Le­banon’s se­cond li­cens­ing round: Lessons learned and the case for sta­bil­ity

Financial Mirror (Cyprus) - - COMMENT - By Mona Sukkarieh

Prepa­ra­tions for the launch­ing of Le­banon’s se­cond off­shore li­cens­ing round have be­gun. The Lebanese Pe­tro­leum Ad­min­is­tra­tion has pub­lished a ten­ta­tive time­line for the ten­der, which will be of­fi­cially launched by the end of 2018. The process, in­clud­ing the pre-qual­i­fi­ca­tion phase, will ex­tend over a pe­riod of one year.

The se­cond li­cens­ing round is sched­uled to start in Jan­uary 2019 with the open­ing of the pre-qual­i­fi­ca­tion round. The le­gal, tech­ni­cal, com­mer­cial and QHSE cri­te­ria might dif­fer from those im­posed dur­ing the first li­cens­ing round in 2013. Given that the ini­tial cri­te­ria were deemed too strict at the end of the first bid round, we might see some loos­en­ing in the se­cond round.

Ac­cord­ing to the 2010 Off­shore Pe­tro­leum Re­sources Law, in­ter­ested com­pa­nies need to pre-qual­ify, ei­ther as op­er­a­tors or non-op­er­a­tors, to be el­i­gi­ble to place bids when the ten­der opens. Chang­ing this pre­req­ui­site would re­quire amend­ing the 2010 law.

In ad­di­tion, and although the 2013 cri­te­ria were strict, a loop­hole was vol­un­tar­ily in­serted to al­low com­pa­nies that did not meet the cri­te­ria to qual­ify, if they part­nered with a com­pany that did. This is how a num­ber of re­cent­lyestab­lished and “well-con­nected” Lebanese com­pa­nies, with no prior pe­tro­leum ac­tiv­ity, man­aged to qual­ify for the ten­der in 2013.

None of them were able to place bids when the ten­der re­sumed in 2017, for var­i­ous rea­sons. With a more ro­bust civil so­ci­ety land­scape in 2018 (in­clud­ing NGOs, me­dia and op­po­si­tion par­ties) com­pared to 2013, all eyes will be on that pre-qual­i­fi­ca­tion de­cree – if in­deed there is go­ing to be a new one – to make sure a sim­i­lar loop­hole is not in­serted again.

It should be rel­a­tively easy for au­thor­i­ties to im­ple­ment and earn credit for this re­form. Some of these com­pa­nies, though, are one step ahead of the au­thor­i­ties and civil so­ci­ety and have started con­sol­i­dat­ing their “pe­tro­leum ac­tiv­ity”.

Off­shore li­cens­ing time­line

The re­sults of the pre-qual­i­fi­ca­tion round will be an­nounced in May 2019. Pre-qual­i­fied com­pa­nies will have six months, be­tween May and Oc­to­ber 2019, to pre­pare and sub­mit their bids, and ex­plo­ration and pro­duc­tion agree­ments are ex­pected to be signed by the end of 2019.

The process is de­signed in a sim­i­lar way to the first off­shore li­cens­ing round. But the first li­cens­ing round did not go as orig­i­nally planned. It is im­por­tant to rec­og­nize the main ob­sta­cles, at the or­ga­ni­za­tional level, that hin­dered the first bid round in or­der to avoid re­peat­ing the same mis­takes.

The au­thor­i­ties, mainly the Min­istry of En­ergy and Wa­ter and the Lebanese Pe­tro­leum Ad­min­is­tra­tion, this time around have a pre­cious ad­van­tage over their mir­ror self in 2013: six years of first-hand ex­pe­ri­ence filled with suc­cesses, drama and dis­ap­point­ments, and a bet­ter un­der­stand­ing of the dy­nam­ics that could ob­struct their en­deav­ours.

The most ob­vi­ous ob­sta­cle when the first bid round was an­nounced in 2013 was to launch it de­spite an in­com­plete le­gal frame­work. There are many po­lit­i­cal rea­sons that ex­plain why it took over four years to close the ten­der, but the straight­for­ward an­swer is miss­ing reg­u­la­tions and leg­is­la­tion.

The ab­sence of three ba­sic doc­u­ments – a de­cree defin­ing off­shore blocks, a de­cree spec­i­fy­ing the ten­der pro­to­col and model EPA, and the pe­tro­leum tax law – made it im­pos­si­ble to pur­sue the ten­der, which had to be re­peat­edly de­layed. Ob­vi­ously, this les­son had not been learned by 2017 when the ten­der re­sumed af­ter a four-year hia­tus. At the be­gin­ning of 2017, the gov­ern­ment ap­proved the first two of these ba­sic doc­u­ments and an­nounced the re­sump­tion of the bid round. The ab­sence of the third doc­u­ment, the pe­tro­leum tax law, meant that the clos­ing of the ten­der had to be ex­tended once more un­til the par­lia­ment had ap­proved the law.

Fast for­ward to 2018, since there is an in­ten­tion to amend some of the doc­u­ments gov­ern­ing the se­cond li­cens­ing round, ide­ally, it would be good to have a sta­ble frame­work, if not on time for the pre-qual­i­fi­ca­tion round (log­i­cal and prefer­able), at least by the time com­pa­nies are in­vited to sub­mit their bids.

In fact, sta­bil­ity is prefer­able across the board. This in­cludes the choice of blocks to put up for bid­ding. When the first bid round was launched in 2013, blocks 1, 4, 5, 6 and 9 were open for bid­ding. How­ever, when the ten­der was re­sumed in 2017, blocks 1, 4, 8, 9 and 10 were put on of­fer. This con­fused and dis­cour­aged some of the com­pa­nies that had ini­tially been gen­uinely in­ter­ested in the ten­der. In ad­di­tion, four out of the five blocks on of­fer in­cluded dis­puted ar­eas.

Award­ing Block 9 to a To­tal-led con­sor­tium was in­deed a feat that few peo­ple ex­pected, given that in­ter­na­tional oil com­pa­nies typ­i­cally are ex­tremely wary of shaky le­gal­ity. But this should not be taken as the norm. This does not mean that blocks along dis­puted bor­ders should not be open for the ten­der. Rather, it means that more has­sle-free op­tions should be on of­fer along­side them.

In­sti­tu­tional sta­bil­ity (or con­ti­nu­ity) is also es­sen­tial. The LPA’s man­date ex­pires in De­cem­ber 2018, the month that will sup­pos­edly see the of­fi­cial launch­ing of the se­cond li­cens­ing round. The lack of trans­parency and com­mu­ni­ca­tion over the is­sue is dis­con­cert­ing.

The ap­point­ment of a new board is in­creas­ingly un­likely if we take into con­sid­er­a­tion that the se­lec­tion process could ex­tend over many months. The law al­lows re­new­ing the man­date of the cur­rent board once, and given time con­straints, this op­tion ap­pears to be in­creas­ingly likely. But this re­quires a po­lit­i­cal de­ci­sion. Will it come on time to al­low op­er­a­tions to pro­ceed smoothly, or will there be a pe­riod of un­cer­tainty?

On the mar­ket­ing front, the process be­tween 2013 and 2017 left much to be de­sired. At the time, some of the events and venues cho­sen to pro­mote the ten­der were in fact mod­est plat­forms with limited out­reach or vis­i­bil­ity.

Le­banon opted to hold the se­cond li­cens­ing round be­fore the re­lease of the re­sults of ini­tial ex­ploratory ac­tiv­ity—which will be con­ducted by the To­tal-led con­sor­tium to­ward the end of 2019—de­spite ini­tially an­nounc­ing that the se­cond round would be held once these re­sults were avail­able.

This is nei­ther good nor bad in it­self, as it is im­pos­si­ble to know be­fore­hand what the re­sult of next year’s drilling will be and so it is im­pos­si­ble to know if they will have a pos­i­tive or neg­a­tive im­pact on the ten­der.

But it shows the un­cer­tain­ties that some­times char­ac­terise the de­ci­sion-mak­ing process, an­nounc­ing one thing and then do­ing an­other. It ap­pears that one of the rea­sons for launch­ing the se­cond bid round ear­lier than ex­pected was the in­ten­tion ex­pressed by other coun­tries in the re­gion to hold li­cens­ing rounds to­ward the end of 2018 and the be­gin­ning of 2019. Sta­bil­ity is also pre­ferred at the rhetor­i­cal level. Some­times, when there is no clear-cut de­ci­sion, say­ing less is more.

Over the past few years, there has been a ten­dency to pre­fer big an­nounce­ments over a more prag­matic and pru­dent ap­proach. This in­cluded pre­ma­ture an­nounce­ments of the launch­ing of the first li­cens­ing round – de­spite an in­com­plete frame­work – and of key mile­stones after­wards. Prob­a­bly the key take­away from the first li­cens­ing round – from the lo­cal per­spec­tive and the han­dling of the ten­der – is that there is an or­der for things: Hope­fully, both the le­gal and in­sti­tu­tional frame­works will be com­plete and fully func­tional by the time Le­banon of­fi­cially launches the se­cond li­cens­ing round. Sta­bil­ity and the abil­ity to an­tic­i­pate the reg­u­la­tory frame­work are vi­tal for the sec­tor and are the first key to the suc­cess of a li­cens­ing round. Mona Sukkarieh is the co­founder of Mid­dle East Strate­gic Per­spec­tives (http://www.mesp.me), a Beirut based po­lit­i­cal risk con­sul­tancy

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