It is tempting for resource-poor countries to overestimate the promise of newly discovered hydrocarbon resources, particularly in times of need. Cyprus’ experience after the discovery of the Aphrodite gas field in late 2011 is revealing. Back then, during a time of economic crisis, many placed unrealistic expectations on this potential offshore wealth, hoping it would save the country from financial collapse. The Cypriots also exaggerated the geopolitical stakes involved, which led them to the wrong conclusions. The Cypriot experience illustrates a series of missteps that we are all too familiar with here in Lebanon, and offers precious lessons as the country embarks on oil and gas exploration.
In 2013, Cyprus’ finances were in disarray. In March, Michalis Sarris, the Cypriot finance minister, flew to Moscow in a last-ditch attempt to seal a deal that would secure Russia a stake in Cyprus’ offshore gas resources in return for financial support to spare the country the need to seek a bailout—the dreaded word that evokes the painful Greek experience and comes with harsh conditions attached.
Hopes were high. Just over a year earlier, the country detected significant gas resources offshore, with expectations of more to come. This new resource wealth, it was thought, would turn Cyprus into a gas exporter and provide Europe with a much-needed source of energy that would ease its reliance on Russian exports. A boon for Europe. And certainly, a boon for Russia, if it were to secure a share in these resources to offset Europe’s move away from Russian gas. The geopolitical stakes were high, and all the big players were competing to get a share.
So the prevailing wisdom claimed at the time. But Russia could not be tempted. “Their proposals were to set up a state company with the transfer of assets of gas fields and to offer Russian investors the chance to join and purchase bonds that will be changed over into shares later. Our investors looked into that and did not show interest,” Anton Siluanov, the Russian finance minister, was quoted as saying at the time.
The delegation flew home empty-handed. Days later, a 10 billion euro international bailout was announced, imposing capital controls and the restructuring of two local banks, with substantial losses to bondholders and depositors.
If the scenario makes you feel uncomfortable as you look at Lebanon’s finances, it should. That was Cyprus in March 2013. The outlook for Lebanon today is equally grim.
Misplaced expectations and a distorted reading of the situation are sure to skew conclusions. Cyprus was tempted to misinterpret the facts. Officials hoped, until the last minute, that Russia would provide help because it was supposedly in their interest to spare Cyprus a bailout program that would also threaten Russian citizens’ bank accounts in Cyprus—Russian nationals were estimated to hold around 30 percent of the 68 billion euros deposited in Cypriot banks at the time.
Cyprus failed to pick up on Russian reservations. A source at the Russian finance ministry, speaking to the RIA Novosty news agency in March 2013, said that the Cypriot delegation’s energy proposals in Moscow failed to generate interest from Russian companies. “They invited us to take part in a tender for fields in which the seismic survey work has not been completed,” he said.
It is common for resource-poor countries to get caught up in the hype following the discovery or anticipated discovery of hydrocarbon resources. But a good tip is to assume that international interlocutors, whether big producers or financial institutions, have the necessary experience to put things in perspective where your enthusiasm might be affecting your judgement.
Lebanese authorities have so far struggled to manage expectations. The trend started in 2013, just before the launch of the first oil and gas offshore licensing round, with a massive billboard campaign by the Ministry of Energy and Water telling citizens that Lebanon now has an oil wealth that can be used to develop transportation networks, support the armed forces, and finance the healthcare and education sectors. It continued with officials giving unrealistic estimates of the size of hydrocarbon resources, with one minister even claiming in front of Lebanese University students that “we have more gas than Qatar.” You would expect financial institutions to be more pragmatic, yet Lebanese banks have, one after the other, released oil and gas reports filled with inaccurate data that grossly overestimates the value of an oil and gas wealth that has not yet been discovered. The trend continued with the awarding of exploration and production agreements to a consortium made up of France’s Total, Italy’s Eni, and Russia’s Novatek. It was an occasion to launch a new slogan: “Lebanon is a petroleum country,” repeated by almost everybody, from the prime minister, the cabinet, and MPs, to stories splashed across Lebanese media. Even landowners are now advertising their assets by pointing to the promises of oil and gas, promoting certain lands expected to “overlook future petroleum activity.” It is as if the entire country has joined in a collective frenzy.
No quick fixes
With a public debt of around $80 billion, a total cash deficit of $3.7 billion in 2017, a stagnant economy, and rising youth unemployment and poverty rates, it is no surprise that Lebanese citizens and the political class are looking for a silver bullet. With few real economic prospects on the horizon, authorities are banking on two opportunities to retain confidence and keep hope alive: offshore oil and gas exploration and postwar reconstruction in Syria. But these are both entirely out of the government’s control. When the Syrian war will end is anybody’s guess. The time it will take until Lebanon’s first commercial discovery is similarly indeterminable. If our stars happen to align, these are, at best, medium-term prospects.
In addition, the presence of over a million Syrian refugees is seen by the political class as a guarantee that outside actors will not permit the country’s collapse. After all, it would not be in their interest to transform the millions of Lebanese and non-Lebanese residing in Lebanon into potential refugees banging on Europe’s doors. Europe cannot afford that, the reasoning goes, echoing the belief in 2013 that Russia would save Cyprus to preserve its own interests in the country. This is exactly how Lebanon interprets the international mobilization that resulted in the organization of three conferences this year: Rome II to support the armed forces, CEDRE to support the economy, and Brussels II to help Lebanon manage the impact of the Syrian refugee crisis on the country. On these occasions, Lebanese discourse directed at our international partners has been much more measured. Concerning oil and gas, the government’s Vision for Stabilization, Growth, and Employment, and its Capital Investment Plan, prepared ahead of the CEDRE conference, stayed clear from brandishing the kind of opportunities that cannot materialize in a reasonable period of time.
It is not unusual to resort to a double discourse, one addressing international partners, and another for local consumption. But we are not doing citizens any favors by inflating their expectations. Nor are we doing our country any good by presenting potential offshore resources as a panacea for Lebanon’s economic woes or ruling out a possible collapse simply because it would supposedly not be in the interest of outside actors. Be realistic when assessing your strong points. Do not invoke shaky arguments to rule out risks, prepare for them. And above anything else, keep expectations in line with reality.