Can Le­banon or Is­rael repli­cate the suc­cess of Cyprus’ third off­shore li­cens­ing round?

Financial Mirror (Cyprus) - - FRONT PAGE - By Mona Sukkarieh - MESP

On June 22, Is­rael’s En­ergy Min­istry an­nounced that the dead­line to place bids in the coun­try’s first off­shore li­cens­ing round would be pushed back un­til Novem­ber 2017. This is the sec­ond time the bid round, which opened in Novem­ber 2016, saw its end date post­poned. It was ini­tially pro­grammed to close in March 2017. The dead­line was pushed back a first time un­til July 2017, be­fore be­ing ex­tended again un­til Novem­ber 2017.

With the sec­ond ex­ten­sion, it be­came harder to be­lieve that the de­ci­sion is mo­ti­vated by an out­pour­ing of in­ter­est from in­ter­na­tional com­pa­nies and the need to pro­vide them with more time to pre­pare their bids, as the Is­raeli En­ergy Min­istry has claimed on a cou­ple of oc­ca­sions. Though a few com­pa­nies ap­pear to be in­ter­ested, no­tably Italy’s Edi­son and Greece’s En­ergean, in ad­di­tion, it seems, to In­dian com­pa­nies, as re­ported by the Is­raeli me­dia af­ter a meet­ing be­tween En­ergy Min­is­ter Yu­val Steinitz and In­dia’s Min­is­ter of State for Pe­tro­leum and Nat­u­ral Gas Dhar­men­dra Prad­han, on the side­lines of the 22nd World Pe­tro­leum Congress in Is­tan­bul on July 12.

This is in stark con­trast with Cyprus’ lat­est li­cens­ing round, which at­tracted in­ter­est from some of the largest in­ter­na­tional oil and gas com­pa­nies, in­clud­ing bids from ENI, To­tal, ExxonMo­bil and its Qatari part­ner Qatar Pe­tro­leum, Sta­toil, etc. This in­ter­est is no doubt owed to the “Zohr ef­fect”. In­deed, af­ter a pe­riod of un­cer­tainty, the dis­cov­ery, by ENI in 2015 of the largest off­shore gas field in the Mediter­ranean off the Egyp­tian coasts, re­vived in­ter­est for ex­plo­ration in the eastern Mediter­ranean. A com­bi­na­tion of fac­tors, in­clud­ing lo­ca­tion, sta­bil­ity and reg­u­la­tory cer­tainty, put Cyprus at the fore­front of East Med coun­tries that could ben­e­fit from this re­newed in­ter­est.

Is­raeli au­thor­i­ties were hop­ing that the dis­cov­ery of Zohr, in ad­di­tion to the res­o­lu­tion of anti-trust is­sues, would en­cour­age com­pa­nies to take part in the first off­shore li­cens­ing round. But it looks like com­pa­nies’ in­ter­est in the ten­der was below ex­pec­ta­tions, prompt­ing a sec­ond ex­ten­sion of the dead­line to place bids. The lat­est four-month ex­ten­sion is hoped to change that. We will know more in Novem­ber, pro­vided the ten­der is not post­poned again.

Le­banon is also cur­rently hold­ing its first off­shore li­cens­ing round. Over 50 com­pa­nies qual­i­fied for the ten­der, which will close on Septem­ber 15. Au­thor­i­ties here are also bank­ing on the “Zohr ef­fect” but might end up at­tract­ing an in­ter­est that is, in their case as well, below their de­clared ex­pec­ta­tions.

That is be­cause com­pa­nies have not en­tirely re­cov­ered their ap­petite for off­shore ex­plo­ration yet. And, al­though some of the fac­tors that have contributed to tem­per in­ter­na­tional com­pa­nies’ in­ter­est in Is­rael’s bid round are coun­try spe­cific (reg­u­la­tory hur­dles, a cer­tain ap­pre­hen­sion to in­vest in a coun­try that could im­pact their ac­tiv­i­ties else­where in the re­gion etc.), oth­ers are com­mon to both Is­rael and Le­banon (global mar­ket con­di­tions and dif­fi­cul­ties to mon­e­tize re­sources in a sim­i­lar en­vi­ron­ment).

In a pre­vi­ous ar­ti­cle pub­lished in Fe­bru­ary 2017 af­ter Le­banon an­nounced a new roadmap for the first li­cens­ing round, we sig­nalled that:

“Fu­ture in­ter­est will de­pend on two things: global mar­ket con­di­tions, and what we of­fer in­vestors. There isn’t much we can do to af­fect the first, but there are some things we can do to at­tract in­vestors – fi­nalise our le­gal and reg­u­la­tory frame­work, of­fer a com­pet­i­tive fis­cal regime, and ac­tively and ag­gres­sively pro­mote our en­ergy po­ten­tial where it mat­ters.”

We have yet to fi­nalise our le­gal frame­work and adopt the pe­tro­leum tax law. And, al­though the Par­lia­ment might adopt it be­fore the bids are due, we are al­ready sev­eral months late. It is true we can pro­ceed with the ten­der with the leg­is­la­tion al­ready in place, but au­thor­i­ties have in­sisted for years that a new tax law ap­pli­ca­ble to pe­tro­leum ac­tiv­i­ties is in the works; fail­ing to fol­low through sends the wrong sig­nal. Be­side the in­ad­e­quacy of launch­ing a ten­der un­der a set of leg­is­la­tion and com­plet­ing it with an­other set, it con­firms – once again in this field – the slow and er­ratic pace of adopt­ing needed leg­is­la­tion. This is a risk com­pa­nies are aware of, but which au­thor­i­ties have yet to deal with and take into con­sid­er­a­tion.

On the mar­ket­ing front, the strat­egy to pro­mote the ten­der ap­pears to be more con­fi­dent than ag­gres­sive, re­ly­ing on the avail­abil­ity of an ex­ten­sive set of seis­mic data, which is hoped to de-risk in­vest­ments. The fo­cus on seis­mic data, while rea­son­able, ig­nores that there is a mul­ti­tude of other types of risks that may dis­cour­age for­eign com­pa­nies.

Fur­ther­more, we took a risk by mod­i­fy­ing the blocks on of­fer, which might af­fect some com­pa­nies’ in­ter­est in the bid round.

Le­banon launched the ten­der with a set of blocks, and will be com­plet­ing (hope­fully on time) with an­other set of blocks, mir­ror­ing the un­cer­tain­ties we have seen with the le­gal frame­work gov­ern­ing the ten­der. When the li­cens­ing round was launched in May 2013, blocks 1, 4, 5, 6 and 9 were open for bid. We changed course when re­sum­ing the ten­der in 2017 by putting blocks 1, 4, 8, 9 and 10 on of­fer. Not only did this con­fuse com­pa­nies in their prepa­ra­tions (some al­legedly gave up af­ter the change), but, in a sur­pris­ing move, four out of the five blocks picked for the auc­tion, in­clude ar­eas of var­i­ous sizes, that are dis­puted by neigh­bor­ing coun­tries (one in the north, and the three in the south).

Still, au­thor­i­ties ap­pear to be con­fi­dent that at least two or three op­er­a­tors, out of the 13 op­er­a­tors that pre-qual­i­fied for the ten­der, will be plac­ing bids, in­clud­ing, it seems, In­dia’s ONGC, ac­cord­ing to a tweet posted by Prad­han, on July 10, fol­low­ing his meet­ing with En­ergy and Wa­ter Min­is­ter Ce­sar Abou Khalil at the same con­fer­ence in Is­tan­bul. We hope this is based on solid in­for­ma­tion.

If their hunch is con­firmed, the ten­der will in­deed be a suc­cess, es­pe­cially as this is Le­banon’s first li­cens­ing round, and even more so if we take into con­sid­er­a­tion the un­pre­dictabil­ity, re­peated de­lays and po­lit­i­cal dead­lock the en­tire process has ex­pe­ri­enced. If in­ter­est is below ex­pec­ta­tions, some of the de­ci­sions must be ques­tioned be­fore we go through the process of pre­par­ing the sec­ond li­cens­ing round.

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