Le­banon’s bumpy road to­wards gas pro­duc­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

The suc­cess­ful devel­op­ment of Le­banon’s gas re­sources could bring sub­stan­tial eco­nomic benefits to an ail­ing econ­omy and strengthen the coun­try’s en­ergy se­cu­rity. The devel­op­ment of its hy­dro­car­bon re­serves would en­able Le­banon to re­duce its de­pen­dence on i mports of oil prod­ucts, which in 2012 con­sti­tuted more than 97% of its to­tal pri­mary en­ergy sup­plies. In 2013, Le­banon’s im­ports of oil and its de­riv­a­tives amounted to $5.11 bln, rep­re­sent­ing 11.4% of its GDP. It would also al­low Le­banon to re­duce the state’s debt, es­ti­mated at 146% of GDP in 2014. The gov­ern­ment is keen to di­ver­sify Le­banon’s en­ergy mix away from oil to strengthen its se­cu­rity of sup­ply and to re­duce air pol­lu­tion. But gas pro­duc­tion is not likely to begin be­fore the mid- 2020s.

Le­banon’s hy­dro­car­bon sec­tor and its in­sti­tu­tional and reg­u­la­tory frame­work are still in their in­fancy. Dead­lock in Le­banon’s sec­tar­ian po­lit­i­cal sys­tem has led to long de­lays in the coun­try’s hy­dro­car­bon devel­op­ment and pro­duced a volatile reg­u­la­tory en­vi­ron­ment. The coun­try suf­fers from weak ad­min­is­tra­tion, wide­spread cor­rup­tion, and a poor busi­ness cli­mate.

The pro­longed fail­ure of the Le­banese par­lia­ment to elect a new pres­i­dent and the for­ma­tion in Fe­bru­ary 2014 of an un­sta­ble gov­ern­ment made up of ri­val po­lit­i­cal groups has paral­ysed the de­ci­sion-mak­ing process. As of Fe­bru­ary 2015, the Le­banese gov­ern­ment has failed to pass two de­crees that are es­sen­tial for ten­der­ing the off­shore acreage. One of the miss­ing de­crees would de­limit Le­banon’s ter­ri­to­rial sea and ex­clu­sive eco­nomic zone, an awk­ward mat­ter as some blocks strad­dle a dis­puted area be­tween Le­banon and Is­rael. The other de­cree would stip­u­late the pro­vi­sions of fu­ture Ex­plo­ration and Pro­duc­tion Agree­ments (EPA). The EPA de­ter­mines the way in which fu­ture rev­enues are to be shared be­tween the state and the in­vestors that pro­vide cap­i­tal, tech­nol­ogy, and ex­per­tise.

The gov­ern­ment needs, with­out fur­ther de­lay, to for­mu­late a plan to man­age the coun­try’s po­ten­tial oil and gas wealth, even though it may be many years be­fore ex­plo­ration, pro­duc­tion, and mon­eti­sa­tion reach a de­ci­sive stage. The Off­shore Petroleum Law re­quires part of th­ese rev­enues to be placed in a fund for the ben­e­fit of fu­ture gen­er­a­tions.

The ini­tial pol­icy pri­or­ity for Le­banon, when rev­enues from en­ergy pro­duc­tion begin to flow, will be to re­duce the state’s debt, es­ti­mated at 146% of GDP in 2014, be­gin­ning with the most risky li­a­bil­i­ties: ex­ter­nal debt de­nom­i­nated in for­eign cur­rency. Le­banon should avoid dis­tribut­ing fu­ture re­source rev­enues as en­ergy sub­si­dies since th­ese dis­tort pric­ing sig­nals and re­sult in mis­al­lo­ca­tion of re­sources. Although en­ergy sub­si­dies con­sti­tute an im­por­tant so­cial safety net for the poor, they are re­gres­sive in na­ture be­cause in many in­stances richer house­holds cap­ture the bulk of sub­si­dies. En­ergy sub­si­dies also have a neg­a­tive en­vi­ron­men­tal im­pact by en­cour­ag­ing waste­ful con­sump­tion of fos­sil fu­els. There is scope for in­creas­ing public in­vest­ment in in­fra­struc­ture such as elec­tric­ity and trans­port. In­fra­struc­ture con­straints pose a se­ri­ous bar­rier to com­pet­i­tive­ness. In­vest­ment in public in­fra­struc­ture would yield a rel­a­tively high rate of re­turn and ben­e­fit the pop­u­la­tion. But the qual­ity of public spend­ing is crit­i­cal. If public in­vest­ment is di­rected to­ward poor qual­ity projects or af­fected by cor­rup­tion, there would be few benefits for the econ­omy or the public at large.

Le­banon’s

nat­u­ral

gas

should

be

used ini­tially to meet do­mes­tic de­mand, re­plac­ing fuel oil in power gen­er­a­tion. If suf­fi­cient quan­ti­ties are dis­cov­ered to per­mit ex­ports, th­ese should, in the first in­stance, be through pipe­line sales to coun­tries in the re­gion, such as Syria, Egypt, and Jor­dan, rather than through LNG. A joint LNG ex­port fa­cil­ity with Cyprus might be­come fea­si­ble in the medium to long term if both coun­tries dis­cover con­sid­er­able ad­di­tional quan­ti­ties of gas. The viability of such a project, or of an LNG fa­cil­ity in Le­banon it­self, will de­pend on the amount of gas avail­able for ex­port, price, de­mand, de­vel­op­ments on in­ter­na­tional gas mar­kets, and Le­banon’s in­vest­ment cli­mate. If the re­cent fall in oil and gas prices is sus­tained, Le­banon’s com­pet­i­tive po­si­tion, as a high cost pro­ducer that has come late to mar­ket, will be ad­versely af­fected.

Le­banon’s lo­ca­tion in the eastern Mediter­ranean, with good coastal and land ac­cess, gives it a nat­u­ral ad­van­tage for gas ex­ports. The bor­der with Is­rael is closed but Le­banon has a num­ber of other re­gional trad­ing op­tions. Even­tual ex­port strate­gies will de­pend on the size of re­serves, do­mes­tic and for­eign de­mand, ex­port tar­gets, the cost of gas pro­duc­tion, price, and com­pe­ti­tion, as well as the avail­abil­ity of fi­nance for pipe­lines or LNG fa­cil­i­ties to bring the gas to mar­ket. The tim­ing of the first gas ex­ports is im­por­tant in view of gas mar­ket dy­nam­ics. Con­tin­ued de­lays could close var­i­ous mar­ket op­por­tu­ni­ties for the coun­try. The com­mer­cial po­ten­tial of re­gional ex­ports to Egypt and Jor­dan is at­trac­tive but Is­rael may have a first-mover ad­van­tage.

Be­cause of its flex­i­bil­ity, LNG is prob­a­bly the most at­trac­tive ex­port op­tion, both for the gov­ern­ment and for in­ter­na­tional in­vestors, pro­vided suf­fi­cient quan­ti­ties of gas are avail­able. By the time Le­banese LNG might be avail­able, Le­banon will be com­pet­ing with new en­trants with con­sid­er­ably more mar­ket weight. Given likely pro­duc­tion costs, Le­banon may also find it dif­fi­cult to com­pete on price. Shar­ing LNG ex­port fa­cil­i­ties with Egypt, or po­ten­tially Cyprus, would of­fer sig­nif­i­cant cost sav­ings if tech­ni­cal, com­mer­cial and po­lit­i­cal ob­sta­cles could be over­come. Joint mon­eti­sa­tion be­tween Le­banon and Cyprus, with a view to LNG pro­duc­tion, might be­come vi­able at a much later stage, depend­ing on the size and lo­ca­tion of any new dis­cov­er­ies off­shore Le­banon and Cyprus. Pipe­line-Ex­port Op­tions to Turkey, Jor­dan, Egypt, Syria, and Iraq Pipe­line op­tions might be fea­si­ble if Le­banon’s re­serves prove suf­fi­cient to per­mit ex­ports but in­suf­fi­cient to at­tract in­vest­ment in the nec­es­sary in­fra­struc­ture for LNG. Pipe­line ex­ports to Jor­dan and Egypt could be made through the ex­ist­ing Arab Gas Pipe­line (AGP), which pre­vi­ously trans­ported Egyptian gas to Jor­dan and Le­banon, and could be used for re­verse flows to both mar­kets. This would re­quire a rel­a­tively in­ex­pen­sive link to be built be­tween Le­banon and the pipe­line. But many un­cer­tain­ties af­fect the viability of this op­tion. The route is long and sub­ject to dis­rup­tions.

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