BEIRUT

Commentary

Lebanon’s energy window is slowly closing

In the opening ceremony of the Second Lebanon Oil and Gas Conference held last December in Beirut, Jerome Ferrier, the president of the International Gas Union, made an important and audacious remark: Lebanon’s gas reserves had to be viewed as part and parcel of the Eastern Mediterranean reserves. He stated that the marketing of Lebanon’s resources hinged on forming a consortium with Lebanon, Cyprus, Egypt and Israel.

Ferrier’s remark, while economically correct, defied geopolitical realities, Not surprisingly, then-Energy Minister Gebran Bassil did not address the remark. Instead, he blamed the Cabinet for depriving Lebanon of the opportunity to exploit its gas reserves. However, what was left unsaid by both Ferrier and Bassil was that domestic Lebanese demand on its own is insufficient to make gas production cost effective.

Attracting lucrative bids is tied to competitive pricing and export. Upon closer examination, it becomes apparent that Lebanon cannot profitably export natural gas if it acts alone in doing so. Only regional cooperation for a joint pipeline or a liquefied natural gas plant can help the country export at a profit. In the absence of such cooperation, gas exports would be either impossible or too costly for Lebanon.

This reality has not been lost on Israel, whose impetus for gas exploration was originally driven by national security concerns. Israel is now actively pursuing venues independently for the export of its surplus gas. Unlike Lebanon, Israeli domestic demand for natural gas is substantial, its electricity production being seven times that of Lebanon.

With no pipeline to Turkey in sight, a joint venture with Cyprus to build a liquefied natural gas plant seemed the most reasonable alternative. In June 2013, Cyprus signed a nonbinding memorandum of understanding with Houston-based Noble Energy and its Israeli partners in the Tamar and Leviathan fields for a liquefied natural gas plant in Vasilikos near Larnaca.

Later in 2013, France’s Total signed a similar agreement to join in the $7 billion plant. The project has yet to materialize because of a lack of funding and issues related to profitability. Anticipated gas supplies from Cypriot and Israeli gas fields fall short of making the plant profitable. Only the additional supply of gas from Lebanon could possibly make the endeavor worthwhile.

Lebanon seemed an ideal partner because of the proximity and volume of its gas reserves. There is regional and international interest in Lebanon developing its hydrocarbon resources so that Eastern Mediterranean gas output can be more profitably exported by all parties concerned through joint ventures. The considerable commercial and international participation in the second Lebanon Oil and Gas Conference last December was a testament to that interest.

If Israel is involved in the Cypriot plant, however, it would rule out any Lebanese participation in the liquefied natural gas project. This sentiment was clearly expressed by Bassil to his Cypriot counterpart. Until recently, an Israeli pipeline to Turkey seemed a remote option given Israel’s deteriorating relations with Turkey and Russian objections to cheaper gas undercutting its own supplies to Europe. Lately, however, a warming of relations between Israel and Turkey and between the Turkish and Greek Cypriots has renewed interest in energy cooperation. Turkish Energy Minister Taner Yildiz has expressed interest in Israeli gas imports via a $3 billion pipeline.

As regional efforts for joint export ventures have faltered, Israel has turned eastward in pursuit of regional clients. Ironically, the Palestinian Authority was Israel’s first customer, followed by Jordan, which concluded a $500 million contract for a period of over 15 years.

Another sign of Israel’s unilateral pursuit of gas exportation is the recent deal with a leading Australian company, Woodside Petroleum, for floating LNG platforms. Woodside, which acquired a 30 percent interest in the Leviathan Israeli field for $2.5 billion, favors floating LNG plants rather than onshore plants for Israeli gas exports.

Noble Energy, the major partner in Israeli gas fields, has described exports to the Palestinian Authority and Jordan as priorities, followed by the creation of floating LNG exports. Discussions are also underway with Egypt to supply it with gas through an existing pipeline.

Israel’s pursuit of an independent export capacity comes at the expense of Lebanon and Cyprus. Lebanon’s gas is crucial if a joint export project is to be considered. But with all the possible moves making this unlikely, Lebanon will probably be left on its own. Moreover, there is waning international interest in Lebanese oil and gas. With no regional venues for export, Lebanon’s hydrocarbon industry is not appealing.

Cyprus, likewise, is at a crossroads. The Cyprus Mail recently sounded the alarm, declaring that Nicosia should act promptly by investing in the LNG plant in Vasilikos if it wants the project to materialize. For this to happen, Cyprus in all likelihood will become dependent on Israeli gas, leaving Lebanon with limited export options.

Another serious hurdle for Lebanon’s energy bid is the contested area off the southern border. While Israeli blocs excluded the wedge-shaped zone in the bidding by foreign companies, Lebanon included it, raising concerns that this could lead to conflict in the future. The United States has had limited success in resolving the impasse. The proposed compromise was accepted by Bassil but rejected by the speaker of parliament, Nabih Berri, and the then-prime minister, Najib Mikati. To add insult to injury, none of the maritime borders with Syria and Cyprus have been ratified by Parliament.

A window of opportunity for Lebanon to fully exploit its hydrocarbon wealth is fast disappearing without a clear and profitable export option. Political instability, contested maritime areas and spillover from the Syrian crisis have hindered Lebanon’s bid to exploit its hydrocarbon resources.

In such a setting, Lebanon has little bargaining leverage with the oil giants. A deal at any price will not only mortgage the nation’s wealth for decades to come, but also squander its resources. Lebanon would be better off tapping its wealth amid internal cohesion, geopolitical stability and clear export options. No deal is better than a bad deal.

Basem Shabb is a Lebanese parliamentarian and a member of the parliamentary committee on defense. He wrote this commentary for THE DAILY STAR.

 
A version of this article appeared in the print edition of The Daily Star on March 28, 2014, on page 7.
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Summary

In the opening ceremony of the Second Lebanon Oil and Gas Conference held last December in Beirut, Jerome Ferrier, the president of the International Gas Union, made an important and audacious remark: Lebanon's gas reserves had to be viewed as part and parcel of the Eastern Mediterranean reserves. He stated that the marketing of Lebanon's resources hinged on forming a consortium with Lebanon, Cyprus, Egypt and Israel.

In the absence of such cooperation, gas exports would be either impossible or too costly for Lebanon.

Unlike Lebanon, Israeli domestic demand for natural gas is substantial, its electricity production being seven times that of Lebanon.

Israel's pursuit of an independent export capacity comes at the expense of Lebanon and Cyprus. Lebanon's gas is crucial if a joint export project is to be considered.

With no regional venues for export, Lebanon's hydrocarbon industry is not appealing.

For this to happen, Cyprus in all likelihood will become dependent on Israeli gas, leaving Lebanon with limited export options.


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