On April 26, 2017, the Lebanese Government announced the final list of pre-qualified companies eligible to submit their bids for Lebanon’s first oil and gas licensing round to start on September 15, 2017. The results increased the number of pre-qualified companies to a total of 52 and came as follows:

a. The 2013 previous results prequalifying 46 companies were maintained, provided that they confirm that they still meet the eligibility criteria by notifying the LPA, before the submission of the bids, with their audited financial statements for 2014 and 2015, and unaudited financial statements for 2016.  

b. New comers of 2017’s second prequalification stage:

Operators:

ONGC Videsh Limited   

Non-Operators:

PJSC Lukoil Sapurakencana Energy Sdn Bhd Sonatrach International Petroleum Exploration and Production Corporation (SIPEX BVI) Qatar Petroleum International Limited Petropars Limited JSC Novatek New Age (African Global Energy) Limited 

c. Disqualified the consortium previously formed of Novatek and GPB Global according to article 3.3 of the Prequalification Decree no. 9882/2013; Novatek which was the reference company in this joint application, has notified the LPA that it is no longer part of the unincorporated joint venture with GPB Global Resources BV. JSC Novatek has submitted an individual application for the second prequalification round.  

Lebanon’s first licensing round was launched in 2013 whereby 46 (12 operators and 34 non-operators) out of 52 companies were prequalified to bid for exploration and production licenses. The licensing round was delayed for political reasons until 4th of January 2017 when the Lebanese Government approved the two long awaited decrees: the first decree divides the Lebanese Exclusive Economic Zone into ten blocks and sets their coordinates, while the second adopts the Tender Protocol (TP) and the model Exploration and Production Agreement (EPA) that will be signed between the State and the winning consortium.

Exploration and production rights in Lebanon are awarded through an exploration and production agreement (EPA) approved by the Council of Ministers and signed by the winning bidders and the Minister of Energy and Water.

Under an EPA, oil and gas companies are granted exclusive rights to explore, appraise, develop and produce oil and gas in a defined offshore block, on a production sharing basis, and non-exclusive rights for construction and the processing, transportation and storage of petroleum. Exploration and Production Agreement shall only be awarded to pre-qualified joint stock companies.

In late January 2017, the Ministry of Energy and Water announced block 1 in the north, block 4 in the center and blocks 8, 9 and 10 in the south open for bids. Results showed the promising potential of hydrocarbon reserves in the Lebanese seabed.

Click here to view the image.

Different 2D and 3D seismic surveys were carried out by different companies. According to Spectrum and French Beicip Franlab Lebanon’s offshore may hold between 12 and 25 trillion cubic feet (tcf) of recoverable gas and between 440 and 675 million barrels (Mbls). The Former Minister of Energy and Water, Jibran Bassil, declared in 2013 that the Lebanese petroleum resources are estimated to be 95.5 tcf of natural gas and up to 865 Mbls of oil. These seismic surveys and unclear figures remain theoretical until exploration activities start in the Lebanese offshore.

Now after oil and gas companies are pre-qualified as operator or non-operator, consortiums shall be formed between one operator and two non-operators to submit a bid before September 15, 2017.

Pre-qualified companies and groups of companies (acting through newly formed joint stock companies for the purpose of the EPA signature) wishing to bid on a block must:

  1. join together in a consortium of a minimum three (3) companies which consist of one individual company pre-qualified as Right Holder-Operator and no fewer than 2 individual Companies each individually pre-qualified as Right holder-Operator or Right holder-Non-Operator and; 
  2. shall form an unincorporated joint venture in which each Right Holder has a joint and undivided percentage of participation interest;
  3. have a legal presence in Lebanon.

An Application shall be submitted to the Minister of Energy and Water/Petroleum Administration by the Authorized Representative of the Applicant.

The list of applicants for each block will be published on September 22, 2017.

The Application shall indicate:

  1. The company nominated to be the Operator which shall accept such nomination.
  2. The participating interest of each Individual Company.

The definitive Model Exploration and Production Agreement provides that (i) the Operator shall hold a minimum thirty five percent (35%) participating interest and that (ii) each other participating Right Holder shall hold a minimum ten percent (10%) participating interest.

        3. The Authorized Representative of any cooperation agreements between the individual companies.

 

Bid evaluation and minimum requirements:

After a month-long evaluation period, by October 16, the LPA will forward its recommendations to the Council of Ministers. By November 15 Cabinet will announce the winners of exploration licenses and sign exploration and production agreement (EPA) contracts.

The Petroleum Administration shall review and evaluate the Applications on the basis of the following criteria with respect to the Technical and the Commercial Proposal:

-the general approach and concept of the Exploration program;

- the proposed Minimum Work Commitment; and

-the biddable commercial terms of the Exploration and Production Agreement.

Bids will be evaluated based on technical (30%) and commercial (70%) criteria.

 

Technical

The exploration phase is limited in the EPA to a maximum of six (6) years divided into two exploration periods, the first lasting three (3) years, and the second lasting two (2), with a possible one-year extension of the second period. Article 7 of the tender protocol stipulates that winning consortia must drill at least one exploration well in each of the exploration periods. As part of their bids, consortia must outline an exploration phase work programme which must detail (1) amount of planned data acquisition (measured in line kilometers or square kilometers, depending on the type of data acquisition); (2) number planned exploration wells to be drilled; and (3) proposed depth of planned exploration wells.

Article 5 of the tender protocol stipulates that “an Individual Company may not be part of more than three (3) Applicants,” and “applicants are allowed to bid for any or all opened Blocks, and any given Applicant or Operator may only be awarded a maximum of two (2) Blocks in the First Offshore Licensing Round.”

 

Commercial:

The biddable commercial terms are the profit petroleum and the cost petroleum.

Profit Petroleum produced in any Quarter shall be apportioned between the Parties in percentages that will be determined by reference to the R-Factor for the immediately preceding Quarter, according to the following:

R-Factor 

State’s portion 

Right Holders’ aggregate portion

R less than or equal to 1 

  A% (greater or equal to 30%) 

    100%- A%

 

 

 

Greater than 1 and less than Rb 

 

    See formula below 

 

    100% less percentage     determined in formula below

Greater than or equal to Rb           B%                                     100%- B%

 

When the R-Factor is greater than 1 and less than

RB, the State’s portion of Profit Petroleum shall be determined in accordance with the following formula:

SP = A + [(B-A ) x (R -1)/ (Rb – 1)]

Where “SP” is the State’s portion and “R” is the R-Factor used to determine the State’s portion (i.e., the R-Factor for the immediately preceding Quarter). [Note to participating companies; A, B and Rb are determined by bidding. A shall have a minimum value of 30%, and Rb shall be greater than 1 and B shall be greater than A.], as provided in the Tender Protocol.

The Right holders shall be entitled to receive and lift, in each quarter, a volume of petroleum called Cost Petroleum equal to the lesser of (…) percent of the disposable petroleum for such quarter, a percentage which will be determined by bidding. Cost Petroleum ceiling shall not exceed the limit of 65% of disposable petroleum.                                                                                                                       

Lebanon has taken several steps to make it closer to becoming an oil and gas producing country.

Today, the Lebanese government is determined to go through with the first round of oil and gas tenders in a transparent way. The Council of Ministers in late January announced its intention to join the Extractive Industries Transparency Initiative (EITI) which is a multi-stakeholder initiative that offers civil society to contribute in governing their national wealth by having general oversight over the oil and gas sector.

One main law remains crucial for the completion of the legislative petroleum framework is the petroleum taxation law.  The draft law was approved by the Council of Ministers on March 8, 2107 and still needs the approval of the Parliament which is expected soon.    

At the forefront of the provisions of the draft law is the definition of a 20% income tax on profits of operating oil companies, against a 15% income tax on other companies, and a mechanism for sharing the so-called profit oil or profit gas between the State and the companies concerned.

This adoption of this law is of great importance as major companies prioritize the legislative stability in the country where they wish to invest, especially with regard to the tax system as it gives them a clear picture on the best financial offers and how to develop their economic and financial models.

Lebanon should take this last legislative step at this stage of the first licensing round and not later as it is essential for the solicitation of successful bids for the exploration and production of oil and gas in the Lebanese exclusive economic zone.