CMS McKenna weighs in on Lebanon's energy future

The development of hydrocarbon resources is a double-edged sword

Lebanon's energy future remains unclear.
Lebanon's energy future remains unclear.

The development of hydrocarbon resources in the Eastern Mediterranean is a double-edged sword for Lebanon. In order for the country to make use of its newfound riches, it must figure out how to structure contracts and attract investors into an increasingly uncertain business environment. CMS McKenna writes in. 

Lebanon’s First Offshore Licensing Round (Licensing Round) launched in May 2013 and attracted substantial international interest. Overall, 46 companies from 23 countries were prequalified to take part.

Under Lebanese law, these companies were required to form consortia (comprising a minimum of 3 members) in order to bid for any of the 10 blocks currently outlined and approved by the Ministry for Energy and Water (MoEW).

Should the consortia be successful in their bids, they will obtain rights under a Model Exploration and Production Agreement, which follows a production-sharing model. The initial estimated timeline envisaged that the awards of licences were scheduled to take place in February 2014.

However, events in Lebanon’s politics and recent decline in regional stability is casting doubts over the viability of this timeline. The resignation of the Lebanese Prime Minister (Najib Mikati) in March triggered the first political event affecting on the Licensing Round, as the Council of Ministers (CoM) lost its major executive powers.

Currently the CoM is considered to be in a caretaker status. While local political parties are struggling to reach consensus on the form of the new government, there is growing speculation on the future of the Licensing Round.

The MoEW and the Lebanon Petroleum Administration (PA) are trying to alleviate these concerns by reiterating that the resignation should not affect the course of proceedings. Furthermore, they are taking active steps to keep to the previously provided timeline and progress the Licensing Round notwithstanding the caretaker status.

These actions had relative success as the Model Contracts and necessary regulations were drafted within schedule. The PA has also provided a map outlining the 10 blocks which cover a total of 17,900 km2, excluding the coastal buffer zone of 2 nautical miles. The map was submitted by the Minister of Energy to the CoM for approval but this is yet to be obtained.

The lack of approval, however, did not prevent the MoEW and the PA to request pre-qualified companies to indicate preferred blocks.

The nominations were caveated in that they did not commit the consortia to such nomination but the result was to be used by the PA in evaluating the interest in the blocks on offer. In September, the MoEW announced that Blocks 1, 4, 5, 6 and 9 are expected to be included in the Licensing Round.

The positive steps outlined above could become moot if clarity is not achieved on the legal standing of the licensing process. One of the concerns fuelling speculation is the scope of powers available to the MoEW in light of its caretaker status.

The extent of the validity of the MoEW and PA’s actions taken as of March is ambiguous under the Lebanese constitution, which only increases uncertainty of the Licensing Round’s participants.

Whilst, there a number of powers available to the CoM, the situation is exacerbated as it is yet to finalise the regulatory framework for the licensing round and implement the decrees which would approve, amongst others: the offshore blocks; the tender protocol; and the Model Contract itself.

The current situation led to the current Minister for Energy and Water (Gebran Bassil) announcing that the deadline for submission of bids will be extended by a month initially. This delay can be extended, unless necessary degrees are issued by the end of November 2013.

Finally, it remains to be seen how the current unrest in the region may (or may not) affect the progress of the Licensing Round and which steps the Lebanese government will take in order to improve the sentiment of the prequalified consortia.

In numbers:
- 10 The number of blocks currently outlined for licensing in Lebanon
- 46 The number of companies prequalified to participate in a licensing round

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