Quit clowning around

Incompetence in the sector is no longer funny

At a recent conference on oil, gas, and Lebanon’s potential future hydrocarbons sector, a ministerial advisor gave an inaccurate and simplistic presentation, proving that he does not understand the industry, nor how it operates. This is who we have advising the top decision making authorities in the country for this nascent sector.

High-level management of “the oil file” to date has been nothing short of clownish. The country’s first offshore licensing round was supposed to close back in 2013. Oil prices were over $100 per barrel at the time. Forty-six international companies prequalified to bid. The situation today is drastically different. The oil price environment since the second half of 2014 means cash flows have significantly reduced compared with four years ago, and exploration budgets have been dropping even as exploration costs have fallen with them. This is not to say Lebanon’s licensing round will end in failure on October 12, only that conditions were far more favorable for success back when the round was originally scheduled to close. We missed a good opportunity for reasons that have never been fully

explained.

In the years between then and now, very few of our politicians and self-proclaimed local industry “experts” have bothered to learn anything about the sector. During conference after conference, year after year, the same basic misunderstandings are revealed. While not a single well has been drilled in Lebanese waters, everyone from taxi drivers to ministerial advisors “know” how much oil and gas Lebanon has and— more surprisingly—how much these resources are worth. This ignorance is extremely damaging when it comes to managing expectations (think, for example, of all the petroleum engineers graduating from recently introduced university programs with hopes of working in a local sector that will realistically only employ a few dozen of them at most). Worse, ignorance invites the opportunity for strategic blunder.

Take, for example, the issue of what’s known as gradual licensing. For years, certain influential Lebanese used anonymous press leaks and surrogates to argue in favor of awarding all 10 offshore blocks at once. Such a strategy is neither strategic nor in line with international best practice. Because Lebanon has never drilled an offshore well, its risk profile is different from that of a producing country. If commercial discoveries are made in Lebanese waters this could improve Lebanon’s risk profile, and information gathered from drilling could be used to finetune modeling and interpretation of geological survey data. By gradually awarding offshore exploration and production rights over the course of time—instead of doing so all at once—Lebanon can get better deals in the future if discoveries confirm its seeming attractiveness. This is not a hard concept to understand, yet the debate was only settled in mid-2016 when Foreign Minister Gebran Bassil and Finance Minister Ali Hassan Khalil (who is also a political advisor to Parliament Speaker Nabih Berri) announced the conclusion of an “oil deal” in favor of gradual licensing, according to comments Energy Minister Cesar Abi Khalil made during an interview with Executive shortly after the deal was sealed.

What no one has ever publicly explained is what Berri received in return for his acceptance of gradual licensing. Facts on the ground suggest it was which blocks to put on offer. Back in September 2013, the Ministry of Energy and Water announced five blocks would be open in the first licensing round (1,4, 5, 6, and 9—see map page 17) at a time when gradual licensing was still not fully agreed upon. After the “oil deal,” however, the blocks on offer changed. Blocks 5 and 6 were swapped out for blocks 8 and 10. This means all three of the southern blocks, parts of which Israel is laying claim to, are now on offer. This a clear attempt to assert Lebanese sovereignty, but it could have a detrimental impact on the success of the licensing round.

The original block choices were based on consultations with the 46 prequalified companies back in mid-2013, explains Wissam Chbat, president of the Lebanese Petroleum Administration (LPA), the sector’s regulator. Companies voted on which blocks they were most interested in exploring, and the top five blocks were 9,6, 4, 5, and 1. Chbat explains that more seismic surveys have been conducted in Lebanon since 2013, changing the picture of prospectivity for Lebanon’s offshore. However, he admits prequalified companies have largely ignored the new data (meaning they haven’t purchased it), which means their picture of Lebanon’s offshore is likely the same as it was in 2013, when blocks 8 and 10 received five and three votes, respectively, compared to 19 votes for block 6 and 16 votes for block 5. Chbat says the block change choice was made by the LPA based on in-house data interpretations. He insists the LPA’s goal is making the round competitive with an eye on awarding a contract that will lead to a commercial oil and/or gas discovery. Asked directly if offering blocks the companies said they are not very interested in would result in fewer bidders, Chbat dodged the question, explaining that the LPA cannot accommodate every corporate strategy.

While it is not wrong to choose blocks to send political messages, this should be something debated and decided publicly, especially if doing so could result in fewer bids, thus making the round less competitive. Why not open seven blocks in the first round— those the companies wanted and the two extra southern blocks that help Lebanon assert its sovereignty? Is the government purposefully trying to steer bids toward the southern blocks? If the secret goal here is an award in the south, how far will our leaders go to acheive that?

This sector demands sound management based on technical principles. Lebanon must not cede its rights to Israel, but it also cannot sign a bad deal simply to assert itself. The political manipulation of this sector thus far has us seriously concerned for its future. The LPA have proven capable and—having covered their activities since the regulator’s creation in 2012— Executive can say they have recommended the creation of a fiscal framework in line with best practice. When bids come in, the LPA will evaluate them and recommend with whom to sign contracts. The ultimate decision, however, lies with the Council of Ministers. The Council must make its reasoning for choosing winners public, and any debates about this must also be made public. We cannot continue clowning around.