How Lebanon’s Politicians Plan to Foil the Oil

Flames rise from a petrol tanker after it was set on fire by protesters in the northern Lebanese city of Tripoli on 14 March 2013, to halt it from reaching Syria. (Photo: AFP - STR)
Flames rise from a petrol tanker after it was set on fire by protesters in the northern Lebanese city of Tripoli on 14 March 2013, to halt it from reaching Syria. (Photo: AFP)

The consequences of Lebanon becoming an oil or gas producing state have probably not registered among much of the public – consumed as they are by a lack of economic progress, the absence of basic public services, and crippling inflation that continues to decimate wages. Given successive governments’ track records in tackling these issues, people should be a lot more worried about these initial phases, which are already looking like a piece of Lebanese policy plunder.

Put aside the fact that Israel and Cyprus are far ahead of Lebanon in terms of exploring the very same waters that hold untold riches; forget that what has already been found could ignite another conflict with Israel. Instead, consider for a moment that a government that cannot keep good on its promises to its own public servants to pay them will have to manage up to a third of the economy’s size washing ashore. Yet, the government barrels forward nonetheless.

Now try to imagine how that will be managed by existing government structures.

At present, any oil or gas money coming into the government will, after some expected skimping off the top, go into the treasury. At that point it will first be used to pay off the interest on the public debt, which has basically become a cover for paying off the country’s banks that hold over two-thirds of it.

In turn, those banks will increasingly fund the real estate sector that brings quick and easy profits, and is now subsidized by the central bank to boot. This will continue to push up housing prices, which raises the price of everything else. With affordable housing unavailable, people are forced further away from where they work, forcing them to spend longer in traffic gridlock to get to jobs that pay them a pittance.

With whatever money left, the government will (hopefully) pay its public servants, then siphon off whatever is agreed upon to the different politically-managed funds and institutions such as the Council for Development and Reconstruction (Hariri and co), the Council for the South (Berri and co), and the Council for the Displaced (Jumblatt and co).

Assuming there’s more to go around, all the ministers who have been squawking for higher budgets can then be paid off and people can wait – as they have for decades – for the effects to trickle down.

And this is by no means a hypothetical scenario; rather, it is one that is already playing itself out.

In late February, the energy ministry launched the pre-qualification round for offshore oil and gas tenders – the first tangible action that starts the process of exploration of the coast.

In order to bid for any of the offshore areas where countless riches may linger, a consortium of companies must be set up encompassing at least three firms. While this has become rather standard practice from Brazil to the Persian Gulf, most countries ensure (or at least try to ensure) that a part of the consortium is of national origin. The fact that this has not occurred in Lebanon is likely the first step on a very slippery slope where foreign firms take advantage of Lebanon’s position as an untapped investment opportunity, rather than the other way around.

What most countries do when they start oil and gas operations is set up a national oil company (NOC) that, at the very minimum, can participate in negotiations or be part of bidding consortium. An NOC, even one that did not participate in the first bid round, would greatly increase the nation’s capacity to conduct and monitor operations in the field. The latter is important because large oil companies try to recoup their investments by extracting resources quickly, something that can damage oil and gas fields permanently.

An NOC not only benefits the country in the exploration and production, but also in the much needed areas such as refining the gasoline for cars or purifying gas for power plants, both of which weigh heavily on public and private budgets.

What’s more, the idea of an NOC has been touted by the minister’s own advisors on several occasions. Developing that company now, a few years before the oil tap starts running, would inspire some much needed confidence, because it could take over from the traditional government institutions that have proved so useless at managing sectors in the past.

However, those in a hurry to produce results and deal with consequences later do not always listen to good advice.

By default, some onshore jobs will be created as a result of any operation off the coast. But because there is no legal requirement to hire Lebanese companies, even for ancillary requirements, large international oil companies will likely argue that the Lebanese market is too underdeveloped to serve the sector. Instead, they will probably opt to use their economies of scale and massive global supply chain contracts for these services.

This not only means potential jobs are squandered. As money goes to foreign providers, our balance of payments – the difference between what money comes in and out of the country and the only major economic indicator that remains in the black because of remittances – becomes progressively worse as the sector grows. That means the country’s wealth is exported instead of being reinvested to grow the economy and create jobs.

As there is no national component to the consortiums, it will also make negotiations over what is cost oil (what companies can take to recover their costs) and what is profit oil (what they can then split with the government) even harder to negotiate, especially given whom they negotiate with.

When international oil companies come to the table they will talk to the Petroleum Authority (PA), the so-called independent regulatory body that was appointed last December to manage a notoriously difficult negotiation and monitor oil and gas contracts and procedures. The process of appointment took months because different politicians kept tossing out names of their patrons without realizing that there was actually a professional profile to be filled with some specifications.

What emerged was a six-person body with a member that was the minister’s advisor, another who used to advise former prime minister Saad Hariri and the current premier, and a third who had worked for the finance minister’s foundation. In any case, the energy minister signs off on contracts, not the PA.

And, when the negotiations are finally over and its time to pay the licensing fees to start drilling offshore, the action will likely be technically illegal.

When the maritime petroleum law was being put together, Lebanon’s politicians disagreed on who would manage the funds to be held in a Sovereign Wealth Fund (SWF). Seeing that Israel had found a massive gas deposit off the coast of Haifa, the Lebanese parliament decided to kick the gas canister down the road and add a clause that stipulates the SWF will have its own law. The idea of such a fund came from the Norwegian government that helped Lebanon draft the law.

In theory, and in Norway, such a fund would have built-in mechanisms to prevent money being used in a way that causes a resource curse, a phenomenon where an increase of natural resources can lead to lower economic growth, internal conflict, and increasing corruption – as if we needed more of those.

If you’re wondering how and why a government that cannot make progress on any major policy has been so keen to see the oil and gas issue through, remember that until today, the SWF does not exist. It took decades to pass the current offshore oil and gas law, years to put in place a PA, and a new election is (or should be) around the corner.

Bearing that in mind, it does not seem likely that an SWF will emerge in less than one year when licensing fees for exploration contracts are due to come into government coffers. Instead, that punctured chest of a national treasury, with all its political funnels attached, will have to do.

First published in Al Akhbar English on March 22, 2013

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