(Corrects sourcing in paragraph 30)
* Lebanese authorities keen to develop energy sector
* Political risks deterring some companies
* Maritime border dispute with Israel unresolved
By Alexander Dziadosz and Oleg Vukmanovic
BEIRUT/MILAN, April 4 (Reuters) - Despite their troubles assembling a fully functional government, Lebanese authorities are at last in a position to start tackling their patch of one of the world’s biggest and most politically divisive natural gas frontiers.
Bureaucracy, spillover from Syria’s war and maritime border rows pose hurdles for would-be investors, analysts and industry sources say.
Some also see proposed fiscal terms as tough, deterring firms despite the prospect of major finds.
Some of Europe’s biggest energy companies, including Norway’s Statoil and Italy’s Eni, who qualified for a long-delayed first licensing round, now show at best lukewarm interest.
“Right now it’s a very high risk investment,” said Mariam Al-Shamma, an analyst covering Lebanon with IHS Energy.
“We see the political situation on the trajectory towards more destabilisation, so that’s basically going to keep the politics in turmoil pretty much as long as the war in Syria keeps going.”
Seated at the Mediterranean’s eastern edge between Israel and Syria, Lebanon offers major gas reserves yet also sits along faultlines of intractable regional conflicts.
Officials have estimated it may have as much as 96 trillion cubic feet of gas under its waters.
If proven, that would give it the world’s 15th largest reserves, according to BP’s 2012 ranking of world gas holders - although recoverable quantities are likely to be a fraction of that given a lack of drilling data for Lebanon.
Still, even a portion of that would be transformative for a country of about 4 million people which relies on expensive oil imports, and may help it become a gas exporter given its limited domestic demand.
Authorities are eager to develop the industry, which they see as key to easing chronic debt and power outage problems.
In March, new Energy Minister Arthur Nazarian urged the cabinet to approve decrees delineating blocks and specifying contract terms - needed to start the bidding process - and vowed political problems would not hold up his ministry.
The eastern Mediterranean’s energy potential has been a source of excitement and speculation since Israel made major finds in 2010.
Since then, Cyprus and even war-torn Syria have started developing and auctioning their own concessions - Russian firm Soyuzneftegaz won a deal on joint exploration of a Syrian block in December - while Lebanon has lagged behind.
One of Lebanon’s biggest problems is the political disarray and paralysis stemming from its sectarian power-sharing system, a legacy of its 1975-90 civil war.
From March 2013 to February 2014, politicians could not even form a government, throwing the first licensing round into limbo because the caretaker cabinet said it did not have the authority to approve the necessary decrees.
The deadlock was broken after a long dispute over which faction would get the energy portfolio, but the decrees have still not been signed.
Ayham Kamel, an analyst at Eurasia Group, said the attractiveness of potential blocks, even the most promising, is incrementally decreasing for companies.
“I would say there are key junctures Lebanon has to go past or key obstacles Lebanon has to overcome before this actually becomes really a material prospect for IOCs (international oil companies),” he said.
“Right now, it is simply an opportunity and nothing beyond that.”
There is also a lack of clarity about how much money there is to be made from any gas they do find, industry sources said.
It is unclear, for instance, how much gas Lebanon would use domestically and how much it would seek to export. Lebanon has serious energy needs, yet its power plants do not use gas.
If it is exported, it is not clear what infrastructure it would use and how much it would cost. Regional conflicts mean joint ventures with Israel or Syria that could ease export costs are out of the question.
One industry source who has looked at Lebanon said the tax regime proposed by authorities, which would tax profits and impose a four percent royalty on gas, seemed too high given the risks.
“Right now they want to sell the butter and the cow. Instead of reassuring the market about the political risks they have freaked everyone out,” the source said.
Indications the government wants to reserve the right to bring in national oil companies to co-develop fields and that it may impose a large local labour requirement have also worried investors, the source said.
Companies in a first licensing round included Anadarko , Chevron, ExxonMobil, Inpex, Eni, MAERSK, Petrobras, Repsol, Petronas, Statoil, Total and Shell.
Yet Statoil told Reuters they would not take part. Shell, Total and GDF Suez declined to comment on the round, while it remains unclear if Eni will participate, a source close to the company said.
Relations with Israel, with whom Lebanon is technically at war, also pose problems. A dispute over the maritime border could affect a number of blocks on offer and tensions could even make it impossible for firms to work in both countries at once.
“The tensions between the two sides simply means that an energy investor cannot be active both in Israel and in Lebanon at the same time,” said a source at Italy’s Edison, which is in talks to buy two Israeli fields.
The disputed region includes over 300 square miles and could contain significant reserves given that it is near the centre of the Levant Basin, according to the International Energy Agency.
Then there is Syria, Lebanon’s historically dominant neighbour which is mired in a three-year-old civil war that has killed 150,000 people and forced millions to flee their homes.
Syria’s conflict has fuelled gun battles, rocket attacks, car bombs and kidnappings inside Lebanon’s borders - none of which are likely to reassure potential investors.
Still, there is a glimmer of hope in that Lebanon’s overall risk rating by most measures is well below others in the region such as Iraq or Iran.
“We’re in Libya, Nigeria, Egypt,” said one source at Eni. “Lebanon is like the Switzerland of the Mediterranean compared to that lot.” (Additional reporting by Stephen Jewkes; writing by Alexander Dziadosz; editing by Jason Neely and David Evans)