Israel-Lebanon maritime agreement to prompt working relations

Al-Monitor Pro Member

Gerald Kepes

President, Competitive Energy Strategies, LLC

Oct. 14, 2022

US-mediated negotiations, underway for months, appear to have reached a successful end, although formal approvals are needed from the Israeli and Lebanese governments (Israel's cabinet gave preliminary approval this week). Full ratification could still be subject to the political jockeying and machinations of various parties. Israel faces an election on Nov. 1, 2022, and Lebanon’s presidential term ends at the same time with no successor identified.

Powerful political factions within each country are either against the proposed agreement or wish to use its existence against their political opponents. The threat of cross-border violence, ever present, looms in the background. However, the Israeli military-security establishment appear to be in favor of the agreement having secured certain guarantees from the US and the main political force in Lebanon, Hezbollah, has acquiesced to dealing with Israel given the dire condition of the Lebanese economy.

The agreement will recognized the buoy-marked border 3.1 miles off the coast of the northern Israeli city of Rosh Hanikra, then will track Line 23. 

Scenario 1: One possible scenario, albeit less likely, is that one or both governments fail to ratify the proposed agreement such that talks collapse completely for an extended, unknown period.

One can envision that Karish gas field production would commence with guarantees from the Israeli military, and the full development of the Karish area ensues, including North Karish gas. In parallel the threat level increases with heightened tensions, and attacks, offshore or onshore. At some juncture, Energean could declare force majeure for its entire Karish area development. And other discoveries and potential would not be developed. In this scenario, full development of this portion of Israel’s northern offshore and Lebanon's offshore also would be hindered. If no agreement is reached, TotalEnergies and Eni will not drill an exploration well on the Qana prospect without a marine border agreement.

Scenario 2: A second scenario variously involves the failure to discover commercial resources at the Qana prospect or the failure of unitization negotiations which would follow the discovery of commercial volumes at Qana.

The Qana prospect, the bulk of which appears to lie on the Lebanese side of the border (provisionally) within Block 9, has not been drilled. It looks attractive and is well positioned given the trend established by the Israeli offshore gas fields. It could be substantially larger than the Karish gas fields and, would if successful, probably produce liquids-rich natural gas (wet gas), similar to the Karish gas fields. It is possible that Qana resources could have even higher liquids content and that a commercial discovery could yield hundreds of millions of barrels of condensate and light oil and 5 to 10 Tcf of natural gas. But it is equally (or more) possible that it could be an unsuccessful exploration effort for a variety of technical reasons resulting in a sub-commercial discovery.

Should a Qana discovery be commercial, the next hurdle will be the execution of the terms of reference for a unitization agreement. The revenue sharing (or royalty payments to the Israeli government) would depend on the specific portion of the Qana field reserves lying on the Israeli side of the agreed border. The negotiated terms of reference requires the selection of an internationally recognized, technical consultancy to study the data and then make a final determination of the allocation of reserves between the two governments. If one of the governments does not agree with that determination, they will require and enter into an arbitration mechanism to reach a final agreement. All this takes time.

The unitization agreement/revenue sharing would also include how an Israeli government authority monitors actual production and delivered volumes to the point of sale, pricing and how funds are paid out. This would include both liquids and natural gas reserves and output. In the case of a Qana discovery, the volume of liquids (and therefore value) could be substantial. Assume that Qana field dry gas sold into a Lebanese market (or other) yields $4 per million BTU (mmBritish Thermal Units) to $6 mmBTU. By way of example, Karish gas will receive about $4.30 per mmBTU from the Israeli market given its supply agreements. This would roughly equate to about $26 per boe (barrels of oil equivalent) for the dry gas. Whereas the liquids (light crude oil or condensate) could be priced (today) at $90 per barrel or higher.

A commercial discovery at Qana would kick off a years-long unitization negotiation, appraisal process, market development (for natural gas) and development. It could easily be seven to 10 years before Qana gas lands onshore Lebanon. The domestic market for discovered gas is small and the ability to pay for larger volumes of gas offtake is probably limited. Domestic gas market development in emerging economies is hard work and takes a long time. But has a higher probability of solving some of the energy problems of Lebanon.

A sufficiently large natural gas discovery of perhaps 12 to 15 Tcf could support an LNG export project and generate substantial returns to a Lebanese government but would not yield the macroeconomic benefits of a domestic gas development. An alternative option, requiring political and commercial relationships between Lebanon, Israel and Egypt, could see substantial volumes monetized via a submarine pipeline into a possible Leviathan Phase 2 tie-in to the offshore Egyptian gas infrastructure. While this seems almost unimaginable, so did an Israeli-Lebanon marine border and unitization agreement seem a short while ago.

There remains the potential for high liquids content in a commercial discovery at Qana. The value of a large liquids resource would be significant and could be monetized more quickly than a large natural gas discovery. In all of these options, a portion of the gas resource could be earmarked for a domestic market even if modest, initially. It would be ironic given that the allure of large, natural gas resources is what brought all of the Lebanese factions to the bargaining table, but it could be a large liquids resource which is actually served. But, an influx of cash flows directly into the coffers of the Lebanese government may damage even further the transparency that the Lebanese population demands of its government at this time.

Gerald Kepes has more than 35 years of experience as a consultant and petroleum geologist in the global energy industry. Most recently, he was vice president in energy & natural resources for IHS Markit, and previously, a PFC energy partner, where he established PFC’s global upstream consulting practice. He also held various positions with a US oil company in North Africa and the Middle East.