Middle East energy: The Levant basin - a new frontier
Source: Etude Maitre Noureddine Kabalan, Clyde & Co , Author: Niazi Kabalan and George Booth
Posted: Thu July 19, 2012 4:05 pm

LEBANON. With an estimated 1.7 billion barrels of recoverable oil and 122 trillion cubic feet (TCF) of recoverable natural gas, the Levant Basin Province in the eastern Mediterranean is an exciting new frontier for the oil and gas industry.

The Levant Basin Province is a deep marine basin with water depths of 1,500–2,000m which encompasses an area of approximately 83,000 sq km in the eastern Mediterranean between Lebanon, Cyprus, Israel and the Palestinian Territories (the Levant Basin States).

The basin lies between four geological boundaries (the Levant Transform Zone, the Tartus Fault, the Eratosthenes Seamount, and the Nile Delta Cone). Existing geological assessments indicate that the area holds potentially rich hydrocarbon plays formed from a variety of geological structures. Several petroleum systems have been identified in the area, and potential prospect types include four-way dip closure structures and stratigraphic traps.

Several fields have already been discovered, with promising prospects as exploration continues. The discovered fields are estimated to hold significant reserves in excess of 25 TCF (Leviathan (16-20 TCF), Tamar (8.3 TCF) and Dalit (0.4 TCF) fields).

Opportunities in Lebanon
The Levant Basin States are preparing for the gas bonanza, as the maritime borders of these states cut across the Levant Basin Province.

The opportunities are not without their challenges, however. As the maritime borders of the Levant Basin States are not demarcated or agreed in advance, border disputes have arisen between these neighbouring states. Nevertheless, exploration in the Levant Basin Province is pressing ahead.

The Lebanese government is actively committed to developing the oil & gas sector in Lebanon, with a licensing round expected in the third quarter of 2012.

This note addresses the current legislation and applicable regulations for oil and gas exploration in Lebanon. As is the case with the other Levant Basin States, the regulation of exploration activity is developing at a fast pace, as the legal frameworks take shape in a manner that provides attractive incentives to international oil companies (IOCs).

Entrants into this exciting new oil and gas frontier will benefit from expert guidance to the complex legal environments for frontier exploration. Clyde & Co’s expert oil and gas team has worked extensively in frontier markets and challenging jurisdictions and is well placed, in tandem with Etude Maitre Noureddine Kabalan’s expertise in Lebanon and the region, to advise companies looking to venture into this exciting new oil and gas frontier.

Legislation and Regulatory Authority
The offshore oil and gas regime in Lebanon is governed by Law 132/2010 (the Offshore Petroleum Resources Law) and supplemented by decrees, rules, regulations and policies set by the Council of Ministers (the Cabinet) (Art. 8 of the Offshore Petroleum Resources Law).

The Lebanese State has the exclusive right to own and manage petroleum resources in Lebanon. Executive power in the Lebanese State is entrusted to the Council of Ministers pursuant to Art 17 of the Lebanese Constitution.

The Minister of Energy & Water (the Minister of Energy) is further entrusted with delegated authority to prepare for the licensing rounds and to conclude exploration and production agreements on behalf of the Cabinet.

The Petroleum Administration Authority (PAA) was recently established under the tutelage authority of the Minister of Energy to organize and manage the forthcoming licensing rounds. The PAA will also be responsible for managing and supervising exploration and production activities in Lebanon.

Hybrid Licensing System
The licensing system under the Offshore Petroleum Resources Law is based on a hybrid type of petroleum agreement structured in the form of a model Exploration and Production Agreement (the Model EPA). The method of calculating and allocating cost oil and profit oil will be determined by a Cabinet decree.

Reconnaissance Permit
Reconnaissance permits (for undertaking studies and surveys) are awarded by the Minister of Energy for a maximum term of 3 years (Reconnaissance Permit). A Reconnaissance Permit is non-exclusive and does not afford the permit holder any priority or privilege in obtaining exploration and production rights.

Reconnaissance Data
All reconnaissance data arising from activities performed under a Reconnaissance Permit shall be owned by the Lebanese State.

Exploration & Production Rights
Exploration and production rights are awarded by the Cabinet pursuant to an Exploration & Production Agreement (EPA), consisting of two phases:

A licence for petroleum exploration, awarded for a maximum term of 10 years (Exploration Licence/Exploration Phase); and
A licence for petroleum development and production, awarded for a maximum term of 30 years (Production Licence/Production Phase).
Exploration Licences and Production Licences grant exclusive rights to the licence holder to carry out the licenced petroleum activities.

Eligibility to apply for a Licence
The ‘contractor’ under the EPA shall consist of a group of at least 3 contractors (Licence Holders). Each contractor must be a joint stock company pre-qualified to apply for a licence.

Joint Licence
The Licence Holders jointly hold an exclusive licence to undertake petroleum activities pursuant to an EPA. The Licence Holders are deemed to form an unincorporated joint venture in which each Licence Holder has a joint and undivided participation interest in the Licence.

State Participation
The Lebanese State retains a right to participate in exploration and production activities, in accordance with regulations to be issued by the Cabinet pursuant to a decree. The Offshore Petroleum Resources Law also anticipates the establishment of a Lebanese national oil company.

Royalty
A Royalty will be payable in respect of petroleum extracted, at a rate to be determined by a Cabinet Decree. The Lebanese State shall be entitled to payment of the royalty in cash or in kind.

Cost Oil and Profit Oil
Each Licence Holder is entitled to take Cost Oil and Profit Oil pro rata to its participation interest in the EPA.

Development Plan
The Licence Holders are required to commit to a Plan for Development & Production to be determined in the EPA (Development Plan). The Development Plan shall consist of two parts: (i) an environmental impact assessment study and (ii) a work programme covering the development of reservoir resources and technical and economic aspects of available development solutions.

Relinquishment
A Licence Holder is required to relinquish at least 50% of its licence area upon extension of the Exploration Phase of its Licence, and in respect of licence areas not covered by a Development Plan, upon expiry of the Exploration Phase.

Surrender Requests
A Licence Holder may apply for a proposed surrender of rights under an EPA provided it has fulfilled its work obligations and expenditure commitments under the Development Plan, and its financial obligations under and arising from the EPA (including payment of applicable taxes).

Model EPA
The Model EPA shall cover the following issues, inter alia:

The coordinates of the area licenced under the EPA;
The allocation of participation interests between the Licence Holders;
The term of the EPA and of each of the Exploration and Production phases;
The minimum work obligations and expenditure commitments for the Exploration phase;
The Lebanese State’s entitlement to participate in the EPA;
Environmental matters related to each licensed area;
Accounting rules and methods for determining cost oil and profit oil;
Dispute resolution and arbitration; and
Standard minimum guarantees covering minimum work obligations, approval of the Development Plan, surrender and/or revocation of rights under an EPA, and decommissioning.

Should you have any questions in connection with this article or the legal issues it covers, please contact Niazi Kabalan or George Booth.

You can access related articles on the Clyde & Co website at www.clydeco.com.

Disclaimer: The views set out in this article do not constitute legal advice and readers are urged to seek specific legal advice in relation to any particular issues which arise from the subject-matter of the article.

© 2012 Clyde & Co LLP. All rights reserved

 

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