Lebanon recently announced its intention to restart its first oil and gas licensing round and is soliciting bids for five offshore blocks. The announcement comes more than three years after an initial bid round was delayed due to internal political deadlock. The new bid round is seen as a significant first step for Lebanon developing of its hydrocarbons industry.
The government has approved two decrees which define the geographical parameters of the blocks, specify the tender process and set out a model exploration and production agreement (EPA) to be entered into with participating companies. The licensing round will allow companies to make their bids and eventually obtain an offshore exploration and production license.
Bids are invited by consortia consisting of at least three companies. The operator must hold a participating interest of at least 35% and each non-operator must hold a participating interest of at least 10%.
The tender process will extend over a period of ten months starting in February 2017 and ending in November 2017. The process will involve a new pre-qualification round. Potential operators will need to satisfy more stringent qualification criteria than non-operators. The new pre-qualification round for submission of documents was opened on the 2nd of February 2017 and will be closed the 31st of March 2017. Results of the new pre-qualification round will be announced on the 13th of April 2017.
Companies that were pre-qualified before the licensing round stalled in 2013 will not be required to pre-qualify again, provided that they continue to meet the pre-qualification requirements. However as per Article 2 of the Decision no. 1 of the Minister of Energy and Water dated 26/01/2017, such companies should notify the Lebanese Petroleum Administration (LPA), within 15 days from the 2nd of February 2017, of any change(s) that could affect the prequalification criteria and shall provide the LPA, before 31st March 2017 inclusive, with their financial statements for the years 2014 and 2015 (audited) and 2016 (unaudited).
Companies that were pre-qualified as a Right Holder Non-operator and want to upgrade their status to become a Right Holder Operator should submit to the LPA the required documents listed in annexes 3 and 4 of the Decree no 9882/2013
Pre-qualified companies will be invited to submit their bids by 15 September 2017. We understand that bidding companies will be required to submit a bid bond of USD 5,000,000 in favour of the Ministry of Energy and Water as part of the bid process and will be expected, amongst other things, to commit to a minimum work commitment of at least one exploration well during each of the two exploration periods under the EPA. The evaluation of the bids and entry into the EPAs is expected to occur by 15 November 2017.
Considerations for International Oil Companies (IOCs)
The government plans to eventually offer 10 offshore blocks for exploration to companies, of which three can be characterised as deepwater blocks and the remaining seven as ultra-deepwater blocks. Although, like Cyprus and Israel, the Lebanese offshore blocks show promise of being particularly gas prone, geological studies suggest that the more mature source rocks of the North Levant Basin will likely be oil prone too. Estimates peg offshore reserves in Lebanon at approximately 96 trillion cubic feet of natural gas and 865 million barrels of oil.
The Lebanese Minister of Energy and Water declared on the 26th of January 2017 that blocks 1, 4, 8, 9 and 10 will be open for bidding during the first offshore licensing round as per the below:
Source: Lebanese Petroleum Administration - http://www.lpa.gov.lb/index.php
It is expected that any gas finds resulting from the exploration activities will be utilised initially to meet domestic demand for gas. If sufficient quantities are discovered to allow Lebanon to become a net exporter of gas, a joint LNG export facility with Cyprus or Egypt might become feasible in the medium to long term, depending on, amongst other things, the size of the gas finds, gas prices, market conditions and political considerations.
The EPAs to be entered into with IOCs will be based on a production sharing contract model where the IOCs will bear the risk of operations being unsuccessful but both the IOCs and the Lebanese government will share in the oil and gas produced from the blocks. Each participating company will be required to establish and maintain a legal presence in Lebanon for the duration of the EPA to undertake its obligations under the EPA. We understand that the government's revenues from its share of oil and gas will be deposited into a national sovereign wealth fund whose creation is currently under discussion. Plans are also underway for the government to adopt a tax regime that will apply to the hydrocarbons industry. Uncertainty over applicable taxes will make it much more difficult for oil companies to evaluate the opportunities the licensing round presents. There is also uncertainty about how the EPAs will be characterised as a matter of Lebanese law. If the EPAs are considered administrative contracts then (in theory) they may be unilaterally amended by the state for national considerations. This is likely to be a chief concern for potential investors.
One encouraging development for investors is that the Government of Lebanon has announced its intention to join the Extractive Industries Transparency Initiative (EITI). The EITI is a voluntary initiative through which the Government of Lebanon will commit to publishing reports on how the government manages the oil, gas, and mining resources. The implementation of the EITI will promote transparency in the hydrocarbons sector and help demonstrate the benefits of the industry to the Lebanese population.Lebanon First Oil And Gas Licensing Round
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