Lebanon faces a fait accompli: a regional security regime to protect gas wealth

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A display at an energy forum on Lebanon's potential oil and gas reserves. (Photo: Haitham Moussawi)

By: Firas Abou-Mosleh

Published Friday, September 19, 2014

Lebanon has so far sat idly by as a new economic-security landscape emerges in the Eastern Mediterranean, which is teeming with gas projects and increasingly submitting to “security arrangements” that accompany such developments. The latter are inherently linked to the broader NATO structure and the interests it represents. Despite this, there is no satisfying answer in Lebanon regarding the reason for the delays in exploiting its prospective natural gas resources.

Lebanon is located in the heart of the Levant basin, where seismic surveys indicate the presence of huge oil and gas reserves, a large part of which were confirmed by subsequent discoveries in the past two decades, from Egypt to the coasts of the Levant, including in the waters off Cyprus. Work is underway at full speed in the Eastern Mediterranean to complete projects and conclude energy deals, while Turkey, Cyprus, and Israel are in the process of building a security regime to protect those projects.

Lebanon will soon have to deal with this as a fait accompli, as it falls behind and fails to impose itself as a regional player in this area. This is the most important conclusion drawn by a conference on oil resources in the Middle East organized by the Lebanese Armed Forces Research and Strategic Studies Center over the past two days, in collaboration with the Lebanese Petroleum Administration and the United Nations Development Program.

Fait accompli

“The expected quantities (of oil and gas) are relatively small, compared to those discovered in the Arabian Gulf, Russia, and the Caspian Sea, but they are enough to make a significant impact on the energy security of Mediterranean countries, and contribute to a lesser extent to Europe's energy security,” said Director of the Research and Strategic Studies Center Gen. Khaled Hamada. Hamada pointed out that Israel had already begun commercial gas production, while Cyprus has started exploration in more than one location.

He said that both countries have prepared related projects and treaties, and built together with Turkey a “security structure” (as part of the broader NATO structure) to protect gas installations and pipelines. This structure requires building marine military facilities and deploying military vessels. This is all taking place as Lebanon has postponed licensing rounds for oil and gas exploration and production for the fifth time, while the country has failed to demarcate its Exclusive Economic Zone (EEZ) in its territorial waters in accordance with international legal procedures, according to Hamada.

In a conversation with Al-Akhbar, Hamada said that Lebanon’s participation in these regional projects, including a project for a Liquefied Natural Gas (LNG) plant in Cyprus, or a project for a pipeline linking Israel to Turkey via Cyprus, is “completely out of the question.” Therefore, Hamada warns that more delays in Lebanon’s efforts to implement gas projects will force it to deal with these projects and security arrangements as a fait accompli down the road.

Hamada pointed out that Ankara wants to “change the rules of the game, and deploy forces away from its territories.” This is in line with what Rabih al-Yaghi, advisor to parliament on oil and gas affairs, had to say: that Turkey is trying to expand in the eastern basin through northern Cyprus, with a view to reduce its dependence on oil imports from Iran and gas imports from Russia. Yaghi also said that Turkey is seeking to build a network of onshore and offshore gas pipelines, to act as an energy transit hub between East and West.

Although no “direct friction” exists between Lebanon and Israel in oil projects yet, Hamada said, oil companies operating in the EEZs opposite Lebanon and Cyprus will be the same, meaning that companies could export Lebanese gas via Cyprus through pipelines or LNG terminals. Hamada warned that these companies could face political pressures to impose restrictions or conditions, with the hub in Cyprus imposing quotas or levies on Lebanese gas, if not rejecting Lebanese gas entirely.

In this regard, Hamada cites Egypt’s experience with energy companies. He said that the latter extracted gas beyond the quantities allowed or agreed upon, while threatening the Egyptian government with heavy fines in the event of non-delivery. As a result, gas wells have been depleted and some even collapsed. From this standpoint, Hamada warned against linking the economy to oil installations, so that the government does not end up having to buy gas to avoid paying fines stipulated in the contracts.

Meanwhile, the chief operating officer at PetroLeb, Naji Abi Aad, cautioned that a distinction should be made between “unexplored resources and confirmed reserves.” Abi Aad explained that the first is an imprecise estimate or figure, like the one put forward by the US Geological Survey as an estimate of unexplored resources in the Eastern Mediterranean basin. The figure was 122 trillion cubic feet (tcf) of gas (which would be enough to meet the demand of the Eastern Mediterranean for 50 years, according to Yaghi), including 15 to 35 tcf in the Lebanese EEZ alone.

Abi Aad explained that the large differences in the estimates of various companies for unexplored resources produced by seismic surveys was normal, but said that these figures must not form the basis for national energy policies that should first confirm the existence of reserves by drilling. Abi Aad cites the “disastrous” Egyptian experience as an example, saying that Egypt once exported gas through the Arab pipeline but now has a deficit in gas supplies, and that it has paid fines to the companies operating LNG plants when the latter could not operate because of the lack of adequate quantities of gas. Abi Aad said the reason behind the Egyptian “catastrophe” is that plans were made on the basis of “potential” rather than “confirmed” gas reserves.

According to Wissam Chbat, head of the Geology and Geophysics Unit at the Petroleum Administration, Lebanon would need no more than 0.2 tcf of gas annually if its power plants and other facilities along the coast operate on gas. In comparison, the volume of gas in marine block 1 is estimated at 14.9 tcf, and 13.7 and 15.2 tcf in blocks 4 and 9 respectively.

On the other hand, Yaghi, arguing that gas is the cheapest fuel for manufacturing, as well as the cheapest and the cleanest for consumption, said that the priority for energy policies should be to “prepare the domestic market to become energy self-sufficient, rather than import fuels,” and to allocate the surplus to exportation, like Israel, which pursues this policy.

Yaghi believes that in the event gas is used as the primary fuel for existing and new power plants to bridge the deficit in the power supply, and in the event all plants switch to gas, and a public transport system using electric energy is built, “the entire demand in Lebanon in 2020 and beyond would be between 0.8 and 1 tcf per year.” By the same token, that is, in order to maximize the use of gas locally, Yaghi believes that it would be more economically worthwhile to grant exploration and production contracts in the marine blocks with two blocks in the first round as a maximum, as the gradual licensing would strengthen the negotiating position of the Lebanese state in subsequent rounds, when potential estimates turn into confirmed reserves.

Lebanon must act now

Lebanon could become a regional producer of gas, “if the gas is used optimally and at the right time,” Abi Aad said, pointing out that the gas produced cannot be stored, and thus has to be exported out of necessity rather than choice, while attention should be paid to the cost of gas production compared to market prices. According to Abi Aad, building gas-fired power plants, public transport that runs on electricity, and petrochemical and aluminum plants that consume a lot of energy are among the most best possible uses of gas domestically.

Concerning export options, Abi Aad said that the best option is to feed Egyptian LNG plants or the Arab gas pipeline (which originates in Egypt and goes to Jordan, Syria, and Turkey, and then the EU). The second option would be to build gas pipelines or LNG plants.

Abi Aad cautions that the regional gas market is relatively small and saturated with supply, bearing in mind that contract durations are usually between 20 and 25 years. As for international markets, they too will have surplus supplies in the coming years, with the shale gas or unconventional gas revolution, Abi Aad said, explaining that this would drive prices down, and predicting that supply would more than double in the coming years. In other words, the value of gas today is higher than it would be in the future, according to Abi Aad, who called for acting immediately to produce and market gas from Lebanon.

The security of the oil industry

The security of the oil industry was the main theme of the remarks made by the chairperson of the Petroleum Administration Nasser Hoteit, who said that collaboration between the administration and the army was necessary for exploration, drilling, and transport in the sector. Hoteit said the army bore important responsibilities, starting with the protection of offshore marine installations, and not ending with logistics, where the army is responsible for monitoring and protecting personnel and equipment during their movement between the shore and the offshore installations, as well as protecting public safety and the environment.

Hoteit called for forming a crisis management cell where the army would be represented, where the army would cooperate with oil and gas companies in dealing with incidents, oil leaks, fires, or explosions, even though exploration and drilling contract formats usually oblige companies to deal with such situations. Hoteit then called on the Ministry of Industry to specify places to develop service stations for marine installations, refineries, and gas plants, and also underscored the need to give the Ministry of Telecommunications an important role in “transporting and storing the huge amount of data from oil and reservoirs to data centers at the Petroleum Administration” for optimal utilization.

It is worth noting that the Research and Strategic Studies Center will prepare jointly with the Petroleum Administration recommendations that will be submitted to the Ministry of Energy and Water, the Council of Ministers, the Presidency of the Republic, and other political bodies.

This article is an edited translation from the Arabic Edition.

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