Matt Nash

Cabinet vacuum could delay oil and gas exploration

Decrees to begin the bidding are still needed

oil derrick in the mediterranean

As talk of forming a new government gets eclipsed by security chaos and uncertainty over when and how the next parliamentary elections will be held, Lebanon is losing more time on the road to potentially becoming an oil and/or gas producer.


In what was arguably a face-saving measure, the Ministry of Energy on April 30 announced that the first licensing round would still begin on May 2 despite the lack of regulations necessary for companies to bid on rights to explore Lebanon’s coastal waters. At the moment, the 46 companies pre-qualified to bid are studying a draft model production sharing agreement along with a draft map of blocks of seabed off Lebanon’s coast.


The two draft documents were supposed to be approved by the cabinet prior to May 2 so companies would have six months to evaluate them and submit bids to drill for the oil and gas believed to be within Lebanon’s exclusive economic zone. While the drafts were submitted to cabinet for an OK prior to the government's March 22 collapse, they were never approved.


Why they were never approved is open to debate.


NOW spoke with several sources familiar with the process – none of whom would speak on-record – and received wildly divergent descriptions of why the oil and gas decrees were not approved. Some argue that Najib Miqati’s surprise resignation simply happened before cabinet could discuss the decrees, which were in the cabinet’s pipeline of things to discuss.


Others say the decrees were being used as leverage in a political struggle involving the Free Patriotic Movement – the party of caretaker Energy Minister Gebran Bassil.


Either way, progress on exploring for and potentially extracting oil and/or gas from Lebanon’s corner of the Eastern Mediterranean is on hold until the decrees are passed. Bassil, on April 30, said that as a caretaker minister he can extend the six-month bidding period – currently slated to end in November – and will do so by the end of the summer if there is no new cabinet.


“It is worth mentioning,” Bassil said, “that the Minister’s prerogatives allow for the extension of the bidding period, by the necessary period to compensate for the resulting time lost, in case the two decrees were not issued by the Council of Ministers prior to September 2, 2013.”


The caretaker cabinet's approval yesterday of decrees related to elections begs the question of why the caretaker cabinet hasn’t approved the oil and gas decrees. Legal opinion is split.


Marwan Saqr, a lawyer familiar with constitutional law, told NOW that the election decrees fall under the “day-to-day affairs” powers the constitution gives a caretaker government. Because there is an election law on the books that has articles stipulating certain decisions must be made according to a certain timeframe, the caretaker government can follow the provisions of the existing law, he said.


Fadi Nader, a lawyer specializing in oil and gas issues, told NOW that a legal argument for a caretaker government passing the oil and gas decrees could be made, though he does not necessarily endorse the argument. In December 2012, the cabinet approved of opening the first licensing round on May 2, 2013.


Therefore, the argument for a caretaker government passing the decrees goes, the two decisions can legally be taken as part of “day-to-day affairs” in line with the earlier, fully legal decision to hold the licensing round.


For whatever reason, cabinet has not tried to employ this argument to move the sector forward.


So, in the meantime, the Petroleum Administration is accepting feedback on the draft model contract and draft block map – commentary which it may or may not use to change the draft documents it already prepared.


The PA announced in April that the two biddable fiscal terms in the model contract are the cost-recovery ceiling and what’s known as the R-factor.


Carole Nakhle, an energy economist with the UK-based Surrey Energy Economics Center, told NOW that the cost-recovery ceiling limits the amount of revenues companies can keep each year to repay their own investments once resources begin flowing.


“If companies can recover 100% of their costs, it can take longer for the government to start getting its share of the revenues from oil or gas sales, compared to a limited ceiling of, say 80%,” she said. “The cost-recovery ceiling is mainly a way to secure up-front revenues to the government, as soon as production starts.”


Because the cost-recovery ceiling is “biddable,” Nakhle said, “companies can therefore suggest their own percentage for the ceiling. The lower the ceiling, the more attractive the bid is from the government's perspective."


The R-factor, she said, is one mechanism through which any profit left after cost recovery is shared between the government and the contractor. An R-factor equal to 1 means that companies have recovered their costs.


Initially, investors will be willing to give the government a lower share of the profits. Once they re-coup their initial investment, they will be more willing to give the government a higher percentage of the profits they’re earning. After companies begin earning only profits from oil and/or gas sales, the percentage shared with the host government also rises.


Bidding on the R-factor means tinkering with the percentages before and after all costs are recovered by the companies that sign the contracts.


Bassil has said that several of the 46 pre-qualified companies have taken the draft documents for review, but these companies demand several months to prepare a bid and need legal documents to do so.


Asked at an oil and gas conference earlier this year how many months companies want a bidding round to be open for, Chris Steele, the chief commercial consultant with Chevron, said, “With three months, we’ll be sweating.”


Anything less, he said, would prompt Chevron to reconsider bidding altogether.


Read this article in Arabic

The lack of cabinet is pushing Lebanon’s oil and gas sector even further behind that of some of it’s closest neighbors. (AFP Photo)

"Why they were never approved is open to debate."