Oil and Gas Prospects in Lebanon 1 st Licensing Round: Bidding & Contractual Terms

1. Oil and Gas Prospects in Lebanon1st Licensing Round: Bidding & Contractual Terms Arab Economic Forum 9-10 May 2013 Wissam Zahabi – Head of Economic & Finance Dept.

2. Fiscal Regimes • Concessionary • Private Ownership of resources • Royalty / Tax • Contractual • State retains ownership of resources • Profit petroleum

3. Licensing PDP Government Pre-license Exploration Development Production Abandonment Production Enhanced. Activities & Cash Flow (oil profile) Income Time Costs

4. ROYALTY COST RECOVERY OIL COST COMPANY PROFIT CONTRACTOR SHARE OF PROFIT OIL Corp. tax PROFIT OIL GOVERNMENT SHARE OF PROFIT OIL Production Sharing Contract TOTAL OIL PRODUCED GVT. TAKE

5. Exploration & Production Agreement Legal Basis • Offshore Petroleum Resources Law (OPR Law) • Petroleum Activities Regulation (PAR) • EPA is a commercial contract anda roadmap of OPR Law and PAR Structure • Exploration and Production Agreement with Production Sharing • Industry Standard Structure • Robust economic incentives to explore, develop and produce Phases • 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 Economics • 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 Protects Key Lebanese Interests • Lebanese employment: At least 80% Lebanese nationals • Procurement: Lebanese contracting requirement where competitive • Environment and Decommissioning: International standard requirements and funding

6. The Partners Right Holder Exploration and Production Agreement (EPA) Operator / Right Holder Right Holder The State, represented by the Minister • 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.

7. Phases Exploration • 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 and Appraisal • 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 Development and Production • 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 Gas Infrastructure and Marketing • 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

8. Key Economic Terms

9. Emphasis on Local Content 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 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

10. Bid Content • 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 BIDS TO BE SUBMITTED BY NOVEMBER 4, 2013 • 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)

11. Bidding Parameters

12. Selection Process & Award • Short-listing consortia • 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) • 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 • Final negotiation round • 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 • Signature of EPA

13. 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

14. Thank You