PM Siniora Keynote Speech - Energy Levant Forum : Nicosia- June 23, 2011
Ladies and Gentlemen,
I thank you all for coming today and I thank Gulf Intelligence and Sean Evers for organizing this important Forum; I was invited to share with you today some thoughts on the Lebanese experience in the hydrocarbon exploration field. At this point I would like to underline that I no longer have any executive role in the Lebanese government and that my political party is now officially in the opposition, at the onset of the formation of a new government last week. Hence, keep in mind that I am talking to you today primarily as a representative of the people of Lebanon and as the head of the Future movement Parliamentary bloc; as well as a former Prime Minister who oversaw closely all the Lebanese efforts that were exerted so far in the field of hydrocarbon exploration.
I will structure my speech around a number of specific points, and leave room for questions and answers.
First, Lebanon is a country whose most valuable asset has always been its human capital rather than its natural resources; its free and open political and economic system, and its knowledge based economy rather than its exporting capabilities of physical products. Despite suffering from long years of war, and continuing domestic instability, Lebanon has nevertheless managed to achieve by today the highest GDP per capita among Arab countries outside the six oil exporting countries of the GCC. This is the most glaring witness to the strength as well as to the resilience of the Lebanese economy. The good prospects of significant oil or gas discoveries carry the potential of elevating the Lebanese economy to a qualitatively higher level of growth, and regional development, besides contributing towards addressing the problems of the large deficit and the debt burden that has been accumulating over the past three decades.
The U.S geological survey has estimated for the first time that the Levant basin province in the eastern Mediterranean region is comparable to some of the other large provinces around the world as it holds around 122 trillion cubic feet of natural gas and 1.7 billion barrels of undiscovered, recoverable oil. The Exclusive Economic Zone of Lebanon falls entirely within the Levant basin. This will provide a great opportunity for Lebanon to diversify its sources of growth, and empower its economy to make a sustainable leap into the range of high income countries.
Second, in addition to enhancing sustainable growth, the possible discovery of oil or gas would help Lebanon achieve higher energy security. Unlike most countries in the region, Lebanon currently imports all petroleum products for the transportation sector, electricity generation, heating, industry and other sectors, and hence suffers from a high level of energy-dependency.
Third, the possible discovery of oil or gas would have a positive effect on the government finances and on the economy. That could potentially be significant not only on the revenue side but also on the expenditure side, mainly by reducing the cost to be incurred by, and in turn the cash deficit of the electricity company. Besides it helps in reducing the cost of production for the for the various economic sectors of the country thus rendering Lebanon more competitive.
In fact, 50% of the electricity generated in Lebanon is from the Combined Cycle Gas turbines mostly running on gas oil rather than on natural gas, which results in a high cost for each KW generated. Additionally, small single cycle power plants are still running on imported gas oil rather than on natural gas.
A modest effort to reduce the cost of producing electricity in Lebanon has been achieved by my government that managed to secure the importation of natural gas from Egypt via the Arab pipeline passing through Jordan and Syria; Still, the quantities of natural gas are not enough to run even one of the two 450 MW combined cycle power plants. In this regard, Lebanon has been exploring the possibility to cooperate with some neighboring countries, specifically Syria, Iraq and Turkey in order to agree on building the pipe lines and ultimately make it possible to import additional quantities of Russian and Iraqi natural gas.
On the other hand and in case commercial gas discoveries are found offshore Lebanon, at least 2/3 of the electricity currently generated in Lebanon will be based on natural gas, and most definitely due to cost saving differentials, the other existing power plants will be gradually converted to natural gas as well, and the new power plants of at least 1000 Megawatt that will be built on that basis, since shortage in the electricity sector is estimated to be more than 1500 Megawatt.
Fourth, Oil and gas exploitation in the Levant basin will certainly enhance cooperation between Lebanon and Cyprus in the energy sector where the two countries have an intrinsic interest in doing so. There is no doubt that both countries share ownership in some of the hydrocarbon deposits and thus the delimitation agreement which was signed between our two countries on 17 January 2007 accounted for future agreement on the two tripartite points in the north and south. A framework agreement concerning the development of a cross-median line hydrocarbon resources and confidentiality agreement shall follow in a similar fashion to the agreements signed between Cyprus and Egypt.
Both Lebanon and Cyprus have an opportunity to join forces in working together with third parties namely Syria and Turkey, by developing common infrastructure projects like in the extraction and the building of gas pipelines or gas terminals and share and exchange expertise in the field. Both countries can benefit from the economies of scale that such projects can offer.
As a Lebanese political group, we will definitely encourage our government to pursue close cooperation with Cyprus in the energy field.
Fifth, let me brief you on the efforts that we have undertaken over the last decade: Lebanon started exploration activities by commissioning Spectrum Company to acquire 4500 km of 2D seismic data in 2000-2002 and later on, in July 2005 during my first presidency of the Lebanese Council of Ministers, we commissioned additional 2D and 3D seismic surveys. More than 12000 km and 4000 square km respectively have been acquired since the year 2000, with the most recent acquisition of data based on the latest technologies in the industry. Many reputable oil companies have bought parcels of this data in anticipation of the upcoming licensing round. In its interpretation report for the 3D data in 2008, PGS Company of Norway indicated that Offshore Lebanon appears to represent a significant yet-to-find hydrocarbon resource base and the current study has identified and delineated several potentially giant sub-salt prospects that merit considerable further attention from the international oil industry. Of course, the presence and commerciality of these prospects is yet to be tested by drilling.
Six, regarding the efforts to delineate the Lebanese Exclusive Economic Zone, I will now brief you on what has been achieved thus far by the Lebanese government.
In preparation for the licensing round and recognizing the importance and necessity to delineate the Exclusive Economic Zone of Lebanon and relying on the previous work conducted by the UK Hydrographic Office (UKHO), the Lebanese government signed a delimitation agreement with the Republic of Cyprus on January 17, 2007 covering the area between the two countries while leaving the points where a trilateral positioning were to be determined later upon completion of the delineation of its southern and northern borders of its Exclusive Economic Zone. Later on and in 30/12/2008, Lebanon formed a committee to delineate the Exclusive Economic Zone of Lebanon, in the South and in the North. The committee presented its report in May 2009 which was approved by the Council of Ministers, a report in which the northern and southern maritime borders of Lebanon were determined unilaterally in addition to determining the median line subject to the bilateral agreement with the Republic of Cyprus. On July 14, 2010, the permanent mission of Lebanon to the UN deposited a report and a list of geographical coordinates of the southern borders to the office of the Secretary General of the UN in line with the Law of the Sea, on which Lebanon is a signatory country and by the way Israel is not a signatory country to it.
On 19 October 2010, the coordinates of the southern part of the median line with Cyprus were also deposited with the UN.
It is worth noting that the committee defined this line of the Lebanese border of the Exclusive Economic Zone from the southernmost coastal point reaching the end point called point 23 which was defined in accordance with the principles of the Law of the Sea and based on the UKHO reports
Seven, as you all know the East Mediterranean region is characterized with political volatility due to the state of war and often conflict; yet we are interested in translating the possible hydrocarbon resources into a lasting benefit to our society. But at the same time we need to make sure that we are safeguarding our sovereign rights over our offshore resources and simultaneously closely working with Cyprus and other international bodies to ensure that each country's rights are protected no less or no more.
We have presented our case to the United Nations who is entrusted in maintaining peace and security in this region just like everywhere else, and also to the UNIFIL forces who are present in Lebanon given their mandate to avoid any conflict between Lebanon and Israel, and I have personally spoken to the UN Secretary General urging him to take the necessary preemptive measures in order to avoid possible conflict by arranging to have Lebanese Southern border of its Exclusive Economic Zone delineated under the auspices of the UN.
I believe and I sincerely hope that the current Lebanese government is keen to keep the delineation issue away from the local and regional politics; and I hope the UN plays a proactive role on this front. I am also sure that Cyprus is well placed and ready to play a useful role in the region in this regard when necessary in order to contribute towards achieving this end.
As mentioned earlier the political situation in the East Mediterranean basin remains problematic since Lebanon is in a state of war with Israel (mind you that Lebanon abides by the Armistice of 1949 and by the Security Council resolution 1701). In this context and upon my request, on February 5, 2009 the Minister of Foreign Affairs addressed a letter to Noble Energy stating that: “Lebanon will not tolerate any encroachment on its maritime areas, including the Exclusive Economic Zone, or any exploitation or attempt at accessing or depleting our natural resources (even form areas not within the jurisdiction of the Republic of Lebanon), and Lebanon will hold Noble Energy responsible for any such violation of our sovereign rights and jurisdiction. The Republic of Lebanon reserves the right to take any steps necessary to protect its interests” .
The eighth point that I want to make is regarding the Lebanese institutional framework needed for hydrocarbon exploration. In this regard it is important to refer to all research that was undertaken on what became widely known and named the Dutch disease. The phenomenon refers to the political and administrative behavior that turns a natural resource discovery, that is supported to be a blessing into a curse and eventually a source of economic deterioration. In all of the research it has been concluded that countries that had the best developed institutional framework before the discovery are the ones that benefited the most from it, and accordingly are the countries that avoided the usual symptoms of the disease: i.e. deterioration of productive economic sectors, decline in competitiveness, corruption and poor governance.
In this context, the example of Norway is often given as a country which avoided the Dutch disease due to the fact that it had managed to set up well functioning established institutions before the discovery of oil. In this regard thanks to the father of the Norwegian hydrocarbon sector who happened to be an Iraqi. Norway has managed to learn the right lessons from other countries and hence avoided the high cost it could have paid in the process of developing the hydrocarbon sector. As a result, and because of this, Lebanon requested assistance from the Kingdom of Norway under the Oil for development program. It is worth noting that Norway is also a world leader in offshore petroleum exploration and production for more than 40 years.
Accordingly Norway and my government launched this cooperation in February 2007, and it is still ongoing. The purpose of the program is to support Lebanon in the management of the potential petroleum resources on its continental shelf, by assisting Lebanon with the setting up of relevant institutions and the drafting of the petroleum policy and the pertinent legislation, and by training key personnel, and by helping the Lebanese authorities to prepare license negotiations. This cooperation between the two countries has been extremely helpful and continues to be so for Lebanon.
The ninth point I would like to make in this regard pertains to the petroleum law, which was ratified by the Lebanese parliament on 17 August 2010. One main characteristic of the law is the establishment of the Petroleum Administration that shall manage the day to day operation of the petroleum activities. This Petroleum Administration once established shall enjoy financial and administrative autonomy. It is important to ensure that the board members of the petroleum administration to be established are highly qualified professionals who should be carefully selected through a transparent selection process according to their merit and high qualification and experience and that the process shall not be subject to any political pressure exerted by the Politicians. In other words, we have to avoid the possibility of being inflicted by the “Lebanese disease”, where religious and sectarian consideration or party loyalty plays a much greater role in influencing the decision in the selection of the members of the administrative body of government than the competence of the candidates.
Another major attribute of the petroleum Law is ultimately the establishment of a sovereign fund where the net proceeds to be collected or received by the State shall be placed. The State should make sure to utilize the proceeds of the fund according to prudent standards that will eventually guarantee its proper implementation. As stated in the offshore petroleum resources law this will be the subject of a separate law in order to ultimately make sure to avoid short or long term negative economic consequences to the national economy, as well as to try to maximize the benefit and welfare of future generations. This bill will have to be drafted by the government and tabled to the Parliament in due course. We hope that this will also lead directly into the avoidance of the Dutch disease that we have discussed earlier.
Ladies and Gentlemen,
These are exciting moments; Lebanon is on the verge of joining the group of oil and gas exploring nations. As we recognize this fact we have to beware of one important fact that there is a long time (seven to ten years) that separates us from the date when there will be a flow of revenues to Lebanon from the sale of hydrocarbon resources. That is as well once the prospects are really tested by drilling. Hence and particularly in the case of Lebanon it is very important not to give in to wild expectation that are fuelled by political statements from here or these, or pressures to increase spending that is not warranted. On the other hand we are and we should be keen to accelerate the opening of opportunities for petroleum exploration as soon as possible; but at the same time we have to make sure that things are done properly right from the beginning. Hence we should be eager to benefit from international experience and best practices. In some sense we are fortunate to be latecomers to this club because we have a lot to learn from other countries’ experiences and will hopefully be really able to avoid their mistakes.
I thank you for your attention this morning and
am ready to take your questions