Selling a national oil company

Fuad Jawad’s solution for a clean hydrocarbons sector? Himself

Illustration by Ivan Debs

The National Oil and Gas Company of Lebanon. Sounds official. It isn’t. But not for a lack of trying.

Many countries with revenue from mining the “Devil’s excrement” (or Satan’s flatulence, to extend the metaphor and fully capture the industry) have a state-owned company participating in oil and gas operations (a working interest, as it’s known). Why doesn’t Lebanon, asks Fuad Jawad, owner of the National Oil and Gas Company of Lebanon (NOGLC), who is trying to sell his company to the state.

Governments use national oil companies (NOCs) to capture hydrocarbon revenues. Not every country with oil and gas reserves has one (meaning rents can be obtained by other means) and their roles vary from country to country (some are passive partners, focused on regulation, not putting boots on rigs; some actively participate in exploration and production, but only on local developments – often as a mandatory partner; some have outgrown their borders, trotting the globe for investment opportunities like their privately owned counterparts). Jawad has his own model in mind. Operations. Lebanon needs a team of people with industry experience to kickstart a sector held hostage by politics, keep it free from corruption and negotiate with international companies keen to get their own cut from Lebanon’s potential wealth. For Jawad, the republic needs not an NOC. It needs his NOC.

A noble cause

His boots say Texas, but he earned his spurs in Oklahoma in the 1980s. More than once he’s questioned Executive’s credentials. “Have you smelled oil?” Jawad has seen and heard as much as any close observer about Lebanon’s offshore oil and gas prospects. There’s serious potential. Beyond that, the journalist and the oil man differ. The geologist in Jawad is certain Lebanon will actually change the game. Based on publically available data, he predicts Lebanon will surpass Kazakhstan to become the country with the 15th largest proven gas reserves in the world. Today it has none. Jawad agrees final proof comes only from drilling, but decades of experience convince him he is right to make assertions that a journalist, in good faith, cannot.

He persists with the zeal of a true believer, pledging the NOGCL will make an offshore natural gas discovery in three years. A bit more data will be necessary. Ocean-bottom seismic, he recommends. Discoveries will be headline grabbing, he promises. And a national oil company is the only way Lebanon can keep the rats away from the cheese. “Corruption follows the money,” he repeats.

No turnkey solution

The history of oil is voluminous. “Black Gold” has been fueling wars, economies and conspiracy theories for over 100 years. By today’s standards, Lebanon – as a sovereign state – would be best advised to claim ownership of any off- or onshore oil and gas it may have and make the highest profit possible from the sale of any resources that may be found. Claiming ownership is easy (as many countries before it, Lebanon did so by law in 2010). Maximizing profit is not as straightforward.

Decades of experience convince [Fuad Jawad] he’s right to make assertions that a journalist, in good faith, cannot

States can extract their share of resource revenues in a number of ways (including, but not limited to, imposing royalties, taxes, revenue sharing mechanisms, or participation in operations through an NOC). The mix of instruments states use vary widely, and in a 2007 book analyzing oil and gas contracts around the world, consultant David Johnston concluded: “Contrary to popular belief … the type of system used is of minor importance relative to other design concerns. Governments can achieve their fiscal objectives with whichever fiscal system they choose as long as the system is designed properly.”

The Lebanese Petroleum Administration (LPA) – the sector’s regulator with a six-member board appointed to a six-year term in late 2012 – has a state revenue strategy that largely follows international norms. The headline fiscal instruments that the LPA is pushing for include a new tax law applying only to oil and gas companies (a common practice impeded in Lebanon by the need for parliament to pass said law), royalties and revenues sharing (the details of which are subject to company offers during the bidding process for drilling rights).

The 2010 law regulating Lebanon’s offshore addresses a national oil company only briefly. Section two of article six reads: “When necessary and after promising commercial opportunities have been verified, the Council of Ministers may establish a national oil company on the basis of a proposal by the Minister based upon the opinion of the Petroleum Administration.”

For Jawad this is heresy. And he doesn’t hesitate to slam anyone who disagrees as ignorant about operations. In email exchanges, he heaped particular scorn on Valerie Marcel, an expert at Chatham House, who recently argued Lebanon should not establish an NOC, at least at this time, in both an article and longer paper published by the Lebanese Center for Policy Studies. NOCs can be beneficial for governments (many are even serious international players) but they can also be cost centers (especially when staffed before revenues begin to flow) and vehicles for corruption, Marcel argued. Jawad largely dismisses this as academic hogwash.

At first, Jawad’s argument against Lebanon’s proposed fiscal regime for the sector sounds like a flawed one that was first made back in 2014 by Nicolas Sarkis, a Lebanese energy expert. As Executive noted at the time – and pointed out in a meeting with Jawad – the Sarkis argument (that royalties in Lebanon are too low) ignores all of the other fiscal instruments the LPA proposed using to capture resource revenues.

Sarkis’ oft repeated critique gets consistently recycled by a press corp apparently lacking in understanding and the ability to fact-check an argument before presenting it to their readers.

Where Sarkis’ argument ends, Jawad’s picks up. He starts by insisting that the LPA’s plan would leave Lebanon with the smallest share of revenues possible, whereas his plan for an NOC would guarantee a state take of revenues north of 70 percent. The research cited above, however, suggests that the LPA can achieve the same result. Jawad eventually concedes the point, but then swiftly changes tact.

“How do you pull your ear,” he asks. Executive reaches straight up, right hand to right earlobe. “Why do this,” he queries, crowning his head with his left elbow to grab the top of his right ear. Complexity will lead to corruption, he now argues. Worse, he says the LPA is not qualified to assess costs on oil and gas projects, meaning companies may well overbill, which would cut into state revenues as company costs are important in determining the state’s take under the LPA’s proposed fiscal regime. Only someone with operations experience can assess costs accurately and only the right personality (here he means himself) can stand up to and successfully negotiate with international oil companies. (The LPA, as one would expect, disputes this.)

Still pitching

Jawad registered the NOGLC locally back in 2013. He owns 99 percent of the company (4,950 of 5,000 shares), according to the commercial registry’s online database. He’s been trying to sell it to the Lebanese government since 2013. He claims support from various Lebanese politicians (though he avoids name dropping) even as he voices hope that most of the country’s leaders (particularly the war generation) peacefully retire, the sooner the better.

Jawad is trying to convince people he believes are corrupt to support him against their own interests

With himself at the helm, Jawad insists Lebanon’s NOC would be free from corruption – his own strength of will and personality preventing the company from becoming bloated with political appointees. He proposes the company retain only 20 to 25 percent of its earnings for budgetary purposes, with the rest deposited with Banque du Liban, the country’s central bank. He believes in the institution, he says, and hopes revenues would be theft-proof there.

Not alone, but little support

Jawad has been making his argument for an NOC with little progress since 2013. Now that his is not the only voice calling for its establishment, it begs the question – what has changed?

In May, local consultant and sector analyst Mona Sukkarieh questioned increasing calls in the Lebanese press for an NOC, even though existing law clearly says this is a decision to be made years in the future. She criticized the “debate” surrounding an NOC as too shallow, specifically in failing to detail how an NOC would avoid becoming full of political appointees. While she didn’t say it directly, one comes away from the piece with the notion there might be political motives behind these recent calls for an NOC, similar to how the Sarkis argument seems aimed more at undermining the LPA for political reasons as opposed to offering genuinely constructive criticism.

The LPA has been relatively open to press requests, but the fate of the sector (and why there hasn’t been a single meaningful development on the licensing process in over three years) is shrouded in mystery. The July 1 “deal” on moving forward with contracts announced after a meeting between Gebran Bassil and Nabih Berri has still not produced any public results.

Is Jawad a pawn in the game, his NOC argument now hijacked for unknown and possibly nefarious purposes? Not willingly, he insists.

Could his argument (ultimately noble: “protecting the people’s money from theft”) be hijacked to achieve what he’s trying to avoid? Again, he first insists the scientific nature of the oil and gas business inherently prevents unqualified people from working at an NOC. He genuinely seems to believe his argument.

But by his own admission, the state has ignored his sale offer. He’s convinced it’s the best way forward for Lebanon, but doesn’t seem hopeful his dreams will be realized. In the end, Jawad is trying to convince people he believes are corrupt to support him against their own interests. “Who agrees with you? Don’t they want to kill you?” Executive asks.

“Exactly,” Jawad replies. “I’m with you on that.”

Matt Nash

Matt is Executive's Economics & Policy Editor. He has been reporting on Lebanon since 2007 with a focus on oil and gas, policy and legal matters.

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