Le­banon fo­cus

In Le­banon, the Mediter­ranean coun­try dev­as­tated by war, gas could solve key eco­nomic is­sues and help the coun­try keep its lights on

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How gas could solve Le­banon’s long-stand­ing elec­tric­ity cri­sis

Le­banon has been de­fined by in­sta­bil­ity for decades, but one thing re­mains con­stant. Ev­ery day, with­out fail, the elec­tric­ity cuts. In the coun­try’s cap­i­tal city, Beirut, the elec­tric­ity cuts for around three hours a day, but in other ar­eas, res­i­dents face more than 12 hours of power out­ages per day. To cope, the aver­age Le­banese house­hold re­lies on a per­sonal diesel-fu­elled gen­er­a­tor at a cost of around $1,300 per year, or 15% of in­come per capita, ac­cord­ing to a 2017 re­port by the World Bank. But the cuts also af­fect busi­ness— in 2008, the World Bank es­ti­mated that power out­ages cost Le­banese in­dus­tries close to $400mn in sales losses.

The rea­sons for the out­ages are var­ied—the 15-year Le­banese Civil War, which ended in 1990, rav­aged the coun­try’s in­fra­struc­ture, power plants are age­ing, but above all else, Le­banon has no gas.

When asked about the gas short­age in a phone call, Wis­sam Ch­bat, a board mem­ber and head of ge­ol­ogy and geo­physics at the state’s Le­banese Pe­tro­leum Au­thor­ity (LPA), in­ter­rupts: “No, it’s not a short­age,” he says. “There is no gas. None.”

As a re­sult, state-run elec­tric­ity com­pany Elec­tric­ité du Liban (EDL) bor­rowed around $1.4bn from the coun­try trea­sury to pur­chase fuel in 2018, ac­cord­ing to the coun­try’s bud­get.

As such, while its Gulf coun­ter­parts might be cel­e­brat­ing a mod­er­ate rise in oil prices, higher prices are

“…IF WE SWITCH THE CUR­RENT EX­IST­ING CA­PAC­ITY FOR ELEC­TRIC­ITY, AROUND 60% OR 65% OF IT, WHICH IS RE­AL­IS­TIC, TO FIRED GAS WE ARE SAV­ING AROUND $1BN DOL­LARS A YEAR.”

bad news for this small, Mediter­ranean coun­try.

“The aver­age pro­duc­tion cost for ev­ery [kilo­watt hour (KWH)] is 14-15 cents, de­pend­ing on the fuel price, and we sell it for 9 cents to the con­sumer,” Ch­bat says. The coun­try’s seven ther­mal power plants use heavy fuel oil, and its gas tur­bines run on diesel oil in­stead of gas.

The sit­u­a­tion is cycli­cal: the govern­ment can­not jus­tify in­creased tar­iffs un­less gen­er­a­tion ca­pac­ity is in­creased, and can­not in­crease ca­pac­ity with­out more in­vest­ment into the sec­tor. Projects to build more power plants have been con­tin­u­ally made and shelved.

This sit­u­a­tion has made EDL, which says it con­trols 90% of the coun­try’s elec­tric­ity sec­tor, a huge deficit cen­tre for the govern­ment.

The In­ter­na­tional Mone­tary Fund wrote in a Fe­bru­ary 2018 re­port that “the elec­tric­ity sec­tor has not only been widely iden­ti­fied as Le­banon’s most press­ing bot­tle­neck, but it also re­mains a sig­nif­i­cant drain on the bud­get,” pin­point­ing the elec­tric­ity sec­tor as a key is­sue for eco­nomic re­form.

Ch­bat es­ti­mates that EDL has, over the years, ac­counted for around $30bn of Le­banon’s to­tal debt. The Min­istry of Fi­nance es­ti­mates that gross pub­lic debt was at $82.9bn by the end of Q2 2018, up $1bn from the pre­vi­ous quar­ter.

“If we look at the state, it is es­ti­mated that if we switch the cur­rent ex­ist­ing ca­pac­ity for elec­tric­ity, around 60% or 65% of it, which is re­al­is­tic, to fired gas, we are sav­ing around $1bn dol­lars a year,” Ch­bat says.

There have been at­tempts to rem­edy this sit­u­a­tion with no sub­stan­tial suc­cess. Gas was im­ported from Egypt for a few months in 2009 through the Arab Gas Pipe­line to the North Le­banon Bed­dawi plant, but this project stopped due to gas short­ages in Egypt and es­ca­lat­ing tur­moil in the coun­try, fol­lowed by the war in Syria.

But Le­banon could soon have its own net­work of pipe­lines along the coun­try’s coast, in­ter­con­nect­ing ma­jor power plants. As part of this plan, a con­tract is up for ten­der for the de­vel­op­ment and oper­a­tion of three liq­uid nat­u­ral gas (LNG) float­ing stor­age and re-gasi­fi­ca­tion units (FSRUS) and as­so­ci­ated pipe­lines, which will be awarded early next year.

“If the ten­der goes smoothly and things work as planned we might have our gas from th­ese FSRUS in 2021 or 2022,” Ch­bat says. It is the fastest po­ten­tial fix to the prob­lem, and might save the coun­try some money on fuel pur­chases, but still re­quires im­ported LNG.

When gas was first dis­cov­ered in the Le­vant

Basin in the east­ern Mediter­ranean in 2009, it must have seemed like a sav­ing grace to the Le­banese govern­ment. But li­cens­ing was de­layed be­cause of re­cur­ring po­lit­i­cal is­sues.

Since then, Le­banon has sur­veyed the acreage for its 10 blocks, and in early 2018 awarded ex­plo­ration li­censes for blocks four and nine to a con­sor­tium led by To­tal, Eni and No­vatek.

Ch­bat says each round has its own ob­jec­tives. For the first li­cens­ing round, a main con­cern was strik­ing a com­mer­cial dis­cov­ery—ch­bat be­lieves they achieved this goal by award­ing block four, which, based on stud­ies, has the high­est chance of com­mer­cial suc­cess of the blocks that were open in the first li­cens­ing round.

He notes that the LPA ranks blocks based on ‘at­trac­tive­ness,’ in line with the goals for that li­cens­ing round, and that find­ing com­pa­nies with shared goals is a key con­cern for them. Now, the LPA is work­ing on its sec­ond li­cens­ing round, which will launch by the end of the year.

For the sec­ond li­cens­ing round, the LPA aims to ac­cel­er­ate ex­plo­ration ac­tiv­ity while di­ver­si­fy­ing the play types in which they award blocks. One strat­egy: learn from the suc­cesses of neigh­bour­ing coun­tries, like Cyprus, which he ad­mits is “three or four years ahead of [Le­banon]” in its oil and gas ac­tiv­i­ties. Af­ter study­ing suc­cess­ful blocks in Cyprus, the LPA might con­sider open­ing blocks with sim­i­lar ge­o­log­i­cal sys­tems to at­tract com­pa­nies to bid.

Pre­qual­i­fi­ca­tion for the sec­ond li­cens­ing round is ex­pected to open in Jan­uary 2019, and Ch­bat says that by April 2019, they should be pre­pared to an­nounce the pre­qual­i­fied com­pa­nies and open the six-month bid­ding pe­riod, which will close to­wards the end of 2019. The LPA plans to award con­tracts ev­ery two years.

Since sign­ing its first ex­plo­ration li­cense with To­tal, Eni and No­vatek, LPA has ap­proved ex­plo­ration plans for the next three years.

“The con­sor­tium has started to scan the Le­banese coast to see which lo­ca­tion is best to launch op­er­a­tions from,” Ch­bat says. “Also, the prepa­ra­tion for en­vi­ron­men­tal stud­ies and the sam­pling of wa­ter and sam­ples on the drilling site are go­ing to start.”

The con­sor­tium has also com­mit­ted to hir­ing

80% Le­banese em­ploy­ees. Given that Le­banon’s oil and gas sec­tor is vir­tu­ally non-ex­is­tent, Ch­bat con­cedes that this will have to be grad­u­ally achieved. Early next year, the con­sor­tium will ten­der sub­con­trac­tors, who will also be held to this rule.

Ex­plo­ration is still in its early days, and there is no guar­an­tee that de­vel­op­ment will yield the re­sults that Le­banon needs. But part of the LPA’S job is to plan for de­vel­op­ment even if it is not cer­tain.

“The Le­banese mar­ket would re­quire, in the first es­ti­mate, 0.2 tril­lion cu­bic feet [of gas] to fire the

“THE AVER­AGE PRO­DUC­TION COST FOR EV­ERY [KILO­WATT HOUR] IS 1415 CENTS, DE­PEND­ING ON THE FUEL PRICE, AND WE SELL IT FOR 9 CENTS TO THE CON­SUMER.”

power plants on gas and to use it for some in­dus­tries,” Ch­bat says, not­ing that it is a small mar­ket.

In such a small mar­ket, the ef­fect of gas pro­duc­tion would be sub­stan­tial. The cost of elec­tric­ity gen­er­a­tion would drop to 11-12 cents per KWH, Ch­bat es­ti­mates, still higher than the 9 cents per KWH that the govern­ment charges res­i­dents.

But re­duc­ing fuel ex­pen­di­ture could give the govern­ment more breath­ing room to up­date power plants and work to in­crease ca­pac­ity—ch­bat says the state would need to “move to above 20 hours [of elec­tric­ity] a day to be able to jus­tify an in­crease in tar­iffs.”

The hope is that im­proved ser­vice from EDL will mo­ti­vate res­i­dents to rely solely on EDL’S sup­ply, in­stead of us­ing black mar­ket gen­er­a­tors, which are not me­tered and weigh down EDL’S sup­ply and per­for­mance.

If gas dis­cov­er­ies are more than enough to sat­u­rate the mar­ket, Le­banon has a few op­tions: send gas to Egypt through ex­ist­ing pipe­lines to be liq­ue­fied and ex­ported by ship, or build a Le­banese pipe­line un­der 250km trans­port­ing gas from off­shore Le­banon and Syria to Turkey, where it could con­nect to the Eurasian pipe­line net­work.

De­pend­ing on dis­cov­er­ies in Cyprus, where in early Oc­to­ber Eni, To­tal and Exxon were in­vited to bid for its off­shore Block 7, Le­banon could have an­other op­tion. If Cyprus has large amounts of re­cov­er­able gas, it is ex­pected to in­vest in LNG in­fra­struc­ture, which Le­banon could use to liq­uefy its gas for ex­port.

But the po­ten­tial for Le­banon’s en­ergy sec­tor could be even big­ger. “Ini­tially, we were un­der the im­pres­sion that it was purely gas,” Ch­bat says. “Now, the oil story is com­ing in more vigor for off­shore Le­banon, with the pos­si­bil­ity of hav­ing a mix­ture of oil and gas.”

Le­banon’s en­trance into the re­gional oil and gas sec­tor could mark a turn in its econ­omy, pro­vid­ing new job op­por­tu­ni­ties, a new rev­enue stream for the coun­try and cut­ting na­tional debt. But is­sues per­sist. The IMF in Fe­bru­ary 2018 pointed out cor­rup­tion as a key ob­sta­cle to eco­nomic re­form.

Oil and gas pro­duc­tion might not cause im­me­di­ate, sweep­ing change, re­solv­ing deep-rooted is­sues like cor­rup­tion, po­lit­i­cal strife or neigh­bour­ing con­flicts. But it could keep the lights on for a change.

Le­banon has 10 off­shore blocks that have yet to be ex­plored

Diesel-fu­elled gen­er­a­tors con­tribute to air pol­lu­tion and harm the govern­ment’s gen­er­a­tion ca­pac­ity

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