Oil and gas in Lebanon: shattered expectations

Katerenchuk Daniil Vladimirovich ORCID: 0000-0002-8513-3026 Postgraduate student, Department of African Studies and Arabic Studies, Peoples' Friendship University of Russia 156 Leninsky Prospekt str., Moscow, 119571, Russia Daniil.Katerenchuk@yandex.ru

Introduction

Oil and gas are the most important resources for the functioning of the global economy and will continue to occupy a dominant position in the energy balance by the middle of the 21st century. even in the context of the global transition from fossil fuels to environmentally friendly energy sources. Hydrocarbons remain a key factor determining the place of the States of the Middle East in the system of international relations. The countries of the region accounted for about 31.3% of global oil production in 2022 (data from the Statista portal), and their share in the gas market was 17% ^{[1, p. 105]}.

Among the Middle Eastern states, only two of them do not produce oil and gas — these are Lebanon and Palestine. The Lebanese Republic, once considered the economic oasis of the region, has been experiencing serious economic problems for many years. The country's authorities hoped to solve them by selling hydrocarbons, the prospects for the discovery of which on the country's shelf clearly manifested themselves after the "gas boom" in the Eastern Mediterranean. Nevertheless, the actions of the Lebanese leadership either did not correspond to trends in the oil and gas sector, or were postponed due to political instability.

Attempts to find oil

Oil exploration in Lebanon began back in the 1930s during the French mandate. From the 1930s to the 1970s, several wells were drilled on the territory of the republic, a number of them to a depth of 3,000 m, but oil was never discovered. According to Nasser Hoteyt, a member of the Board of the Lebanese Petroleum Administration (LNA), who previously served as chairman of this institution, a modern reading of the descriptions of drilled layers indicates the presence of methane and heavy hydrocarbons, however, "at that time investors were not interested in gas, and operations for the extraction and processing of heavy hydrocarbons were very expensive" ^{[2, pp. 1-2]}. Exploration work was suspended due to unfavorable security conditions during the Civil War (1975-1990). In the 1990s, exploration resumed offshore Lebanon and was subsequently expanded to conduct two-dimensional and three-dimensional scanning in the country's exclusive economic zone (EEZ).

According to Ammar Khoury, a member of the Mustaqbal parliamentary bloc, in 2006 Lebanon agreed with Norway to provide technical assistance under the oil-for-Development program. The Lebanese government has signed a contract with the Norwegian company Petroleum Geo-Services to conduct three-dimensional scanning in the country's EEZ on an area of 2,350 square kilometers. The results of the study turned out to be better than expected, revealing signs of the presence of oil and gas on the republic's shelf ^[3].

Hydrocarbon potential

In March 2010, the United States Geological Survey (USGS) published a report on the potential resources of the Levantine oil and gas basin with an area of about 83 thousand square kilometers, which covers the territories of Israel, the Gaza Strip (Palestine), Lebanon, Syria and Cyprus ^{[4, p 1-2]}. According to USGS estimates, the average volume of undiscovered technically recoverable oil reserves in this area is 1.689 billion barrels, gas – 122.378 trillion cubic feet (about 3.46 trillion cubic meters m), liquefied petroleum gas (broad fraction of light hydrocarbons, SHFLU) – 3.075 trillion cubic feet (about 87.074 billion cubic meters). Two months later, the USGS published another report on the Nile Delta basin, which allegedly contains 223.242 billion cubic feet of gas (about 6.32 trillion cubic meters) and 1.763 billion barrels. oil, which potentially makes it the largest in the Mediterranean.

Exploration in the Eastern Mediterranean accelerated after a consortium led by the American company Noble Energy discovered the Tamar field off the coast of Israel in 2009 with estimated reserves of about 280 billion cubic meters of gas. The following year, Noble Energy discovered an even larger Leviathan gas field in the waters of the Jewish state, with a volume of about 620 billion cubic meters. In 2011, the company announced the discovery of the Aphrodite field with reserves of 140 billion cubic meters of gas in the EEZ of Cyprus ^{[5, pp. 13-14]}.

The discovery of large gas reserves in the Levantine oil and gas basin has confirmed Lebanon's hydrocarbon potential. Realizing this, Beirut sought to start exploration and production on the country's shelf as soon as possible in order to solve its economic problems, which was regularly stated by top officials of the republic. Lebanon has not yet recovered from the 2006 war with Israel, as the country's economy began to experience the negative impact of the conflict in Syria that began in 2011 – thousands of Syrian refugees flooded the small country. Instability in the region, combined with political problems, led to a slowdown in the growth rate of real gross domestic product (GDP). Moreover, after 2011, such traditional economic drivers as real estate, construction, finance and tourism were severely affected by the situation in the region ^{[6, pp. 11-13]}. Over time, the situation in Lebanon has only worsened: inefficient government, combined with corruption and falling living standards, led to a wave of protest activity in 2019, followed by the COVID-19 coronavirus pandemic, pushing the economy to the abyss. In January 2022, the World Bank described the economic crisis in the country as one of the three strongest in the world since the middle of the 19th century.

Legislative framework

In order to bring national legislation in the field of natural resources development in line with international standards, in the summer of 2010, Lebanese President Michel Sleiman presented draft Law No. 132 "On Oil Resources in marine waters", which was approved by Parliament on August 24. This document, in particular, established the legal framework for oil exploration and production in the Lebanese EEZ, mechanisms for the fair distribution of income and the procedure for granting licenses.

However, the Lebanese "oil law" does not contain enough information to "make an informed judgment about the attractiveness of the country from an investor's point of view," says Carol Nahle, CEO of the consulting company Crystol Energy and associate researcher at the Isam Fares Institute of Public Administration and International Relations ^[7]. The document mainly concerns oil, not gas, although its discovery offshore Lebanon is more likely. Oil and gas production has a number of common features, but the economics of their projects can vary greatly. For example, investments in a deep-sea offshore gas field are more capital intensive than in an oil field.

Political obstacles

The Lebanese authorities conducted the first prequalification of companies to participate in the tender for the exploration of gas fields on the Lebanese shelf in 2013, although it was planned to organize it back in 2011. A total of 52 companies from 25 countries submitted applications. On April 18, 2013, the Minister of Energy of the Republic Gibran Basil announced that 46 companies had received the right to participate in the first tender, 12 of which can apply as operators: American Anadarko, Chevron and ExxonMobil, European TotalEnergies, Repsol, Shell, Maersk, Statoil and Eni, Brazilian Petrobras, Malaysian Petronas Carigili and Japanese Inpex. Non-operators, in particular, included Rosneft, Novatek & GPB Global Resources B.V. and LUKOIL Overseas Lebanon B.V.

In May 2013, J. Basil, speaking at the Arab Economic Forum in Beirut, presented for the first time data on the projected volumes of resources on the country's shelf. He stated that georadar scanning was carried out on 70% of the territorial waters of the republic (15 thousand square kilometers) and 10% of this territory, according to preliminary estimates, contains 850 billion cubic meters of gas and 660 million barrels of oil. "If we meet all deadlines, we hope to complete the first stage of exploration in 2016-2017 and after that start development and production," the minister said ^[8].

However, Beirut's plans were never implemented due to the constant twists and turns characteristic of Lebanese politics, and the tender process had to be put on pause. On March 22, 2013, Lebanese Prime Minister Najib Mikati resigned amid controversy among religious communities ^[9]. The government crisis, which ended only on February 15, 2014 with the announcement of a new government in the voice of Tamam Salam, replaced the presidential vacuum when parliamentarians could not elect a new head of the republic after the expiration of Michel Sleiman's term of office on May 25, 2014. Another crisis was overcome only in October 2016 after the election of Michel Aoun to the presidency.

After several years of political confusion, the authorities began to actively deal with the oil and gas dossier. On January 19, 2017, M. Aun signed a decree dividing the country's EEZ into 10 blocks. Blocks 8, 9 and 10 were located in the disputed area with Israel ^[10]. Just a week later, on January 26, Lebanon resumed the first round of licensing (in Beirut it was called the second round of the first prequalification) of companies after a three-year delay, Energy Minister Cesar Abu Khalil said. He also announced the opening of 5 blocks (1, 4, 8, 9 and 10) for bidding during the first licensing round. As a result of this round, Indian ONGC Videsh Limited qualified as an operator. Russian companies Novatek and Lukoil provided updated information and also passed as non-operators.

According to Lebanese law, qualified companies create consortia, which must consist of at least three companies, one of which acts as an operator. The main company conducts exploration work, while the other two cover part of the costs based on their share in the consortium.

On December 14, 2017, the Government of Lebanon approved two licenses for exploration and production at blocks 4 and 9 to a consortium consisting of subsidiaries TotalEnergies (40%), Eni (40%) and Novatek (20%), and in February 2018 they signed relevant agreements with the Government of the Republic. Drilling operations on blocks 4 and 9 were expected to begin in 2019 after the consortium completed logistics and necessary research during 2018.

The first wells

At the end of April 2020, TotalEnergies completed drilling the first Byblos well 16/1 well at block 4, located about 30 km north of Beirut, to a depth of just over 4 km, but it turned out to be dry ^[11]. The French company also planned to drill a well at block 9, part of which was located in the disputed EEZ area with Israel, but the economic collapse in Lebanon, the COVID-19 coronavirus pandemic and the possible reaction of Tel Aviv led to the postponement of work on this block.

On August 24, 2022, Lebanese Energy Minister Walid Fayyad announced that Novatek Lebanon SAL (a subsidiary of Novatek) had notified of the decision to withdraw from the agreements on blocks 4 and 9 after the completion of the first stage of exploration by October 22, 2022, citing economic and financial reasons, as well as international political risks. At the same time, the head of the Lebanese Ministry of Energy noted that the operator of the blocks, TotalEnergies, will continue work in accordance with the plan ^[12]. At that time, V. Fayyad stated that Novatek's withdrawal from the consortium could be "related to the general situation of Russian companies," referring to the sanctions pressure exerted by a number of Western countries on Russian companies in connection with the conflict in Ukraine ^[13].

The Lebanese leadership faced a difficult question about whether TotalEnergies and Eni would choose a new partner, which would then be approved by the government, or the authorities would have to repeat the tender process, because there was no procedure in this regard. However, Beirut has taken an alternative path. At the end of September 2022, the Lebanese government decided to take the place of the Russian company in the consortium and asked Novatek to transfer its 40% stake ^[14]. On January 29, 2023, the Qatari national oil and gas company QatarEnergy joined the consortium, which was licensed back in 2013. In accordance with the agreement signed in Beirut, the Qatari giant received 30% in the project, and the shares of TotalEnergies and Eni were reduced to 35% ^[15].

In 2022, Lebanon and Israel were at the final stage of indirect negotiations on the delimitation of their EEZ border, which they had been conducting with the mediation of the United States since 2010. According to the provisions of the agreement signed on October 27, work on the Qana field separated by the border (Lebanese block 9 and Israeli block 72) should be carried out by a consortium or a company that, in particular, is not subject to sanctions.

The resolution of the dispute with Israel allowed TotalEnergies to begin preparations for exploratory drilling at Block 9. In December 2022, the head of TotalEnergies, Patrick Pouyanne, announced that the company had announced a tender for the provision of a drilling rig, which would be selected in the first quarter of 2023, and also placed pre-orders for equipment ^[16]. The French company announced the start of work on this block on August 22, 2023 – more than five years after the conclusion of an agreement with the Government of Lebanon. The Qana 31/1 well was planned to be drilled in about 67 days, but in October 2023, Reuters reported that no hydrocarbons were detected during drilling ^[17], although block 9 was considered one of the most promising. In the same month, V. Fayyad stated that "the consortium has an obligation to drill another well," but its execution dates will come later ^[18].

Unsuccessful trades

The Lebanese leadership planned to hold a second round of licensing of oil and gas companies in late 2019 – early 2020, but the deadline for submitting applications was repeatedly postponed due to the lack of candidates and the crisis in the country. According to the LNA, the reason for the delays was the negative impact of the COVID-19 coronavirus pandemic on the oil and gas industry as a whole. All blocks except 4 and 9 were open for bidding. Only a consortium led by TotalEnergies took part in the tender, submitting applications for blocks 8 and 10 on October 2, 2023. In the same month, TotalEnergies, Eni and QatarEnergy refused the license for Block 4 after unsuccessful drilling conducted in 2020.

Moreover, the consortium did not conclude agreements with the Government of Lebanon on exploration and production at blocks 8 and 10, the deadline for signing documents expired on February 17, 2024. According to V. Fayyad, the companies could not be satisfied with the two conditions put forward by Beirut. The first concerns the period during which the consortium must decide whether to conduct three-dimensional studies on block 8. The oil and gas companies requested one year for this, but the Lebanese government insisted on three months. The parties also failed to agree on a time frame within which the consortium will decide whether to drill an exploration well or not. "Lebanon set a deadline of one year, as stipulated by the provisions of the framework decrees, but the consortium wanted to extend it to two years. As a result, we offered a year and a half, but the consortium does not seem to be satisfied with this," said the head of the Lebanese Ministry of Energy ^[19].

At the end of December 2023, V. Fayyad signed an order to conduct the third round of licensing of companies in the period from December 27 to July 2, 2024. At the same time, all blocks except 9 were open for applications. It seems that it would be more effective for the Lebanese government to review the terms of contracts for blocks 8 and 10 with the consortium already operating in the country, led by TotalEnergies, than to include them in a new licensing round, given that its success is not guaranteed.

Conclusion

            Attempts to find oil and gas in Lebanon, which have been undertaken since the 1930s, have not brought tangible results to date. At the same time, the country is estimated to have significant oil and gas reserves, which is indirectly confirmed by the discovery of large gas fields offshore neighboring Israel and Cyprus.

            Despite the active investigation of the EEZ for the availability of energy resources in the early 2000s, exploratory drilling began later than planned. Firstly, the unstable political situation in the country prevented bidding for the distribution of oil and gas blocks and the start of work. Secondly, exploration in the southern part of the EEZ was postponed due to the long-term conflict with Israel over the delimitation of the maritime border. Foreign companies simply could not carry out work in the disputed area, taking into account the fact that Lebanon and Israel are formally at war.

            In addition, the uncertain tender process of recent years and the refusal of the only foreign consortium operating in the Lebanese EEZ, consisting of TotalEnergies, Eni and QatarEnergy, to conclude contracts with the Lebanese government for blocks 8 and 10, indicates an insufficiently effective oil and gas policy of Beirut.

            The plans of the Lebanese authorities to solve the country's economic problems through the possible sale of hydrocarbons have not been implemented for more than a decade. If proven oil and gas reserves are discovered, Beirut will face the problem of exporting them, since there is practically no appropriate infrastructure in the country, although this task can be solved with the help of floating terminals. In addition, inefficient public administration, caused primarily by political turbulence, can lead to difficulties in distributing income from energy exports, given also the high level of corruption in the country.