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10 June 2019
On 9 February 2018 two exclusive petroleum rights covering Blocks 4 and 9 were officially awarded to a consortium comprising Total, Eni and Novatek. Drilling operations are expected to start in the last quarter of 2019 in the Safra region (North Lebanon).
On 4 April 2019 the Council of Ministers launched the second offshore licensing round (SOLR) for oil and gas exploration in Blocks 1, 2, 5, 8 and 10. It also approved the updated tender protocol (UTP)(1) and approved updates to some articles of the model exploration and production agreement.
In order to intensify exploration activities, increase the attractiveness of Lebanese offshore exploration and promote competition, the Lebanese Petroleum Administration (LPA) has chosen blocks that are geologically diverse. Notably, each SOLR applicant can bid on any one or more blocks; however, no applicant or operator may be awarded more than two blocks during the SOLR.
The LPA has invited interested companies to combine their bidding efforts by forming consortiums of at least three companies. One company must pre-qualify as an operator and hold a minimum 35% participating interest in the consortium. The remaining companies must pre-qualify as operators or non-operators and hold a minimum 10% participating interest. Interested applicants must submit their licensing round applications (including their pre-qualification application and exploration and production agreement (EPA) application) no later than 31 January 2020.
This article examines the pre-qualification process as provided for in the UTP and reviews how bids will be assessed up until the award stage.
The pre-qualification procedure for the SOLR is different from that which applied during the first licensing round, in which a separate pre-qualification phase preceded the actual bidding. For the SOLR, one process applies to both the pre-qualification and bid assessment phases.
Submission of applications and pre-qualification criteria
In addition to the requirement to apply as a consortium of at least three companies, the UTP provides for certain requirements relating to the submission of applications and introduces the following pre-qualification criteria.
Pre-qualification application requirements
Each company must submit a separate application containing pre-qualification materials specific thereto.
The UTP sets out the information and documents which must be filed as part of each company's pre-qualification package, regardless of whether it intends to be a rights holder – operator or a rights holder – non-operator. Such information and documents include:
Notwithstanding the fact that each member of an applicant must submit a separate application, the authorised representative (who must be a natural person) must sign the application on the applicant's behalf.
Notably, each company may ask for a preliminary evaluation from the LPA regarding the satisfaction of one or more pre-qualification requirements; such a determination is not binding on the LPA.
As a minimum, one member of each applicant must satisfy the pre-qualification criteria for operators, while the other members must satisfy the same for non-operators.
The pre-qualification criteria are set on the following basis (non-exhaustive list):
Companies applying to be non-operators need experience only in petroleum production.
Notably, the pre-qualification criteria do not require applicants to provide information relating to their governance, transparency and anti-bribery policies and procedures. Despite Parliament's recent issuance of Law 84 on Transparency in the Oil and Gas Sector (for further details please see "New transparency law in oil and gas sector aims to fight corruption").
Following the closing date (ie, 31 January 2020), the LPA will evaluate all applications within three weeks. The minister of energy and water may extend this period for an additional week on the LPA's recommendation.
Based on its evaluation, the LPA will submit its recommendations regarding the pre-qualified applicants and companies to the minister, who will announce the results in the Official Gazette. The minister will also send a letter to each company that fails to pre-qualify, setting out the reasons for the decision.
The LPA will review the EPA applications of pre-qualified applicants.
According to the UTP timetable, the LPA will have approximately three weeks from the issuance of the pre-qualification results to evaluate the EPA applications before conducting negotiations with the first-ranking applicant for a determined block.
The UTP sets out the requirements that pre-qualified applicants must fulfil during this stage of the SOLR.
Each EPA application must include:
Each applicant must present a bid bond in favour of the Ministry of Energy and Water for each block for which it submits an application.
Bid bonds must take the form of letters of credit which are worth $5 million or €5 million and issued by:
The bid bond requirement reflects the LPA's aim of obtaining the signature of the winning applicant of the EPA for the relevant block. The minister may draw on the bid bond if:
Losing applicants' bid bonds will be returned within two weeks of the Council of Ministers' approval of the winning applicant for a given block.
Technical and commercial proposals
The EPA application must also include technical and commercial proposals in the format provided for in the UTP.
The technical proposal must include:
The commercial proposal must provide the commercial terms open to bid.
The EPA application must comply with the submission requirements regarding the pre-qualification application.
The LPA must review and evaluate an EPA application on the basis of:
The UTP also provides for the evaluation marks on which the decision to select the winners will be based; the technical criteria will contribute to 20 marks of the overall grade, while the commercial criteria will contribute to 80 marks.
Based on the above, the LPA must prepare and submit to the minister an evaluation report on the applications for each block, including a ranking of the applicants. The minister may consequently invite the first-ranked applicant for a given block to proceed with the negotiation process.
If the minister and the first-ranked applicant reach an agreement following the negotiations, a recommendation will be sent to the government to sign an EPA in accordance with the Petroleum Law. Otherwise, the UTP provides for a specific procedure to follow – namely, inviting the second-ranked applicant to participate in the negotiations, provided that it received a higher commercial mark than the first-ranked applicant.
Once the negotiations are concluded and the winner of a given block is determined, it must deliver to the minister a fully executed EPA and ancillary documents within 30 days of receiving the minister's request. Such documents will be submitted to the Council of Ministers for approval (at the sole discretion of the council on the recommendation of the minister and the LPA) in order for the EPA to take effect.
According to the timetable set out in the UTP, the Council of Ministers should (provided that all deadlines are respected) begin awarding blocks by April 2020, which will signal the launch of exploration activity for the SOLR.
Oil and gas experts believe that this is the right time for Lebanon to launch the SOLR, as there has been a lot of interest in the East Mediterranean by international companies working in the field.
That said, it is critical that the LPA – in its efforts to intensify exploration activities, increase the attractiveness of Lebanese offshore exploration and promote competitiveness – abides by the recently adopted Law 84 regarding the enhancement of transparency in the oil and gas sector.
For further information on this topic please contact Mohamed Y Alem at Alem & Associates by telephone (+961 1 999 717) or email (email@example.com). The Alem & Associates website can be accessed at www.alemlaw.com.
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Mohamed Y Alem