Oil and Gas Prospects in Lebanon 1 st Licensing Round: Bidding & Contractual Terms Arab Economic Forum 9-10 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

Arab Economic Forum 9-10 May 2013 Activities & Cash Flow (oil profile) Pre-licenseExplorationDevelopmentProductionAbandonment Production Enhanced. Costs Income Time Government Licensing PDP

Arab Economic Forum 9-10 May 2013 Production Sharing Contract ROYALTY COST RECOVERY OIL PROFIT OIL CONTRACTOR SHARE OF PROFIT OIL GOVERNMENT SHARE OF PROFIT OIL TOTAL OIL PRODUCED Corp. tax GVT. TAKE COST COMPANY PROFIT

Arab Economic Forum 9-10 May 2013 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 Sharing  Industry Standard Structure  Robust 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 gas  Cost petroleum up to percentage of petroleum produced, based on bid  Profit petroleum split based on bid -Adjustment based on R-Factor  Lebanese employment: At least 80% Lebanese nationals  Procurement: Lebanese contracting requirement where competitive  Environment and Decommissioning: International standard requirements and funding Legal Basis Structure Phases Economics Protects Key Lebanese Interests

Arab Economic Forum 9-10 May 2013 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.

Arab Economic Forum 9-10 May 2013 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

Arab Economic Forum 9-10 May 2013 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)

Arab Economic Forum 9-10 May 2013 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

Arab Economic Forum 9-10 May 2013 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)

Arab Economic Forum 9-10 May 2013 Bidding Parameters Grading System Tender 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)

Arab Economic Forum 9-10 May 2013 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

Arab Economic Forum 9-10 May 2013 Lebanon Advantages in 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

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