Wednesday, April 9, 2014

Lebanon must move quickly to benefit from gas reserves

Lebanon’s politicians, always on the prowl for new sources of revenue, are greedily eying the country’s offshore gas reserves. However, unless the Lebanese government organises the gas sector soon, Lebanon could miss out on a valuable source of revenue at a time of serious domestic crises.

Last year, the government of prime minister Najib Mikati was supposed to pass two decrees allowing for the start of a licensing round, in which foreign oil companies would bid to explore Lebanese waters. The decrees were never passed, however, because of political divisions. Until they are, there will be little progress in offshore gas projects.

Now, foreign companies have asked the Lebanese to delay the auction, saying they need more time to prepare bids. This will probably happen given the delay in passing the decrees. Foreign companies are also reportedly unhappy that Lebanon has not put all of its blocks up for bidding. According to press reports, several companies have shifted their investment to countries that have opened up their entire shoreline for exploration.

This sense that things are not moving has been exacerbated by a broader question: how does Lebanon export its gas once it is extracted? In a recent opinion piece, a Lebanese MP, Basem Shabb, warned that unless Lebanon found a cost-effective way of exporting its gas, it could fail to cash in on its offshore wealth. “A window of opportunity for Lebanon to fully exploit its hydrocarbon wealth is fast disappearing without a clear and profitable export option,” he wrote.

The reason is that domestic demand is insufficient to make extraction cost-effective. This would change if the Lebanese agreed to participate in a project to build a liquefied natural gas plant in Cyprus, to prepare gas for export. But for such a plant to be profitable, Mr Shabb argued, it would need to rely on Israeli, Lebanese and Cypriot gas supplies, and the Lebanese have ruled out participation if ­Israel is involved.

Complicating matters is the fact that Israel and Lebanon continue to disagree over a gasfield along their disputed maritime border. The United States is seeking to find a solution to the disagreement, and last week the US deputy assistant secretary for energy diplomacy, Amos Hochstein, was in Beirut to talk to officials on the matter.

Mr Hochstein urged the Lebanese not to drill in the disputed waters. He also sounded a cautionary note, saying in an interview: “The longer you wait on resolving this dispute, the less likely it is that international oil companies will wholeheartedly invest in that area.”

Given these obstacles, is Lebanon about to see the window of opportunity close on its gas reserves? The prospects for gain, political and personal, tend to reduce this risk. But if gas is there mainly to serve the interests of the politicians, it leaves little hope that Lebanon will gain in the way it could.

The formation of the Salam government was delayed because the previous energy minister, Gebran Bassil, refused to surrender his portfolio in an agreed rotation of ministries. A compromise was reached when the ministry was given to an ally of the Aounists, of whom Mr Bassil is a leading figure.

Though he is now foreign minister, Mr Bassil will, doubtless, have a say over gas policy until a new government is formed after the presidential election scheduled for May. And if his father-in-law, Michael Aoun, is elected president, Mr Bassil’s sway over the oil sector may be extended, to the displeasure of other politicians.

But for as long as the energy ministry provokes political envy, this could hinder a consensus over gas policy. For instance, the differences between Mr Bassil and the speaker of parliament, Nabih Berri, are palpable, and this could exacerbate a relationship already damaged by Mr Aoun’s challenge to Mr Berri in the elections of 2009.

Mr Berri’s approval will also be necessary for any compromise proposal offered by the Americans to resolve the dispute with Israel. As for the decrees allowing the licensing round to go ahead, it is imperative that Mr Aoun and Mr Berri be on the same wavelength, otherwise Lebanon as a whole may suffer.

Even if self-interest ultimately makes a consensus over the gas sector possible, agreement over the export of gas presents myriad complications. Lebanese and Israeli gas are part of the same Eastern Mediterranean fields, so all sides win from cooperation. Yet it is doubtful in the current political climate, with Hizbollah’s presence in the government, that Lebanon would join a consortium with Israel.

Lebanon faces serious financial and sectoral challenges, making exploitation of its gas reserves necessary. The public debt is around $64 billion (Dh236bn), and the debt to GDP ratio is estimated at 163 per cent, according to some economists. In addition, Lebanon’s electricity sector is in a shambles, with most regions of the country continuing to face hours of rationing per day.

The pressures on the country do not give the government the luxury to delay agreement over the gas sector. The two decrees must be passed as soon as possible – and the new energy minister said on Tuesday that they would be by the end of April, with the gas-licensing auction to be held within four months – and Lebanon must define a long-term strategy for exporting its gas. This can only be done through a political accord, which, unfortunately, will mean that all major parties will want a share of the profits.

Gas has another meaning for Lebanon. For as long as the country is seen as a potential gas producer, there will be an incentive to maintain its stability. But once that window is closed, or alternative windows are opened elsewhere, maintaining Lebanese stability will become less vital. This is a fact the politicians must absorb now before tomorrow.

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