The Lebanese National Assembly has just passed the long-awaited oil and natural gas taxation law, the last of three crucial pieces of legislation needed to begin the exploration and development of offshore oil resources. The law enables international oil companies (IOCs) to apply for a license for exploration and development; final contract awards are likely to be given by the end of November. Though this marks significant progress in the development of Lebanese offshore oil fields, there is still much work to be done to address the administration of the sovereign wealth fund, as well as onshore exploration issues that will affect different political and religious groups that potentially have an interest in the developing industry.
Lebanon is believed to have billions — if not trillions — of cubic meters of natural gas resources located off its coast in the eastern Mediterranean Sea. Over the last decade, major oil and natural gas discoveries in the eastern Mediterranean Sea have occurred in the waters off the coast of Lebanon's neighbors Israel, Cyprus and Egypt. While Beirut the Lebanese government in Beirut is hopeful that it has similar resources to exploit, no one really knows for sure how much oil and natural gas will actually be found in Lebanese waters, largely because of political gridlock that has prevented the development of the oil industry and that has thwarted investment in exploration.
Beirut had planned to hold its first licensing round in 2013, with some 52 companies submitting pre-qualification applications at that time. That round was delayed five times and was eventually frozenas the country did not have a president from March 2014 until October 2016. Once Lebanese President Michel Aoun took office, Lebanon took up the licensing round again, finally approving two decrees in January that demarcated the exploration blocks and adopted the Exploration and Production Agreement that IOCs would use.
Now that Beirut has passed the new taxation law, IOCs have a better idea about the finer fiscal details that they will be facing in the country, such as capitalization rules, tax exemptions, capital gains taxes and the corporate income tax. But there are still a number of concerns that will complicate operations for IOCs in the country. Three of the five blocks open for bidding are located on the disputed maritime border with Israel. With the Syrian war slowly winding down, the prospects for armed conflict and preventive Israeli airstrikes against Hezbollah targets in southern Lebanon are higher than in previous phases of the war. If Iran's Petropars is part of a consortium that receives a license for exploration in the disputed waters, it will aggravate pre-existing tension between Iran and Israel.
Ultimately, the structure of Lebanon's political system — in which the country's Christians, Sunnis, Shiites and Druze all haggle to get a say on key items — will complicate Lebanon's management of the industry, especially if and where large volumes of oil and natural gas are found. The National Assembly must finalize its sovereign wealth fund law, which manages the fund where oil and natural gas revenues would be deposited. And, there is still a need for an onshore petroleum law to govern onshore exploration. These will be lightning rods for disagreement among Lebanon's political groups, and the control of revenue and rights in certain areas will likely be challenged by the different groups living there. In spite of the pragmatic cooperation among Lebanon's various ethno-sectarian groups over the last year, joining the oil development industry in the country still requires the careful navigation of a complicated political system.