The first step

Long road ahead as Lebanon begins exploratory drilling for offshore oil and gas

Drilling of Lebanon’s first offshore well started on February 27. All eyes are pinned on Byblos 1, waiting to find out whether it is a dry or a commercial well. It will take at least three or four months before there will be a conclusive result, however. What is critical to understand is that this is merely an exploration phase. Lebanon has not yet joined the new group of oil and gas producing countries—in fact there is still a chance it might never do so. What is even more critical to realize is that even if the stars align for Lebanon and offshore oil and gas is discovered—and at a volume that would make its extraction commercially viable for energy companies— that becoming a new oil and gas producing country will take time.

Take Guyana as one sobering example of the length of time it can take to see results. It was only after 16 years of exploration and 40 dry wells that Guyana made its first offshore oil discovery in 2015. A similar example in the Eastern Mediterranean is that of Zohr field, an offshore natural gas field located just off the coast of Alexandria, Egypt. Ten years of failed attempts and a number of dry wells in the Shorouk Block led France’s Total to walk away and sell its share to Italy’s Eni. Two months later, Eni made the biggest discovery in the Eastern Mediterranean—the Zohr field has an estimated 30 trillion cubic feet of gas, making it likely far larger than nearby Leviathan gas field offshore Israel. What these examples tell us is that exploration for oil and gas takes times, patience, and a degree of luck.

At a time of complete economic meltdown and critical liquidity shortages, it is expected that Lebanese politicians will try to position the potentially lucrative oil and gas sector as Lebanon’s savior in the making. This is exact opposite of what they should be doing. Unleashing expectations, in these desperate times, could trigger use of a resource-backed borrowing mechanism— as was witnessed in countries such as Mozambique. Such loans usually prove detrimental to developing countries, especially those using their future revenues from natural resources as collateral. For a country such as Lebanon, which is already nearing its breaking point because of the heavy debts, resource-backed borrowing could prove to be the straw that breaks the country’s back.

What Lebanon can do right now, while waiting for a potential discovery of offshore oil and gas, is engage in certain immediate reforms that can help to ensure that all its citizens have an equal opportunity to economically benefit from current exploration activities.

A number of services and goods are expected to be provided across the supply chain to support the exploration phase. Subcontracts are usually awarded by the rights (license) holders during this stage to companies that are able to offer a number of services. Examples of such services are a local logistics base, platform supply vessels—such as boats to transfer equipment to and from the drill vessel—and a supply of marine gas oil. It is vital that the names of all companies currently subcontracted are revealed and that beneficial ownership disclosure is implemented as soon as possible. Ensuring that no politically exposed persons own the companies providing goods and services during the exploration phase will help to ensure that the Lebanese have an equal economic opportunity to benefit from this nascent sector. Moreover, beneficial ownership disclosure in Lebanon is required by law, as per article 10.7 of Law 84 (2018) on enhancing transparency in the petroleum sector.

A journey of a thousand miles starts with a single step and finally, at the tail end of February 2020, we have started on the road toward offshore oil and gas discovery in Lebanon. But nothing is guaranteed. Managing our expectations and ensuring from the get-go that Lebanese have equitable economic chances of benefitting from this sector will help us not to falter down the line if a commercially viable well is discovered in Lebanese waters.

For a country such as Lebanon resource-backed borrowing could prove to be the straw that breaks the country’s back.