbons are discovered.

“Lebanon can easily export oil and gas through the existing pipelines on shore that connect Lebanon to Syria, Jordan and Egypt,” Nasser says. “Other options can also be discussed to reach Turkey and Cyprus.”

Domestic use is also an option for some of the output.

Lebanon has also announced the creation of a sovereign wealth fund to hold oil-and-gas revenues.