Oil and Gas Prospects in Lebanon

1st Licensing Round: Bidding &

Contractual Terms
Arab Economic Forum
9-10 May 2013

Wissam Zahabi – Head of Economic & Finance Dept.

Fiscal Regimes

 Concessionary  Contractual

– Private Ownership of – State retains ownership of

resources resources
– Royalty / Tax – Profit petroleum

Arab Economic Forum 9-10 May 2013

Activities & Cash Flow (oil profile)

Income

Government

Time

Costs
Production
Pre-license Exploration Development Production Enhanced. Abandonment

Arab Economic Forum 9-10 May 2013

Production Sharing Contract

ROYALTY

COST COST
RECOVERY
OIL

COMPANY
TOTAL
PROFIT
OIL
PRODUCED CONTRACTOR
SHARE OF
PROFIT OIL Corp. tax
GVT. TAKE
PROFIT
OIL GOVERNMENT
SHARE OF
PROFIT OIL

Arab Economic Forum 9-10 May 2013

Exploration & Production Agreement
 Offshore Petroleum Resources Law (OPR Law)
Legal Basis  Petroleum Activities Regulation (PAR)
 EPA is a commercial contract and a roadmap of OPR Law and PAR

 Exploration and Production Agreement with Production Sharing

Structure  Industry Standard Structure
 Robust economic incentives to explore, develop and produce

 Exploration: Five years, divided into periods of 3 years and two years, with possible
extension
Phases  Appraisal: up to two years, plus marketing period for natural gas discovery (if approved)
 Production: 25 years plus possible 5 year extension with secondary investment

 Royalties: sliding scale for crude oil, flat 4% for natural gas
Economics  Cost petroleum up to percentage of petroleum produced, based on bid
 Profit petroleum split based on bid -Adjustment based on R-Factor

Protects Key  Lebanese employment: At least 80% Lebanese nationals

Lebanese  Procurement: Lebanese contracting requirement where competitive
 Environment and Decommissioning: International standard requirements and funding
Interests
Arab Economic Forum 9-10 May 2013
The Partners

Right Holder

Exploration and
Production Agreement Operator / Right Holder
(EPA)

The State, represented by Right Holder

the Minister

 At least three Right Holders at all times (OPR Law Requirement)

 No State Participation Interest in First Round EPAs

 State role is to receive share of production, and to exercise approval rights

 Some decisions reserved by OPR Law to Council of Ministers. Others made

by Minister, acting on recommendation of Petroleum Administration.

Arab Economic Forum 9-10 May 2013

 Phases
 Exploration Phase of five years
 Divided into two Exploration Periods, three years and two years
Exploration  Exploration Phase can be extended for justified operational reasons or Event of Force
Majeure, subject to Council of Ministers approval

 Discovery must be promptly reported to PA.

 Right Holders indicate if Natural Gas or Crude Oil, and whether Potentially Commercial
Discovery and  If Potentially Commercial, Right Holders must submit Appraisal Plan to retain rights to
Appraisal Discovery
 Right Holders must decide on Declaration of Commerciality after Appraisal period

 After Declaration of Commerciality, Right Holders must submit Development and

Production Plan
Development and  Plan is subject to Council of Ministers Approval
Production  If approved, Right Holders must achieve first Commercial Production by agreed deadline

 Natural Gas Discovery requires Gas Infrastructure and Marketing Plan

 Right Holders may apply to Minister for extra time to secure offtake and infrastructure
Gas Infrastructure  Associated Natural Gas in Crude Oil Discovery must be disposed of or delivered free of
and Marketing charge to State

Arab Economic Forum 9-10 May 2013

 Key Economic Terms
Royalties Cost Petroleum Profit Petroleum Profit tax Other Issues

• Crude Oil: Sliding • Costs fully • Profit petroleum • The OPR Law • State priority
Scale ranging recoverable up split based on requires right to take
from 5% to 12% to fixed bidding companies to royalties and
based on percentage of (minimum and pay all Lebanese production share
monthly average Disposable maximum State taxes (see Annex) in natural gas
daily production petroleum profit petroleum
rate (see next share) • This is reflected • State priority
slide) • Percentage • Minimum bid in the EPA right to purchase
determined State share until natural gas
• Natural Gas: 4% through bidding costs recovered (international
flat royalty • After costs prices)
• No ring-fencing recovered, split
• May be taken in within area – if adjusted based
cash or in kind multiple on R-Factor
(State election discoveries, cost (cumulative cash
made annually) recovery based inflow
on total /cumulative
production capex, see next
slide), using
sliding scale up
to maximum bid
State split

Arab Economic Forum 9-10 May 2013

Emphasis on Local Content
Procurement
 General rule: competitive
tenders
 Lebanese contractors are
given preference:
– Services –price less than 110%
of foreign competitor
– Goods – price less than 105%
of foreign competitor
 Minister approval: affiliate
contracts/contracts above
US$5 M per year or US$10
M overall
Employment and Training
 Recruitment and training
program for Lebanese
nationals mandatory
 At least 80% of employees
must be Lebanese nationals
 Right holders required to
fund training program for
Lebanese personnel
 Plans must include program
for hiring Lebanese nationals
as management and
professional staff
Arab Economic Forum 9-10 May 2013
Bid Content
 Consortia must include one operator (minimum 35% stake) and at
least two right holders (minimum 10% stake each), all unaffiliated
 No company may join more than one consortium per block

 No right holder (operator or non-operator) may be part of more

than three applicants

 Technical Proposal
BIDS TO BE
 Commercial Proposal SUBMITTED BY
NOVEMBER 4,
 Proof of payment of $50,000 retrieval fee and purchase of 3D
seismic data 2013
 $5,000,000 bid bond per consortium, per block
– Bid must remain open for at least 180 days, extendable by an
additional 90 days by the Minister

 Legal documentation (as detailed in the tender protocol)

Arab Economic Forum 9-10 May 2013

 Bidding Parameters
Commercial Proposal
• Cost Petroleum recovery ceiling
• Profit Petroleum sharing (based
on the R-factor formula set forth
in the Exploration and Production
Agreement)
Tender protocol specifies weighting
for the items described above
Bid
Technical Proposal
• Proposed activities per exploration period:
• Proposed 3D seismic survey
• Proposed other geological and geophysical activities
• Exploration wells (number, depths)
• Technical proposal must provide for at least one exploration well per
exploration period (except for blocks 3 and 8, where one exploration
well is required for the second period only)
Grading System
Each of the items shall be evaluated
Overall weight split: 70% for the
independently, with the highest mark for
Commercial Proposal and 30% for
each item attributed to the best proposal
the Technical Proposal
by a consortium for such item
Arab Economic Forum 9-10 May 2013
 Selection Process & Award
 Evaluation of Commercial and Technical Proposals by Petroleum Administration
 Petroleum Administration to make recommendation to Minister regarding the
Short-listing selection of candidates to be short-listed for next stage
consortia
 Minister announcement of shortlist of up to five bidders per block (expected
December 2013)

 Items subject to negotiation in the final stage to be specified in the Final Tender
Protocol
Final  Current expectation is that the consortia will be invited to improve their
negotiation Commercial and Technical Proposals, but that no other terms will be negotiated
round  Upon completion of negotiation process, Minister to submit a report to Council
of Ministers on results of negotiation process
 Signing of EPA, parent guarantees and presentation of work commitment guarantees
for first exploration period to occur simultaneously (expected February or March
2014)
Signature of
EPA  If final negotiations round yields no improvement on Commercial and Technical
Proposals, any consortium may be required to enter into an EPA on the basis of its bid
 Effectiveness of EPA upon approval of Council of Ministers

Arab Economic Forum 9-10 May 2013

Lebanon Advantages
in Attracting Exploration Investment

 High oil prices have led to increased availability of risk

capital.
 Declining resources and investment opportunities
increases the oil companies’ appetite for frontier areas,
such as Lebanon
 Large areas are available for licensing offshore
 Modern data available to possible investors
 Modern Legal and Contractual framework
 Oil and gas discoveries in neighbouring and similar
basins
 Close to large markets
 fiscal stability
Arab Economic Forum 9-10 May 2013
Thank You