Lebanon to drill for oil despite maritime border dispute with Israel

Lebanon began its first ever exploration for oil and gas this week. An international consortium led by France’s Total is to carry out the drilling. Lebanon, which shares the so-called Levant Basin with Israel, Cyprus and Syria, lags far behind Israel and Cyprus in exploring and developing its share of resources. But the deal is not without controversy.

Signing ceremony on a gas exploration contract between Lebanon and Total, 9 February 2018 in Beirut REUTERS/Mohamed Azakir

Lebanon did not issue legislation facilitating offshore oil drilling until last year.

“Lebanon has been very much delayed in getting to its first steps of developing its gas,” says Valérie Marcel, an oil specialist with Chatham House.

So it is clear that the relationship between the oil industry and the Lebanese government is not much in favor of the Lebanese government

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Lebanon starts oil exploration

Jan van der Made

“The bidding process was delayed by political paralysis, the key legislative documents were not approved by the cabinet and it was the object of some political wrangling.

“And then finally things started to fall into place, and now are moving at a good rhythm, a good pace. So I think the intention is really to catch up with Cyprus and to catch up with Israel and not be left behind,” she says.

Israel and Cyprus are also involved in oil exploration in the eastern Mediterranean.

But Lebanon and Israel have a difficult relationship.

The major problem is that Lebanon doesn’t recognise Israel as a state, so attempts to solve a territorial dispute in the common coastal area have failed.

A triangular area of about 850 square kilometers is disputed and exactly this area is believed to be potentially rich in oil and gas reserves.

EEZ claims clash

In October 2010 Lebanon sent its Economic Exclusion Zone (EEZ) delineation to the United Nations after an agreement with Cyprus in 2007.

In July 2011 Israel officially adopted its own EEZ after negotiating it with Cyprus, creating an overlapping zone between the two countries’ territories of 850 to 870 km², ignoring the Lebanese law.

US attempts to mediate resulted in the “Hoff blue line” proposal, a maritime blue line marking a neutral zone between Israel and Lebanon named after State Department official Frederic Hoff.

But, although the proposal was accepted by Israel, it was rejected by Lebanon.

So Total and the other members of the consortium, the Italian Eni and the Russian Novatek, have decided not to drill in the disputed area.

“Initially, after awarding the contract there was a bit of uncertainty about what the consortium planned for its drilling,” says Marcel, ”whether it would be encroaching on that disputed area.

“But in fact they clarified more recently that they were going to be staying well clear off the disputed area, in that the more interesting prospect in that block were kilometres away.

”So that reduces very much the tensions with Israel."

Is Lebanon ready?

Territorial considerations aside, is Lebanon ready to plunge into the world of oil and gas exploration?

The country does not have its own national petroleum company or other structures needed to enter the energy market.

“The big question is: will the Lebanese be able to establish a national sovereign fund in order to invest the gas money?” says Hilal Kachan, an analyst at the American University of Beirut.

“Given the nature of Lebanon’s fragmented political system and its lack of accountability, this seems to be a big challenge."

Another problem is that because reserves have not yet been proved to exist, so the consortium is taking a big risk in investing in the area.

Analysts say that the Production Sharing Agreement between the Lebanese government and the oil companies does not look very good for Beirut, at least on paper.

“In Lebanon you have some criticism, saying the terms are favorable for the oil companies and the country will not earn enough money if there are oil and gas discoveries,” says Francis Perrin, an oil analyst with the OCP Policy Center in Rabat.

“But, of course, the Lebanese government wanted to attract these investors, and we may see that, in fact, there were not a lot of investors. Apart from the consortium comprising Total, which was awarded two offshore blocks, you did not have any other company or consortium which participated in the initial bidding round."

So the Lebanese government is not in a strong position in relation to the oil industry, Perrin believes.

But some Lebanese have high hopes of the deal, speculating that, if oil is found and production starts, it could earn the country to 50 billion euros per year.

That would come in handy for a country of whose economy is under tremendous strain as a result of the refugee crisis caused by the war in next-door Syria.