How gas could solve Lebanon's electricity crisis and power its future
In Lebanon, the Mediterranean country devastated by war, gas could solve key economic issues and help the country keep its lights on
Lebanon has been defined by instability for decades, but one thing remains constant. Every day, without fail, the electricity cuts. In the country’s capital city, Beirut, the electricity cuts for around three hours a day, but in other areas, residents face more than 12 hours of power outages per day.
To cope, the average Lebanese household relies on a personal diesel-fuelled generator at a cost of around $1,300 per year, or 15% of income per capita, according to a 2017 report by the World Bank. But the cuts also affect business— in 2008, the World Bank estimated that power outages cost Lebanese industries close to $400mn in sales losses.
The reasons for the outages are varied—the 15-year Lebanese Civil War, which ended in 1990, ravaged the country’s infrastructure, power plants are ageing, but above all else, Lebanon has no gas.
When asked about the gas shortage in a phone call, Wissam Chbat, a board member and head of geology and geophysics at the state’s Lebanese Petroleum Administration (LPA), interrupts: “No, it’s not a shortage,” he says. “There is no gas. None.”
As a result, state-run electricity company Electricité du Liban (EDL) borrowed around $1.4bn from the country treasury to purchase fuel in 2018, according to the country’s budget.
As such, while its Gulf counterparts might be celebrating a moderate rise in oil prices, higher prices are bad news for this small, Mediterranean country.
“The average production cost for every [kilowatt hour (KwH)] is 14-15 cents, depending on the fuel price, and we sell it for 9 cents to the consumer,” Chbat says. The country’s seven thermal power plants use heavy fuel oil, and its gas turbines run on diesel oil instead of gas.
The situation is cyclical: the government cannot justify increased tariffs unless generation capacity is increased, and cannot increase capacity without more investment into the sector. Projects to build more power plants have been continually made and shelved.
This situation has made EDL, which says it controls 90% of the country’s electricity sector, a huge deficit centre for the government.
The International Monetary Fund (IMF) wrote in a February 2018 report that “the electricity sector has not only been widely identified as Lebanon’s most pressing bottleneck, but it also remains a significant drain on the budget,” pinpointing the electricity sector as a key issue for economic reform. In the report, the IMF warned that the country's debt-to-GDP ratio could shoot up to 180% by 2023 if reforms are not undertaken.
Chbat estimates that EDL has, over the years, accounted for around $30bn of Lebanon’s total debt. The Ministry of Finance estimates that gross public debt was at $82.9bn by the end of Q2 2018 (160% of GDP in 2017), up $1bn from the previous quarter.
“If we look at the state, it is estimated that if we switch the current existing capacity for electricity, around 60% or 65% of it, which is realistic, to fired gas, we are saving around $1bn dollars a year,” Chbat says.
There have been attempts to remedy this situation with no substantial success. Gas was imported from Egypt for a few months in 2009 through the Arab Gas Pipeline to the North Lebanon Beddawi plant, but this project stopped due to gas shortages in Egypt and escalating turmoil in the country, followed by the war in Syria.
But Lebanon could soon have its own network of pipelines along the country’s coast, interconnecting major power plants. As part of this plan, a contract is up for tender for the development and operation of three liquid natural gas (LNG) floating storage and re-gasification units (FSRUs) and associated pipelines, which will be awarded early next year.
“If the tender goes smoothly and things work as planned we might have our gas from these FSRUs in 2021 or 2022,” Chbat says. It is the fastest potential fix to the problem, and might save the country some money on fuel purchases, but still requires imported LNG.
When gas was first discovered in the Levant Basin in the eastern Mediterranean in 2009, it must have seemed like a saving grace to the Lebanese government. But licensing was delayed because of recurring political issues.
Since then, Lebanon has surveyed the acreage for its 10 blocks, and in early 2018 awarded exploration licenses for blocks four and nine to a consortium led by Total, Eni and Novatek.
Chbat says each round has its own objectives. For the first licensing round, a main concern was striking a commercial discovery—Chbat believes they achieved this goal by awarding block four, which, based on studies, has the highest chance of commercial success of the blocks that were open in the first licensing round.
He notes that the LPA ranks blocks based on ‘attractiveness,’ in line with the goals for that licensing round, and that finding companies with shared goals is a key concern for them. Now, the LPA is working on its second licensing round, which will launch by the end of the year.
For the second licensing round, the LPA aims to accelerate exploration activity while diversifying the play types in which they award blocks. One strategy: learn from the successes of neighbouring countries, like Cyprus, which he admits is “three or four years ahead of [Lebanon]” in its oil and gas activities. After studying successful blocks in Cyprus, the LPA might consider opening blocks with similar geological systems to attract companies to bid.
Prequalification for the second licensing round is expected to open in January 2019, and Chbat says that by April 2019, they should be prepared to announce the prequalified companies and open the six-month bidding period, which will close towards the end of 2019. The LPA plans to award contracts every two years.
Since signing its first exploration license with Total, Eni and Novatek, LPA has approved exploration plans for the next three years.
“The consortium has started to scan the Lebanese coast to see which location is best to launch operations from,” Chbat says. “Also, the preparation for environmental studies and the sampling of water and samples on the drilling site are going to start.”
The consortium has also committed to hiring 80% Lebanese employees. Given that Lebanon’s oil and gas sector is virtually non-existent, Chbat concedes that this will have to be gradually achieved. Early next year, the consortium will tender sub-contractors, who will also be held to this rule.
Exploration is still in its early days, and there is no guarantee that development will yield the results that Lebanon needs. But part of the LPA’s job is to plan for development even if it is not certain.
“The Lebanese market would require, in the first estimate, 0.2 trillion cubic feet [of gas] to fire the power plants on gas and to use it for some industries,” Chbat says, noting that it is a small market.
In such a small market, the effect of gas production would be substantial. The cost of electricity generation would drop to 11-12 cents per KwH, Chbat estimates, still higher than the 9 cents per KwH that the government charges residents.
But reducing fuel expenditure could give the government more breathing room to update power plants and work to increase capacity—Chbat says the state would need to “move to above 20 hours [of electricity] a day to be able to justify an increase in tariffs.”
The hope is that improved service from EDL will motivate residents to rely solely on EDL’s supply, instead of using black market generators, which are not metered and weigh down EDL’s supply and performance.
If gas discoveries are more than enough to saturate the market, Lebanon has a few options: send gas to Egypt through existing pipelines to be liquefied and exported by ship, or build a Lebanese pipeline under 250km transporting gas from offshore Lebanon and Syria to Turkey, where it could connect to the Eurasian pipeline network.
Depending on discoveries in Cyprus, where in early October Eni, Total and Exxon were invited to bid for its offshore Block 7, Lebanon could have another option. If Cyprus has large amounts of recoverable gas, it is expected to invest in LNG infrastructure, which Lebanon could use to liquefy its gas for export.
But the potential for Lebanon’s energy sector could be even bigger. “Initially, we were under the impression that it was purely gas,” Chbat says. “Now, the oil story is coming in more vigor for offshore Lebanon, with the possibility of having a mixture of oil and gas.”
Lebanon’s entrance into the regional oil and gas sector could mark a turn in its economy, providing new job opportunities, a new revenue stream for the country and cutting national debt. But issues persist. The IMF in February 2018 pointed out corruption as a key obstacle to economic reform.
Oil and gas production might not cause immediate, sweeping change, resolving deep-rooted issues like corruption, political strife or neighbouring conflicts. But it could keep the lights on for a change.