Israel and Lebanon reach historic deal that will pave the way for offshore energy exploration in previously-contested areas of the Mediterranean Sea

During the second week of October, a historic agreement was agreed in principle between the Republic of Lebanon and the State of Israel over a maritime border dispute that had erupted more than a decade ago between the two countries.

The agreement, which was brokered by the United States of America given the absence of any diplomatic ties between Israel and Lebanon (and the de facto state of war between them), establishes a permanent maritime boundary that will pave the way for the exploration and exploitation of reportedly hydrocarbons-rich, and previously untapped reservoirs in the Mediterranean Sea.

The deal will likely be a boon to the European Union, which relentlessly seeks alternatives to Russian hydrocarbons, as well as attract foreign investment and inject billions of dollars into both countries' economies, at a time where Lebanon, being the only Mediterranean country which had not begun exploration for hydrocarbons resources, has been beleaguered by an unprecedented financial crisis.

Importantly, the deal will provide certainty to foreign operators who had steered clear of beginning development works in the conflicted waters pending an agreement between the two countries.

The agreement has already been approved in principle by Lebanon's President, as well as the Israeli cabinet, making its way to the Knesset where it will be reviewed for a period of 14 days without being put to a vote.  The agreement is expected to be signed by both governments and enter into force in the coming weeks, prior to the next Israeli general elections of 1 November 2022.

Main contested fields between Israel and Lebanon

The agreement puts to rest previous conflicts over two main hydrocarbons fields in the Mediterranean Sea:

• The Karish Field: under the agreement, the gas-rich Karish Field will now fall entirely within Israel's territorial waters.  Development works are already underway in the Karish Field, led by London-listed Energean and its Israeli subsidiary, with gas flow testing having started and production expected to follow later this year.  This agreement will provide certainty following geopolitical tensions between Lebanon and Israel that arose after a vessel operated by Energean arrived at the Karish field in June 2022.
• The Qana Field

While parts of the Qana Field will fall within Israel's territorial waters, Lebanon will be granted the exclusive right to explore and operate the Qana field.  However, some revenues flowing from the exploitation of the Qana Field will also be paid to Israel.

As part of the agreement, Israel will be entitled to royalties directly from the company operating the Qana Field (currently understood to be TotalEnergies), although such remuneration is expected to form a small part of any overall revenues.  Once the US-brokered agreement enters into force, Israel will sign a separate financial agreement governing such revenue-sharing arrangements directly with the company operating the Qana Field, prior to which no exploration works can begin in the Qana Field.

The fact that exploration works are contingent on an agreement being signed between Israel and the block operator is unusual, in that it may lead to delays in Lebanon's exploration of its field.  However, the agreement obliges Israel to work "in good faith to ensure that [the financial agreement] is resolved in a timely fashion", and ensures that Lebanon's full share of economic rights will not be affected by such separate agreement.  It bears emphasis that such revenue-sharing mechanism is mainly due to the absence of any diplomatic ties between the two countries which excludes any potential unitisation agreements or joint development of the cross-border field.

Lebanon has already granted exploitation licences for the Qana Field to a consortium led by France's TotalEnergies (40% share, and operator of the block), Italy's ENI (40% share), and previously, Russia's Novatek (20% share) – the Lebanese government announced, in September 2022, that it has asked Novatek to withdraw from the consortium and that it will be buying Novatek's 20% share in the field.

According to the agreement, any differences concerning the interpretation and implementation of the agreement will be resolved through discussion facilitated by the US.

Once signed, the Agreement will be deposited by both Israel and Lebanon with the Secretary General of charts and lists of geographical coordinates of points under the United Nations Convention on the Law of the Sea, and override the countries' prior submissions.  It will then lead to a unique situation under international law whereby the two countries would have agreed their maritime boundaries, without agreeing their land borders.

We will keep you informed of any further developments in that respect, and please contact Craig Tevendale, Partner, Isaac Zailer, Partner, Steven Dalton, Partner, Andrew Cannon, Partner, Amal Bouchenaki, Partner, Cedric Saliba, Associate, or your usual Herbert Smith Freehills contact for more information.