Basem Shabb

Lebanon’s window of opportunity to explore its hydrocarbon reserves has practically closed. After a series of political blunders and reckless bickering on the part of the Lebanese ruling class, a declining energy market has finally dealt a death blow to any reasonable and profitable prospect of tapping into Lebanon’s hydrocarbon reserves. Worse yet, the groundwork for jump-starting the leasing process still remains unfinished, with serious legal and regional hurdles remaining in place.

Two important and necessary decrees to initiate the leasing process, a top priority of the current government a year and a half ago, were never passed. The governmental impasse makes approving these decrees unlikely in the near future. Even when the government was fully empowered, tensions within the March 8 coalition remained a major stumbling block.

Two years ago, then-Energy Minister, Gebran Bassil was inclined to accept Frederic Hof’s option for settling the issue of the disputed southern Extended Economic Zone with Israel.

Hof, then-special coordinator for regional affairs in the U.S. State Department’s Office of the Special Envoy for Middle East Peace, had proposed that two-thirds of the disputed 899 square-kilometer area’s revenue go to Lebanon, whereas the remaining one-third go into an escrow account pending the final legal status.

Hezbollah’s opposition derailed the Hof plan by forestalling the passage of the decrees implementing it. The option was later proposed again by Amos Hochstein, the special envoy and coordinator for international energy affairs at the U.S. State Department. However, it was turned down by both March 8 and March 14 in favor of delineation by the United Nations.

As the U.N. and Israel are not willing to extend the blue line, meaning the extension of the Lebanese-Israeli Armistice line of 1949, across the EEZ, it is apparent that the dispute over the southern EEZ will remain unresolved in the near future. Indeed, Lebanese officials were told in no uncertain terms that the dispute effectively precluded leasing the contested blocks. Ironically, the dispute may be superfluous as the disputed area was not adequately scanned and may not have substantial deposits.

Refusal to compromise over what might have proven to be nothing may in fact have derailed any meaningful leasing of the most promising blocks, namely 8 and 9. While U.S. mediation has stalled and U.N. intervention is unlikely, the prospects of any breakthrough seem dim. Additionally, the other boundaries between Lebanon’s EEZ and those of Cyprus and Syria remain unratified.

However, assuming that the decrees are eventually passed, the dispute with Israel resolved and the boundaries of the EEZ with Cyprus and Syria delineated and ratified, there will still be a challenge of falling energy prices and profitability. One has only to look at the current situation in Cyprus and Israel.

Cyprus, which has already leased its blocks and had several drills completed, is facing a dismal situation. As the quantity of its proven reserves keeps getting downgraded, leasing companies have put a hold on further drilling. Banking on anticipated gas reserves only to find the quantity is limited or not commercially profitable can be costly. France’s Total and Italy’s ENI have halted all drilling in Cyprus after three wells showed no commercially exploitable natural gas – the last, ominously, in Block 9 close to the Lebanese EEZ. Noble Energy has also halted further drilling in Block 12 further south. Cyprus will instead focus on developing its Aphrodite field with Noble energy, close to the Israeli Tamar and Leviathan fields southwest of the Lebanese EEZ.

Much as in Egypt, with its two idle liquid natural gas plants, Cyprus’ gas deposits turned out to be exaggerated and unprofitable. Even the limited amount of gas available may prove difficult for the country to export as production costs and storage through floatable devises would make it uncompetitive on world markets.

The difficulty of marketing gas has been no more evident than in the case of Israel, which has large proven reserves but no real venue for export. With no LNG plants and no pipeline, Israel has had to rely on limited local partnerships with Jordan and the Palestinian Authority to sell its natural gas. Additionally, it is marketing its gas with the PA and Gaza as cheaply generated electricity.

A deal with Egypt is in the works to make use of Egypt’s LNG plants. Assuming Lebanon has excess and proven gas reserves, one wonders how it can effectively market it’s gas without an export venue, regional cooperation and defined customers. As a new energy consortium forms in the eastern Mediterranean to export gas to Europe, Lebanon has actively excluded itself from any meaningful cooperation and security arrangements. No serious dialogue has been undertaken with Cyprus, Egypt or Greece, while Israel has consolidated energy cooperation with all three. In isolation, Lebanon cannot develop and export its hydrocarbon wealth.

To add to Lebanon’s woes, the costly deep sea drilling that would be required to explore Lebanon’s hydrocarbon reserves are made more difficult by the fact that, today, large energy companies are facing depleted cash reserves. Hit hard by falling energy prices, these companies have postponed as much as $200 billion in projects according to the Financial Times, with deferral of as many as 46 new oil and gas rigs. Among companies postponing plans are BP, Shell, Exxon, Statoil, Woodside Petroleum (a leading company in floating natural gas storage) and Total. All, without exception, expect a prolonged period of low oil prices. The most affected ventures are the technically demanding and expensive deep-water projects that would be required in Lebanon.

At the same time, geopolitical developments, such as Iran’s rehabilitation, could flood the market with cheap and easily accessible gas and oil. No wonder the major energy companies are rushing to Iran. It would be ironic indeed if Iran benefits from investment to the detriment of Lebanon, where the big oil players are discouraged from investing because of political instability that is being exacerbated by a powerful pro-Iranian Hezbollah.

It is time to tell it as it is. Without a quick turnaround in policy there is no appreciable chance for Lebanon to tap its national wealth. A newly elected president and Cabinet should pass the necessary decrees without delay. The oil and gas law should be amended to give the Petroleum Authority real and independent power. Hof’s proposition should be reconsidered to resolve the southern EEZ imbroglio, and the rapprochement between Washington and Tehran may facilitate the process. Discussions with Cyprus, Egypt and Greece have to be pursued with a common interest in energy, security and electricity. Time is of the essence.