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Euro crisis could dent offshore gas windfall

In this photo provided by the Cyprus Press and Information office, the Noble Energy company's offshore oil and gas rig is seen some 115 miles (185 kilometers) off Cyprus' south coast. (AP Photo/Press and Information Office, HO)

LARNACA, Cyprus: Governments in the Mediterranean need to get creative if they want major oil firms to help them tap the full potential of recent undersea gas finds, a leading industry expert told a conference here Wednesday. Speaking at the European Mediterranean Oil & Gas Exploration & Production Summit in this Cypriot resort town, Doha-based energy economist Roudi Baroudi cited two key hurdles to the launch of full-scale exploration and development in the near future.

Europe’s financial crisis, he explained, would lead to decreased energy demand, necessarily making investment in Mediterranean gas less attractive until conditions change.

More importantly, however, he warned that political risk heightened by the so-called “Arab Spring and political feuding in the East-Med” would dissuade international oil companies from diving into new projects in the region.

“While the financial crisis has led to tighter credit for investment ... this does not appear to be a major constraint on the large IOCs to invest in oil and gas exploration, since most of them carry out such investments on their own balance sheets,” said Baroudi, the CEO of Energy and Environment Holding.

He also pointed out that in a recent survey by Barclay’s Capital, $600 billion was estimated to be spent by oil and gas companies worldwide for the year 2012 alone.

“The main constraining factor for investments in the region is the widespread perception of high risk due to the climate of political turmoil, the Euro crisis, rule of law in certain countries and some uncertainty exacerbated by the Arab uprising,” Baroudi said.

To surmount these hurdles, he offered two primary recommendations. First, he said, governments could agree to share the risk with the IOCs by entering into joint ventures with them.

“In such an arrangement, the country would take a significant equity stake in the venture but would sell its interest over time to private parties, including its IOC partner,” Baroudi said, adding that once the right circumstances and reserves have been proven, the states in questions would be able to obtain financing from “both commercial and development banks in the region, and even from multilateral financial institutions, such as the World Bank and the European Investment Bank.”

Baroudi, who also serves as Lebanon secretary for the World Energy Council, also suggested that apart from risk being shared, it should be mitigated too.

“This could be accomplished through the provision of political risk guarantees, which provide financial coverage for financial losses caused by political upheavals,” he said. “There are insurance companies and bilateral state agencies, such as U.S.-based OPIC [Overseas Private Investment Corp.], which offer political risk guarantees to private ventures in high-risk areas.

“The World Bank provides such guarantees to private sector investments through its Multilateral Insurance Guarantee Agency, and a number of European bilateral financial agencies have similar instruments for credit enhancement for ventures in politically unstable areas,” he said.

Amid all the pros and cons of the European crisis and the Arab uprising, a substantial number of industries five different continents have moved rapidly to establish local presence and seek a piece of the action in the Mediterranean’s new hydrocarbon discoveries.

Wednesday also saw the closing ceremony of the three-day conference, which attracted a long list of key personalities in the energy industry.

Leading oil firms are also showing interest in exploring oil and gas in some regional countries which have untapped energy wealth off their coasts.

Among the countries that have promising oil and gas reserves are Lebanon, Cyprus, Syria and Israel.

Britain-based Spectrum, which is surveying the potential gas reserves off the Lebanese coast, says the county’s southern offshore has over 25 trillion cubic feet of gas which is valued more than $40 billion at current market prices.

The firm is convinced Lebanon’s remaining coast possesses more quantities of gas and oil that can be easily extracted in five years if the Cabinet gets its act together and speeds up the formation of the Petroleum Administration which will issue the tenders for companies to start drilling.

 
A version of this article appeared in the print edition of The Daily Star on September 27, 2012, on page 5.

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