April 24, 2013 (TSR-The Daily Star) – Even if Lebanon manages to overcome domestic obstacles and begin producing natural gas from its potential offshore hydrocarbon reserves, seismic shifts in the global energy market may forestall its dream of becoming an energy-exporting nation.
International experts at the Oil and Gas conference in Beirut warned the country to moderate its expectations in light of the vast quantity of natural gas that will come on the market over the next two decades.
Australia, for example, will expand its gas supply from 25 million tons per year to 88 million tons per year between 2015 and 2020.
The U.S. is expected to produce an estimated 230 million tons of gas over the next decade, effectively doubling the global gas supply and making it the largest net energy exporter in the world by 2017.
The advent of new technologies to exploit commercial shale gas has created a global energy revolution that will transform the Eastern Mediterranean, said Lord Howell, a former British energy minister.
Shale is present in massive quantities in the Ukraine, China and Indonesia, and the U.S. and Canada will be exporting gas from this source by 2015.
Meanwhile, some believe Saudi Arabia will be importing gas by 2030 if its current energy subsidy program is not altered. “In Lebanon’s case the revenues from gas [lie] somewhere ahead … and these depend on the market conditions prevailing [during] this period,” Howell said. “Within five years the world will be filled with new sources of gas … Gas supply will be up but so will demand. It’s not going to be a world in which you charge anything you want for gas.”
“The shale revolution, first for gas and then for oil, has really caused fundamental changes in both markets that we cannot ignore,” said Carole Nakhle, an energy economist at the U.K.’s Surrey Energy Economics Center. “We are moving to a more flexible gas market … Oil indexing and long-term contracts are eroding,” she said. “I think for a country like Lebanon, they are going to have difficulty finding buyers [with this pricing mechanism] and if they do, they won’t be sustainable.”
There appeared to be a consensus among attendees and panelists that the arrival of large quantities of U.S. and Australian natural gas would dramatically alter the dynamics of the energy market.
But some believe a projected upsurge in demand from Asia will offset any downward pressure on pricing that might occur . Michael J. Economides, editor of the Energy Tribune news outlet, said China aimed to meet 10 percent of its annual energy consumption with natural gas by 2020, compared to just 4 percent today. This means Chinese demand for natural gas will effectively quadruple in less than a decade.
While the $15-per-unit price that Qatar and Australia sell gas at may be unsustainable in the long run, Economides believes that within three years the price will level out at $8 per unit. He dismissed fears that the global market will be oversupplied by then as “complete and utter nonsense.”
“Here’s the gist of it. China, China, China,” Economides told The Daily Star. “Local demand for natural gas in Lebanon is like a Volkswagen, while Lebanon’s potential for exporting gas is like two tractor trailers.”
Whatever the global market looks like in 2020, there are lessons Lebanon can learn from the Norwegian model, according to Svein Aass, Norway’s ambassador to Lebanon.
Norway first discovered its energy resources in 1961 and has since grown to become the third-largest gas exporter in the world.
Norway did this by developing the national company Statoil and attracting international investors, while charging a high tax of 50 percent in addition to the regular 28 percent corporate tax rate. The state also took a substantial ownership stake in petroleum resources.
Since then, gross domestic product per capita has grown to $100,000. Norway now benefits from having 95 percent of energy consumption from hydroelectric sources so almost all its oil and gas can be exported.
Aas gave Lebanon four pieces of advice to follow in order to have a similarly positive outcome. “First, do not sell the skin before you have killed the bear. In other words, all the geological surveys in the world cannot substitute for actual drilling and exploration,” he said. “Second, don’t give up. As technology will evolve, so will discovery.”
He urged Lebanon to use gas revenues to develop other economic sectors and to adopt a fiscal rule similar to one Norway passed in the ’90s. The rule said the state could only allocate 4 percent of energy revenues to the budget to protect Norway from the vagaries of the international market.
Tapping Lebanon’s gas wealth won’t be complicated: Expert
Fresh analysis of offshore seismic surveys of Lebanon are showing that tapping into Lebanon’s gas wealth might be easier than first thought, said experts at a major oil conference Tuesday.
“On the old 2-D data, we had initially thought that the main plaque [layer] offshore Lebanon has the same age as in Tamar and Leviathan [gas fields offshore Israel],” said Neil Hodgson, director of geoscience at Spectrum – which has commissioned multiple surveys offshore of Lebanon.
“But what we actually discovered is that there are two plaques on Lebanon’s offshore. … This is a really, really good thing [for natural gas prospects],” Hodgson told The Daily Star on the sidelines of the Lebanon Oil & Gas 2013 Summit.
The much shallower layer has high prospects and, equally importantly, will reduce efforts needed to tap the wealth, Hodgson said.
The higher prospects became apparent in the last few months as the company finalized the processing of 3,000 sq km of 3-D data from deep water southwest of Lebanon.
In order to reach the initially identified deeper targets, oil and gas companies would have needed to drill about 6-7 km deep.
But for the newly spotted shallow layer, companies would only need to drill 3.5 km, cutting the time and cost of the whole process and making the retrieved natural gas reserves commercially viable.
Hodgson said Lebanon was in a unique situation with 70 percent of the offshore acreage already having been covered by 3-D seismic surveys. “
As far as I know this has been never done before,” he said, estimating this has accelerated the whole process by two or three years.”
If things proceed as they have been so far, Hodgson said 2019 or 2020 could be the year when Lebanon is expected to commercially produce gas.
Starting next week, Spectrum will acquiring a new 3-D survey offshore Lebanon, meaning data coverage will be increased to above 95 percent.
“Offshore Lebanon will be almost completely covered with 3-D seismic surveys and the [oil and gas] industry will immediately know exactly where to drill and will have all the tools to drill their wells,” Hodgson added.
While there are no proven reserves in Lebanon until drilling occurs, Spectrum estimates prospective resources in the 3000 sq km at between 30 and 40 trillion cubic feet of gas.
Onshore surveys focusing mostly on oil rather than natural gas are also expected to be launched soon. Western Lebanon, including the west Bekaa Valley and northern Bekaa, is also very promising, he said, predicting the areas would have plenty of structures where source-rock reservoirs would be expected. But as geologists expressed cautious optimism, economists seemed to be less sure.
“When it comes to the oil and gas sector, I usually advise people to keep their expectations low,” said Carole Nakhle, Economist at U.K.-based Surrey Energy Economics Center, told The Daily Star.
“It is very easy to get over-excited about a bonanza, something you receive like a gift. But we are talking about a huge sector which has high risk, lots of investment upfront and is capital intensive, which means that it will not be a big employer.”
What is even more important is how oil and gas revenues are poured into the economy, Nakhle added. “This is where we have a big risk. Experience shows that in developing countries where you have weak institutions, like unfortunately in Lebanon, … the risk of having a resource curse is more pronounced,” she said.
In such economies, high expectations come with high disappointment when governments start to spend money that they have not earned yet, Nakhle explained.
“Then they are faced with cost overruns or project, production delays. This delays revenues and governments find themselves stuck and renegotiate contracts into unfavorable conditions,” she said, highlighting Kazakhstan and other countries as examples that faced such dilemmas.
Lebanon has so far set international good practices but applying these standards when the drilling starts might be a different story if the country does not build its institutional capacities, she added.
Economic policymakers should keep in mind that the oil and gas sector itself will not create jobs for the economy but productive sectors that will benefit from it, Nakhle added.
A presentation by Alia Mobayed, economist at Barclays MENA, echoed Nakhle. Grappling with large twin deficits in its fiscal and current account balances, Lebanon should focus on restoring and financing, when oil and gas revenues are made available for the state, Mobayed said.
She stressed that a top priority for Lebanon should be avoiding falling into a Dutch disease scenario, when real exchange appreciation leads to loss in competitiveness across tradable sectors.
46 firms to bid for Lebanon’s offshore gas reserves
Forty six international and local oil companies gained approval to bid for offshore exploration licenses in Lebanon, caretaker Energy Minister Gebran Bassil announced Thursday.
During a news conference at the headquarters of the Petroleum Administration, Bassil announced the names of qualified companies who are scheduled to begin filing bids for the first licensing round on May 2.
Chevron, ExxonMobil and Total are among the 12 out of 16 international companies who won the pre-qualification round after they applied as right-holder operators.
34 out of 36 international companies won the pre-qualification as right-holder non-operators.
Bassil has said that contracts with the companies should be signed in February 2014.
An initial survey estimated the offshore gas reserves in Lebanon at more than 25 trillion cubic feet, greater than the gas discovery in Cyprus and Syria combined.
Speaking to reporters, Bassil said his ministry will continue its work despite while in a caretaking capacity, noting that the negotiation phase and signing of contracts required a Cabinet decision.
Commenting on the issue of Lebanon’s dispute over its maritime borders with Israel, Bassil said “Israel is drilling in a location far from the Lebanon’s Exclusive Economic Zone, and their operations don’t affect us.”
Lebanon and Israel lay claim to nearly 850 square kilometers which is said to be rich in oil and gas.
Hours before the conference, Bassil met with U.S. Ambassador Maura Connelly when she welcomes the continued work of the Petroleum Administration to establish the framework for Lebanon’s oil and gas sector.
According to the U.S. Embassy, Connelly “encouraged the Ministry’s continued commitment to implement fair, transparent regulations to develop the energy and water sectors in a way that promotes Lebanon’s peace and prosperity.”