The high turnout at the Lebanon International Petroleum Exhibition Forum 2011 at the end of June in Beirut testified to the international oil community's interest in the gas deposits offshore Lebanon. There is regularly talk of potential in excess of 30 tcf1. The enthusiasm of investors is tempered by the technical challenges of deep wells in an earthquake zone, the political situation in the region (disputed borders and uncertain routes to gas monetisation) and the absence of a fully termed petroleum regime in Lebanon.
As Lebanon prepares for its first offshore bid round, Herbert Smith and Issa El-Khoury Law Office consider some of the key issues.
Lebanon's petroleum regime is not yet complete
Lebanon has issued Offshore Hydrocarbon Law No. 132. That law is not currently supplemented by secondary legislation. It is planned that secondary legislation, in the form of the Petroleum Activities Regulations, will have been drafted by the end of 20112. Further, Lebanon has not yet issued the draft Exploration and Production Agreement, nor has it established the planned Petroleum Administration3. Accordingly, no criteria have been published for prequalification for the planned bid round.
Lebanon's exclusive economic zone is not delimited
Lebanon has not agreed the delimitation of its exclusive economic zone (EEZ) with any of Cyprus, Syria or Israel (with whom Lebanon is technically at war)4. An agreement with Cyprus was signed in 2007 but has not so far been ratified5. Lebanon has also formally objected to the United Nations about a delimitation agreement between Cyprus and Israel, which it alleges trespasses into the Lebanese EEZ6.
Lebanon is a party to the United Nations Convention on the Law of the Sea (UNCLOS), as is Cyprus, although not Syria or Israel7. UNCLOS requires that pending delimitation agreements parties should enter into provisional arrangements of a practical nature. It also creates mechanisms for resolving disputes over delimitation, but these will not apply to non-parties. Other dispute mechanisms are available, for example through the International Court of Justice, but this would require the express consent of both parties.
Some of Lebanon's petroleum reserves lie within its uncontested EEZ, however, and Lebanon should be free to explore and exploit these in accordance with the general principles of international law applicable to the EEZ and continental shelf8.
In other petroleum basins, it is common for there to be intergovernmental agreements by which governments co-operate on matters such as tax and the environment to encourage the development of hydrocarbon resources in the most efficient manner.
Investment protection in Lebanon
Lebanon has been the subject of political instability in the past. Investors will be concerned about the legal and fiscal stability of any investments they make.
Lebanon has signed a number of double taxation treaties and bilateral investment treaties ("BITs") (not all of which are in force). Lebanon has BITs with the following common investment jurisdictions (Cyprus, Netherlands) and with the following home jurisdictions of international oil companies (China, France, Italy, Russia, Spain, UK) – Japan and the USA are notable absences9. Of the BIT covered countries Cyprus, France, Italy and Russia have double taxation treaties with Lebanon10. As part of the legal due diligence and deal structuring, international and Lebanese legal and tax advisors will review carefully the treaty possibilities. Claims have been made by investors against Lebanon under the France and Italy BITs. In the France case, an award was made in favour of the investor, and a settlement agreement was finally reached. The Italy case is still ongoing.
Following previous uncertainty as to capacity of the State under its domestic law to arbitrate disputes, an amendment was made in 2002 to the Lebanese Civil Procedure Code to clarify the conditions upon which the State may validly enter into an arbitration agreement. Lebanon is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
A certain amount of gas will be set aside for gas to power sales in the local markets (it is worth noting that the local power markets are not fully liberalised). The real value will be in exports to world markets. The deep water and susceptibility to earthquakes may make pipelines north into Turkey uneconomic. Investors may also be concerned about there being a gut of Russia, Caspian and Iraqi gas in Turkey. The answer which comes to mind is LNG, but where to liquefy? The current political situation is fluid and it is not clear which country would host a liquefaction plant or if there will be more than one. A key issue will be the willingness of international lenders to finance an LNG plant in the chosen jurisdiction, following a detailed assessment of the political, fiscal and legal stability of the host jurisdiction and the ability to use local assets for security and the ease of enforcing that security.
Despite the lack of modern legislation in the financing sector, Lebanon offers to international lenders the legal tools necessary to provide them with the full security package generally required in similar transactions. Investors should, however, be aware of the delays they might face in Lebanon for the enforcement of their rights under the financing agreements, part of which may be mitigated by an arbitration clause or through appropriate contractual mechanisms.
Our track record in the region
Herbert Smith has been involved in the Levantine Basin since its emergence as a petroleum province. We have acted for BG in its attempts to develop the Gaza Marine finds. We advised Israel Electric on the purchase of gas from the Yam Tethys Field and recently from the Tamar Field, as well as on the 20 year $3 billion import of Egyptian gas from EMG. We are currently advising a seller of an interest in the Sara and Myra Fields. We have deep experience of WDDM and other Egyptian offshore areas, as well as of their ancillary infrastructure such as the El Arish processing terminal, ELNG trains 1 and 2 and Damietta LNG.
Moving north, we have had a long involvement in the Turkish gas market, working on the South Caucasus pipeline and associated gas sales into Turkey, and more recently, we advised Edison and DEPA in relation to gas pipelines in Bulgaria, Greece and Italy to bring Shah Deniz gas to Europe through Turkey.
Issa El-Khoury Law Office has a longstanding practice in key areas of private law and in administrative law. The office has, in particular, advised a major Lebanese group with respect to its project finance activities in the electricity sector in Africa (involving financing agreements, security packages, sponsors’ agreements, EPC and O&M contracts with respect to the construction and operation of power plants) and is currently advising the same client on a new project. The office has also extensive experience in administrative law. It advises private companies of electricity distribution on their legal relationship with public administrations. It also supervises dispute resolution procedures with public entities and handles litigation before the “Conseil d’Etat”, the Lebanese administrative supreme court.