Dripping away

How political bickering is endangering Lebanon’s oil and gas future

A “minor delay” is how he put it. In the weeks before the September 2 deadline for the Cabinet to meet and ensure the bidding process over the rights to extract Lebanon’s offshore oil and gas stayed on track, caretaker Minister of Energy and Water Gebran Bassil seemed increasingly incredulous that the country looked set to miss its target, using desperate measures to encourage his fellow politicians to take action. In what appeared to be a faintly disguised bid to force their hands, he even made the implausible claim that Israel could start stealing Lebanon’s resources if the bidding process was delayed. But his efforts were to no avail, and in the end he tried to put a brave face on it, stressing that the bidding would only be extended from November until December and that he would keep searching for a deal. This was followed last week by another extension.

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By Lebanese standards, Bassil had done well to get so far. From October 2012 to July 2013, he made rapid progress toward extracting oil and gas, hitting every self-set target in a feat rarely accomplished in the country. But the fall of the government in March left unsigned two decrees crucial to continuing the country’s path from energy importer to potential exporter.

After numerous debates, and a decision by the Shura Council — Lebanon’s highest legal body — in the end it was concluded that all that was needed for the bids to go ahead on schedule was for the caretaker cabinet to convene for “two minutes”, as Bassil put it to Executive, and sign the decrees. This was the first delay in the process to tap Lebanon’s offshore oil and gas since major international oil companies (IOCs) became involved.

No consensus

The reasons for the failure to meet are disputed, but most agree that colliding political interests were the root cause. Ever since the discovery of offshore oil and gas the energy ministry has become something of a prized possession. Control of the ministry has been the subject of a fierce battle, with Progressive Socialist Party leader Walid Jumblatt keen to get his affiliate Bahij Abou Hamze into the role and Free Patriotic Movement leader Michel Aoun, who happens to be Bassil’s father-in-law, resisting any changes.

More importantly, Bassil has become increasingly isolated from his fellow politicians. A senior source with knowledge of the negotiations told Executive that a deal was agreed with caretaker Prime Minister Najib Mikati to sign the decrees on September 18 but Bassil demanded an earlier date, leading Mikati to walk away from the talks altogether.

There are also concerns about the way in which he is running the bidding process, with critics alleging that he is trying to monopolize control of what should be a national process. “Everyone is agreed that we can go ahead when there is a new minister,” the source said. Bassil himself has, at least publicly, tried to avoid playing the blame game, knowing he will need the agreement of all sides in order to move forward. “We are not here to accuse,” he told Executive when asked who was responsible for the delay. But it appears clear that politicians of all colors are jostling for influence in the oil and gas process.

Counting the cost

This perhaps unsurprising intrusion of politics into the oil and gas process is highly disruptive, says Sami Atallah, director of the Lebanese Center for Policy Studies. “The delay that is being talked about is catastrophic,” he said. “We haven’t seen that the government has shown willingness to meet and sign the decrees. Why is that? Either simply they don’t want to, or they think it is for the next government to do, or there is something deeper where some think that if they postpone it they will have more of an opportunity to interfere in the process,” he said.

While the minister is hopeful the political impasse will be solved within the coming weeks, as Executive went to print there were as yet few indications that a breakthrough was forthcoming. The effect the delay will have depends on whether, as Bassil is hoping, a deal is reached by the end of the year, or the process stretches ahead indefinitely.
The most immediate concern is that major oil companies that are bidding for Lebanon’s resources may lose interest. In total, 46 companies were pre-qualified to bid, 12 of these as operators — the lead companies in the three-company consortiums. Among these were many of the world’s largest IOCs, including Shell, Total and Exxon Mobil.

Map of Lebanon’s oil and gas blocks – click to enlarge

 

 

Already there are signs that a number of them are looking at the political impasse and deciding against continuing their bids. An unnamed oil executive told a local paper in July that already there were a “a few companies that withdrew [from the round], others who are weighing options and others that lost a bit of interest,” due to the political crisis.

From the companies’ perspective, they have already suffered significant losses due to delay. The government had promised to give them the full details of the 10 proposed blocks and which of them were going to be open for bidding on July 1. As such the companies arranged their top seismic experts, some of whom are among their highest earners, to focus on the file for a few months. When the day came and the information was not forthcoming they were left with numerous expensive staff twiddling their thumbs, whom they eventually had to assign to other projects. Getting them back if and when the government does release full data is far from easy, as many have since been allocated on medium-term contracts to other countries.

This, according to Bassam Fattouh, director of the Oil and the Middle East Program at the Oxford Institute for Energy Studies, is indicative of a wider problem of IOCs losing faith. “It is all really about confidence and trust. The problem is, if you are going to start delaying and not being able to fulfill what you promised, some of the companies may lose interest,” he said.

The need to hold on to these companies’ interest is potentially made more acute by the current global situation, as international oil companies are faced with more options for extracting natural gas. In the past decade, outside of the eastern Mediterranean, Australia, South Africa and Azerbaijan are among the countries that have announced major plans to extract large amounts of new gas, making it somewhat of a buyers’ market. “It is not like this is the only opportunity with gas, they are finding it almost everywhere,” Fattouh said.

Wading through

Bassil appears characteristically unperturbed. “They [the companies] will not lose interest because what will matter at the end of the day to these companies is if the resource exists — and it exists,” he boldly told Executive. This is not strictly true — though you would not know it from the government-sponsored billboards that pitch oil as Lebanon’s panacea, the coffer for its ailing transport sector and armed forces. There is as yet no absolute proof that Lebanon has any oil and gas, let alone enough to make it commercially viable for extraction. While the seismic surveys have been positive, until the companies drill down into the seabed it is impossible to know exactly how much Lebanon has.

But Bassil is perhaps right to point out that Lebanon does still have a relatively strong hand — the sheer number of firms that applied for the bidding process mean that a few dropouts would not be disastrous. Carole Nakhle, an energy economist specializing in hydrocarbons, agrees that the delay is not ideal but thinks that the companies are not yet likely to be heading for the door en masse. “It is common in developing countries to postpone licensing rounds. Lebanon is not unique … I feel that international companies do expect delays to take place in developing countries,” she said.

A government-sponsored advert reads “Our country now has oil to develop a transportation network”

 

So while perhaps oil companies may not yet be ready to abandon Lebanon’s hydrocarbons, the delay may increase their leverage in deal making. The fear is that when, eventually, a deal is reached to continue and the six-member Petroleum Administration begins its main task of leading the negotiations with the IOCs, the companies will try and push the cost of any further setbacks onto the government.

“It puts the Petroleum Administration or the government in a weaker position to negotiate with these companies,” Fattouh said. “[The companies] will look for better terms, in terms of revenue distribution. And also try to put force majeure clauses — if [a political crisis] happens and the companies are not able to deliver, [they are not responsible].”

A looming curse?

Perhaps the biggest danger of Lebanon’s politics seeping into its oil and gas bids is not in delay, but actually in extraction. In their seminal 1995 paper, “Natural Resource Abundance and Economic Growth”, Jeffrey Sachs and Andrew Warner showed that countries with natural resources often had lower growth rates than similar countries without hydrocarbons. This is because the effect of resources is to reduce competitiveness in the other sectors of the economy — the so-called resource curse.

This was backed up by a 2012 joint study between the World Bank and the Brookings Institute which concluded that resource-rich countries that lack proper governance tend to see an increase in corruption over time, as compared to non-resource producers. In effect, the evidence suggests that if politicians don’t work together oil and gas could make Lebanon worse, not better.

Martin Skancke, a global consultant who advises states with newfound hydrocarbons, believes that the most important way a country can avoid wasting their wealth is by building a broad consensus. “There should be an effort to reach out across different political bodies, parties, interest groups and religious groups to make sure you build something on solid ground and stability,” he said. Clearly this has yet to succeed in Lebanon, and without it the chances of the country using its resources in a logical fashion are slim.

When it comes to managing the sovereign wealth fund that revenues will initially be directed to under the 2010 Offshore Petroleum Law, best practice would be for all political parties to agree on how that money will be used in the long term.

Skancke said it was important that there was little political infighting in the process and that the fund is seen to be neutral. “If you have a sovereign wealth fund you need to be a long-term investor and a long-term investor cannot change every time there is a change of government,” Skancke said. He added that if there is political infighting “the risk of macroeconomic instability is much larger because investors will not know how spending will evolve over time if there is no broad consensus and no broad guidelines for it. The risk of mismanagement of the fund is large.”

Lebanon’s delay may only be minor right now, but it is perhaps emblematic of a worrying trend of political interests creeping into a sector that moved ahead impressively in the past year. If offshore resources, as with many of Lebanon’s policy issues, become a battleground for political interests, ultimately the chances of it helping the country will be reduced.

Joe Dyke

Joe has extensive experience covering the Syrian crisis, oil and gas, and Lebanese government and regulatory authorities, among other topics. He was Executive's online editor from 2012 to 2014, and led the Economics & Policy section from 2013 to 2014.

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