oil and gas prospects in lebanon 1 st licensing round: bidding & contractual terms arab economic...

Oil and Gas Prospects in Lebanon1st Licensing Round: Bidding & Contractual Terms

Arab Economic Forum9-10 May 2013

Wissam Zahabi – Head of Economic & Finance Dept.

Arab Economic Forum 9-10 May 2013

Concessionary

– Private Ownership of resources

– Royalty / Tax

Fiscal Regimes

Contractual

– State retains ownership of resources

– Profit petroleum


Activities & Cash Flow (oil profile)

Pre-license Exploration Development Production AbandonmentProduction

Enhanced.

Costs

Income

Time

Government

Lic

en

sin

g

PD

P


Production Sharing Contract

ROYALTY

COST RECOVERY

OIL

PROFITOIL

CONTRACTORSHARE OF

PROFIT OIL

GOVERNMENTSHARE OF

PROFIT OIL

TOTAL OIL

PRODUCED

Corp. taxGVT. TAKE

COST

COMPANYPROFIT


Exploration & Production Agreement

Offshore Petroleum Resources Law (OPR Law)Petroleum Activities Regulation (PAR)EPA is a commercial contract and a roadmap of OPR Law and PAR

Exploration and Production Agreement with Production SharingIndustry Standard StructureRobust economic incentives to explore, develop and produce

Exploration: Five years, divided into periods of 3 years and two years, with possible extension

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 gasCost petroleum up to percentage of petroleum produced, based on bidProfit petroleum split based on bid -Adjustment based on R-Factor

Lebanese employment: At least 80% Lebanese nationalsProcurement: Lebanese contracting requirement where competitiveEnvironment and Decommissioning: International standard requirements and funding

Legal Basis

Structure

Phases

Economics

Protects Key Lebanese Interests


The Partners

The State, represented by the Minister

Right Holder

Operator / Right Holder

Right Holder

Exploration and Production Agreement

(EPA)

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.


Phases

Exploration

Discovery and Appraisal

Development and Production

Gas Infrastructure and Marketing

Exploration Phase of five years Divided into two Exploration Periods, three years and two years 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 If Potentially Commercial, Right Holders must submit Appraisal Plan to retain rights to

Discovery Right Holders must decide on Declaration of Commerciality after Appraisal period

After Declaration of Commerciality, Right Holders must submit Development and Production Plan

Plan is subject to Council of Ministers Approval 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 Associated Natural Gas in Crude Oil Discovery must be disposed of or delivered free of

charge to State


Key Economic Terms

Royalties

• Crude Oil: Sliding Scale ranging from 5% to 12% based on monthly average daily production rate (see next slide)

• Natural Gas: 4% flat royalty

• May be taken in cash or in kind (State election made annually)

Cost Petroleum

• Costs fully recoverable up to fixed percentage of Disposable petroleum

• Percentage determined through bidding

• No ring-fencing within area – if multiple discoveries, cost recovery based on total production

Profit Petroleum

• Profit petroleum split based on bidding (minimum and maximum State profit petroleum share)

• Minimum bid State share until costs recovered

• After costs recovered, split adjusted based on R-Factor (cumulative cash inflow /cumulative capex, see next slide), using sliding scale up to maximum bid State split

Profit tax

• The OPR Law requires companies to pay all Lebanese taxes (see Annex)

• This is reflected in the EPA

Other Issues

• State priority right to take royalties and production share in natural gas

• State priority right to purchase natural gas (international prices)


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

Emphasis on Local Content

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


Bid Content

BIDS TO BE SUBMITTED BY NOVEMBER 4,

2013

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

Commercial Proposal

Proof of payment of $50,000 retrieval fee and purchase of 3D seismic data

$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)


Bidding Parameters

Grading SystemTender protocol specifies weighting

for the items described above

Each of the items shall be evaluated independently, with the highest mark for

each item attributed to the best proposal by a consortium for such item

Overall weight split: 70% for the Commercial Proposal and 30% for

the Technical Proposal

Bid

Commercial Proposal• Cost Petroleum recovery ceiling• Profit Petroleum sharing (based

on the R-factor formula set forth in the Exploration and Production Agreement)

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)


Selection Process & Award

Short-listing consortia

Signature of EPA

Evaluation of Commercial and Technical Proposals by Petroleum Administration Petroleum Administration to make recommendation to Minister regarding the

selection of candidates to be short-listed for next stage Minister announcement of shortlist of up to five bidders per block (expected

December 2013)

Signing of EPA, parent guarantees and presentation of work commitment guarantees for first exploration period to occur simultaneously (expected February or March 2014)

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

Final negotiation

round

Items subject to negotiation in the final stage to be specified in the Final Tender Protocol

Current expectation is that the consortia will be invited to improve their Commercial and Technical Proposals, but that no other terms will be negotiated

Upon completion of negotiation process, Minister to submit a report to Council of Ministers on results of negotiation process


Lebanon Advantagesin 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

Thank You

oil and gas prospects in lebanon 1 st licensing round: bidding & contractual terms arab economic...

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