Lebanon on track with first licensing round: Chbat

Lebanon launched the roadmap to its first oil and gas licensing round in January 2017. Lebanese Minister of Energy and Water, Cesar Abi Khalil, officially announced at the time that the Levantine country had opened five offshore blocks for bidding in its first licensing round.

The roadmap to the first licensing round will start with a second pre-qualification round for both operators and non-operators interested in exploration and production contracts. Pre-qualified companies will be required to submit their bids by September 15th, and the signature of the EPAs will start in November.

Chbat, who was ranked among the top MENA oil and gas industry professionals in Oil & Gas Middle East’s recently published annual Power 50 list, has provided details of the progress that has been achieved by his administration, along with the government’s efforts to structure and develop the nascent oil and gas industry, in an exclusive interview.

Chbat has offered the interview ahead of the Lebanon International Oil and Gas Summit (LIOG-2017), due to happen in Beirut on May 9th and 10th – an event that the LPA is banking on to showcase and promote opportunities in Lebanon’s upstream segment and to attract investments from foreign players.

Transcripts of the interview, conducted by the event’s organisers and published on the official website of LIOG-2017, as received by arabianoilandgas.com, is as follows:

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Can you explain and evaluate the progress in the preparations for the Lebanon’s first licensing round?

Since the 2nd February, 2017, we started a new pre-qualification round. We contacted all the previously pre-qualified companies. On the 23rd February, we organized a meeting with the pre-qualified companies.

The closure of the new pre-qualification round was on the 31st March. So far the response of the companies is very positive.

We have also been attending conferences abroad and meeting with representatives of the companies. We can see that there is still a good appetite towards investment in Lebanon. This has been well detailed and well explained by the companies’ responses to our meetings and to our presence in the conferences. We have also been receiving a lot of queries from new companies which are showing interest in pre-qualifying for the licensing round.

Currently we are on target with the dates set in the road map which was announced earlier this year by the minister of energy and water. After the closure of the pre-qualification on the 31st March, we expect the closure of the bid round on the 15th September as declared.

So far the progress has been as expected and sometimes positively surprising. We hope that this will continue with the momentum building up and the interest of the companies growing.

The LPA has been very active in promoting Lebanon’s petroleum sector locally, regionally and internationally. Please give us a general idea about the LPA strategy in this respect, and the results achieved so far.

Since 2014 and even before, we started promoting the licensing round and the whole offshore of Lebanon as a new province for investment for exploration and production (E&P) companies in the East Mediterranean.

This is one of the rare provinces around the world that have not been explored yet. Exploration activities have started however around this area.

However, our promotional strategy is a bit different from other types of promotions because we have a very extensive set of seismic data, which is helping in the promotion of the offshore, by making it available for the interested companies.

Those companies can acquire and interpret this data. This certainly contributes to the de-risking of their investment prior to even engaging in a contract with the Lebanese state.

This is a very important promotional tool that has served its purpose in raising the interest of oil and gas companies. In 2013, for example, we pre-qualified 46 companies out of 52 which applied for pre-qualification.

On the other hand, we have adopted a kind of a partnership with serious event organizers to secure our presence in these events that have been taking place in Lebanon and abroad.

Those events have been a platform for the LPA to promote Lebanon and to be present in the local, regional and international forums to achieve a certain two way dialogue with the companies which are interested in investment and to attract additional companies for the upcoming licensing round.

We have been mostly using those two tools, de-risking the investment through making data available prior to any commitment with the state, and relying heavily on local, regional and international forums and exhibitions to also promote Lebanon. For example, The Lebanon International Oil & Gas Summit (LIOG) has been one of such events, since its inaugural edition in 2012.

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The recently approved Exploration and Production Agreement (EPA) seems to set the foundation for partnership between the State and the consortium of right holders who will win the bids over the offshore blocks. Is this arrangement based on production sharing or profit sharing and what is the difference for both the state and the companies?

By all means this is a production sharing contract format. The name of the contract in Lebanon is Exploration and Production Agreement (EPA) which stresses its exploration component, whereby the companies are committed to a well defined programme for exploration.

Like in any other production sharing contract, the EPA stipulates that a part of the petroleum produced will be refunded to the companies to cover their costs. The remaining part will be divided through the biddable items between the state and the companies. The petroleum produced can be monetized and the government can take its share either in cash, or in kind.

The government share of production, however, forms only one component of the overall government take, which also includes the payment of royalty by right holding companies to the state against all their production.

A third component consists of the income tax to be paid by companies on their net profits.

A profit sharing contract, on the other hand, may mean that the government take is related to the deduction from the profits of the whole project, which is not the case here. In our case it is a production sharing contract, very well detailed, where three components will constitute the government take.

For the state, it is also important to highlight that by the production sharing contract the state does retain ownership of its hydrocarbon resources, while in the concession system the hydrocarbon possession or ownership goes to the right-holders. In our case this constitutes a major difference for the state which will have more sovereign rights over its own hydrocarbon resources.

Does this arrangement allow for the Lebanese government and/or the LPA to be involved in the decision making process within the consortium(s)?

Within the consortium, the decision making for operations – related activities will be done by the management committee and by the companies who are in the consortium. The government (or the LPA) has its seat in the management committee but it is a non-voting seat.

On the other hand, the philosophy of the production sharing contract is that the state does not take any liabilities in the exploitation of its resources. All the liabilities are passed the companies, including financial, operational and risk-related liabilities.

The companies are contracted by the state to extract resources from the underground to be marketed and monetized above ground.  In a very challenging environment and very complicated operations the government and its institutions do not have as yet the experience to manage the operations.

Therefore, it is not appropriate for us to be part of these operations and take decisions that could lead to accidents or incidents. For that reason, all the responsibilities of the operations are on the companies in the consortium.

However, the state has control over the operations even though it does not decide on the day-to-day operations.

There are three layers of governance, which include the LPA, the Ministry of Energy and Water, and the Council of Ministers.

The LPA will be required to give approval for many operating decisions, or phases or periods.  Then the ministry and the council of ministers will take major decisions such as the development and production plan and the appointment of the operators.

So it is not accurate to say that the state is not a part of the process.  It is not part of the decisions, but It is the maestro who will orchestrate all the sequence of the operations and periods (phases) passing from exploration to development and production.

The state is an active partner in the decisions, because it has to review most of the major decisions before giving clearance to the companies to proceed. In that sense, yes the state is a full partner. It follows up on the operations, without taking the risks and the liabilities of any possible incident resulting from those operations.

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What is the importance of the recent decision by the Lebanese Council of Ministers to join the Extractive Industries Transparency Initiative (EITI); particularly in terms of consolidating investors’ confidence in Lebanon and its petroleum sector?

Adopting transparency measures is a way of work for us. It is not like an addition to what we are doing. Since 2010 and 2011, we have established a direct dialogue with the companies in a sort of 2-way communication and we have been gaining credibility in that direction.

We have been discussing many issues and many things and trying to resolve them prior to issuing the decrees and the legislations. This is our way of work and in that sense transparency is a key factor for attracting investors.

The more transparent you are, the more attractive you will be for investors. There is a direct relation here, because the oil and gas industry may always be undermined by corruption, where deals may be done outside the legal and ethical framework of the business.

Transparency will not definitely forbid, ban or stop corruption. It is a tool to know what’s going on.  Then one will have accountability and responsibility considerations to follow within the Lebanese legal and judicial system which should fight corruption in the country.

In addition to the importance of creating more transparency vis-à-vis the companies and the public, joining the EITI it is something encouraging for the companies to invest in countries where there is a high level of transparency which is framed within the legal structure of the country.

A specific importance of the EITI is that it will allow the three stakeholders – the government, the companies and the civil society, to sit on the same table, and exchange ideas as active partners in the management or in the planning for this sector.

Today we have a robust, dynamic and active civil society. But there is no platform for this civil society to exchange its ideas. We are making an effort as LPA to reach out and to communicate with the civil society. But our work does not fit in a regulated and well acknowledged platform. The EITI will provide this platform as part of their initiative. So the best benefit out of joining the EITI is to harness the thoughts, the energy and the dynamism of the civil society in Lebanon.

The EPA stipulates that there is some level of secrecy in the agreement. How does this work with the Law of Access to Information that was recently passed by the Lebanese parliament?  

There will always be some confidential information. Transparency does not mean to release or to publish everything.

For example, the commercial terms of the contracts will definitely be made public. Equally, information about the winners of the bids and about the ranking of each applicant will also be published.

But what is meant by a certain secrecy level is that everywhere around the world in this industry you don’t release your geologic data. This information is sometimes considered as state secrets. This set of data helps the state to better manage its resources and to attract better offers from bidders.

In some places, available data is kept secret for 10 years and sometimes more. This kind of confidentiality is an international trend, especially that any geologic data that can affect the competitiveness, or can be relevant for the state interest is not released.

Additionally, proprietary data and patented information, as well as information about the technologies which will be used cannot be made public, because they may affect the competitiveness of the companies among themselves.

These are the only two items that are kept from the eyes of the public, not because the stakeholders want them to be secret but because their confidentiality is part of industry practices and standards.

However, this does not undermine everything else that can be released, and which can be of interest to the public. It definitely does not conflict with the Access to Information law

This kind of secrecy does not apply to any information that can help anyone determine if there is corruption in this sector, if proper measures are being taken or if procedures are being followed. All such types of information are not secret.  Limited confidentiality will not in any way affect the assessment of the overall performance of the companies or the state.