Bassam Fattouh| The Daily Star

One of the key decisions that Lebanon must make if natural gas is extracted off the country’s coast is determining how much will be earmarked for export. Securing export markets is central to a strategy of maximizing gains from offshore gas and providing the right incentives for international companies to develop these resources.

But gas production is not likely to begin before the mid-2020s. Until then, Lebanon would need to import all of its gas requirements in order to increase the share of natural gas in the energy mix. Lebanon’s economy could significantly benefit from interim imports of natural gas. In 2013, Lebanon’s imports of oil and its derivatives amounted to $5.11 billion representing 11.4 percent of its GDP. The Energy and Water Ministry has estimated that at a price of $90 per barrel, Lebanon could save $1.9 billion on its annual fuel bill if it switches its power generation to gas. In addition to these savings, increasing the share of gas in the power generation mix would bring with it substantial environmental benefits.

In order to achieve these gains, however, the government should adopt a clear policy regarding the pricing of gas for the domestic market. Since gas demand is closely linked to electricity demand, it is essential that the government begin reforming the power sector and electricity pricing methods. Electricite du Liban suffers from very large financial and operating losses, which constitute between 20 percent and 25 percent of the government’s primary expenditure. EDL also suffers from chronic underinvestment, which has prevented it from modernizing its grid and expanding power generation capacity.

Increasing the proportion of gas in the power mix would also require heavy investment in the gas grid, including the planned project to build a 173 kilometer, 36-inch coastal gas pipeline connecting a planned storage terminal onshore in the north to Tyre in southern Lebanon, allowing all of Lebanon’s major power plants to tap the gas supply. This project, however, faces many hurdles, including land reclamation and finding the necessary funding for its construction. The government should also seek to secure stable sources of gas supplies. Given the current lack of regionally available pipeline gas supply options, importing liquefied natural gas (LNG) is the most realistic and practical option. The government has announced plans to import LNG to replace fuel oil in power generation, although at present the country has no regasification terminal and no contract to build and operate one has been signed.

Assuming that Lebanon does eventually develop its potential natural gas reserves and meets its domestic demand, the country faces an array of choices as to how to monetize its hydrocarbon riches via gas exports. Lebanon’s eventual export strategy will to a large extent depend on the eventual size of its reserves, its production targets, and the cost of Lebanese gas production, which will impact the price range that Lebanon needs to secure, as well as external factors such as gas price levels in potential export markets.

So, it will depend on timing. Lebanon’s already much-delayed offshore bidding round and tendering process, and the time gap between initial exploration, appraisal drilling, production and eventual export imply that current predictions of Lebanese gas exports being merely some four years away are highly unrealistic. The Lebanese government’s more recent discussion of an eight-year frame, with exports starting during the early 2020s, seems slightly more realistic, but may be delayed by further political stalemate. By that time Lebanon will likely find itself in a fundamentally different market than it is today.

Traditionally, the first option considered for exporting natural gas has been via regional pipeline exports to neighboring countries in the vicinity of natural gas producers. Lebanon is not short of gas-hungry neighbors. Particularly favorable in terms of low initial infrastructure costs could be the markets of Jordan and Egypt, both of which are already connected via the Arab Gas Pipeline to Lebanon. But this option requires the consideration of costs and complications. In addition to the fact that the route is long and subject to disruptions, the potential of regional exports to Egypt and Jordan is so attractive that currently Israel has been seriously considering the option – a development which, if it materializes, may yet prove to render all talk about Lebanese gas exports to these countries redundant, as Israel will have captured these markets by the time Lebanon may be in a position to export.

The Turkish option with its European link may also prove highly attractive but also comes with its own complications. European and Turkish gas demand constitutes a big source of uncertainty given the range of other supplies (both pipeline and LNG options) that will appear on the horizon during the early 2020s. Pricing mechanisms, including Europe’s accelerated moves toward gas-to-gas pricing, may end up offering small gas exporters more variable, and possibly, lower returns, an issue particularly acute for Lebanon, whose offshore gas reserves may yet prove to have a higher cost than those of alternative European gas providers such as Russia.

Lebanon could consider its own LNG export strategy, which remains the most flexible option to export its natural gas, allowing access to extra-regional markets such as Europe and current premium markets in East Asia. The LNG export option, however, remains subject to many uncertainties. One of the key uncertainties is the actual size of Lebanon’s gas reserves. LNG will require sufficient reserves, sufficient production, and sufficient production allocations of Lebanese natural gas to export markets, under long-term contracts that will lock Lebanese gas into exports for about 15 to 20 years.

The timing of such an option will also be critical. By the time Lebanese LNG might be ready to be exported, Lebanon will be competing with a number of new market entrants, many of them with considerably more market weight over key markets in Asia/Pacific and Europe, primarily Australia, East Africa and North America.

Lebanon faces both external and internal challenges in realizing the commercial advantages of various export options. But for now, the key challenge lies within Lebanon itself; primarily in Lebanon’s ability to provide a domestic contracting framework to foreign investors, competitive and stable enough to allow for the development of gas resources; and, on the other hand, the stabilization of the domestic political situation and Lebanon’s gas contracting frameworks that render Lebanon a desirable, reliable and stable gas exporter to potential regional and international clients.

Bassam Fattouh is director of the Oxford Institute for Energy Studies and a research fellow at the Lebanese Center for Policy Studies. This commentary is published by permission.

A version of this article appeared in the print edition of The Daily Star on April 17, 2015, on page 7.

http://www.dailystar.com.lb/Opinion/Commentary/2015/Apr-17/294728-where-lebanon-exports-its-gas-is-vital.ashx