Lebanon, which is in the middle of its Worst Economic Crisis, may be years away from reaping the dividends of any potential oil and gas finds in the Levant Basin, analysts have said.

Exploratory drilling for hydrocarbons has begun in the country’s offshore Block 9, less than a year after a US-mediated agreement that demarcated its maritime border with Israel.

French oil company TotalEnergies is leading the consortium that is drilling, along with Italian company ENI and state-owned QatarEnergy.

Lebanon’s government has pinned its hopes on possible oil and gas reserves as a source of much needed revenue that can help one of the world’s most indebted countries to reduce its liabilities and help it to emerge from its worst economic crisis since the country’s independence.

However, analysts and economists say the country will have to pass several hurdles before it can become an energy exporter, including navigating a volatile geopolitical landscape and a deeply sectarian political system at home.

There’s a “presource risk” when it comes to Lebanon’s case, where policymakers ramp up spending in anticipation of potential future revenue, Nasser Saidi, president of Nasser Saidi and Associates and Lebanon’s former economy minister, told The National.

Even if they find oil and gas trapped beneath the seabed, the quantity discovered may not be worth a major investment, Mr Saidi said.

TotalEnergies drilled Lebanon’s first offshore well in Block 4 in 2020 in search of oil reserves, but without success.

The Levant Basin in the eastern Mediterranean has one of the world’s largest natural gas reserves.

The US Geological Survey estimates that the basin – stretching across the waters of Cyprus, Egypt, Israel, Lebanon and Palestine – contains 122.4 trillion cubic feet of technically recoverable gas.

In 2009 and 2010, consortiums comprising US and Israeli companies discovered the Tamar and Leviathan gasfields, which are estimated to hold 26 trillion cubic feet of natural gas.

Within the past two decades, Israel has been transformed from a net importer of oil and gas to an exporter of the commodity to countries such as Egypt and Jordan.

The political leadership in Beirut is hoping for a similar outcome but economists say the government should first resolve the country’s hyperinflation and high levels of public debt.

Lebanon’s public debt stood at about $102 billion at the end of 2022, equivalent to about 150 per cent of gross domestic product.

Lebanon’s economic meltdown, described by the World Bank as one of the worst in recent global history, has plunged most of the population into poverty according to the United Nations

Hyperinflation continued for the 37th consecutive month in July as the country’s currency continued to lose value on the parallel and official markets since it was devalued by 90 per cent at the start of February.

“Even in the case of commercial discoveries, there will be no impact on the country’s sovereign ratings,” Nassib Ghobril, chief economist at Byblos Bank, told The National.

Lebanon will have to restructure its external debt and establish a viable plan to manage its public debt for an upgrade in its sovereign ratings, Mr Ghobril said.

In June, the International Monetary Fund warned that further reform delays would keep confidence low while the dollarisation of the economy would increase, causing the national currency to depreciate further and keeping inflation high.

Adding to the uncertainty is a political impasse over the election of a president.

The country has been without a president since the end of October 2022, when the six-year term of Michel Aoun ended. It is being run by a caretaker cabinet led by Prime Minister Najib Mikati, with limited powers.

For Lebanon’s economy to benefit from any future oil and gas production, a national oil fund that is independent of the country’s Finance Ministry needs to be set up, Mr Saidi said.

“There should be a strict law on the use of any revenues because this is resource wealth that is not renewable … you have to keep it for future generations,” he said.

The discovery of gas could allow Lebanon to switch from expensive fuel oil, which it imports from Iraq, to generate power.

“This would help the balance of payments, reduce the import bill, preserve foreign currency and support the environment,” Mr Ghobril said.

Electricity, which was already a problem before the country’s economy collapsed in 2019, has become notoriously scarce in Lebanon.

The main electricity company was draining about $2 to $3 billion a year from state coffers while power cuts would last between three and 12 hours a day in some parts of the country.

Privatisation of the country’s main electricity company and other entities is a critical part of the reform measures that the IMF is calling for.

Lebanon’s oil and gas drilling efforts come against the backdrop of an energy crisis triggered by Russia’s war in Ukraine last year.

Competition for liquefied natural gas has increased, with Europe importing record volumes of the supercooled fuel last year to replace Moscow’s supplies.

Energy executives and ministers have said that gas supplies from the east Mediterranean could help Europe to avert potential shortages.

In June, Egypt and Israel signed a framework agreement with the EU in June to increase LNG sales to European countries. Under the deal, Israeli gas will be transported by pipeline to Egypt’s LNG plants before being shipped to Europe.

In Lebanon’s case, revenue from oil and gas exports will come after “seven to eight years” as it builds the necessary infrastructure and pipelines, Mr Saidi said.

“We don’t know what the price of oil and gas is going to be by then. The world is in the energy transition and everybody is moving towards renewable energy and that might mean potentially downward pressure on oil and gas prices,” he said.

Meanwhile, in the absence of reforms, Lebanon’s economy will continue to worsen, Garbis Iradian, chief economist at the Institute of International Finance, told The National.

“The economic situation will continue to deteriorate, including a soaring parallel exchange rate, a triple-digit inflation rate, persistent high unemployment and poverty, an acceleration in emigration and, most likely, the disintegration of the country,” Mr Iradian said.

Updated: August 25, 2023, 6:07 AM