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