Instability stir waters of Lebanon’s 1st offshore licensing round

Offshore Lebanon*Opportunity remains attractive to E&P coy

21 January 2014, Sweetcrude, London, UK – Lebanon’s first offshore bidding round has generated significant interest from oil companies, and while ongoing political instability has led to its third postponement, this time until April 10, 2014, any resultant fall in interest is unlikely to make the round a failure, says a new report from research and consulting firm GlobalData.

The company’s latest report* states that the bidding in Lebanon’s first offshore round is still expected to be reasonably competitive, thanks to the perceived hydrocarbon potential in the region’s waters. Indeed, 46 international companies, including ExxonMobil, Chevron, Royal Dutch Shell and Total, have pre-qualified in the round, which originally opened from May 2, 2013 until November 4 of the same year.

Rabie Khellafi, GlobalData’s Lead Analyst covering Upstream Oil & Gas in the Middle East and North Africa region, says: “There may be some potential bidders who are put off by the delays and instability, but this is unlikely to outweigh the prospect of significant discoveries similar to those made in Israel and Cyprus. Large exploration and production (E&P) companies have experience in operating within politically unstable countries, but others will certainly not take that risk, as they just cannot afford it.

“Although the three-month duration of the latest extension is more cautious than the previous one-month extensions, it is likely that additional postponements may be required. Not only does Lebanon’s political instability appear to be worsening as a result of the war in Syria and increased security threats, but very little progress has apparently been made in forming a new government, with parliamentary elections not scheduled until November 2014.”

The current caretaker government refused to sign the decrees required for the round. Despite the Minister of Energy and Water’s apparent suggestion that the round could go ahead without the decrees if a new government is not formed, the report suggests that companies would most likely be wary about bidding in this case, due to the legal uncertainty it would entail.

When the round finally goes ahead, bidders that are awarded blocks will sign an Exploration and Production Agreement (EPA), which has a Production Sharing Agreement (PSA) framework, with the Ministry of Energy and Water.

Will Scargill, GlobalData’s Upstream Fiscal Analyst, says: “Apart from the royalties, which are payable at a rate of 4% for natural gas and 5–12% for crude oil production, all the other main terms, which will determine the state’s share of production, will be decided by the bidding. Companies will then pay Lebanon’s standard corporate income tax of 15%, and foreign companies will also be subject to a 10% branch remittance tax, resulting in an overall direct tax burden of 23.5%.

“The flexibility of the framework means that the final terms will vary across the different blocks that are licensed. Those adjacent to Israeli waters are likely to generate the most interest, although the maritime boundary dispute over Block 9 may hold back bids for this particular block. In general, we expect the state’s take to average around 40–45% of gross revenue,” concludes Scargill.

About the Author