A looming shadow

Serious concerns over transparency in Lebanon’s oil and gas process

Lebanese politicians are the least trustworthy in the world, or so its people think — in last month’s World Economic Forum’s Global Competitiveness Report the country scored 148th out of 148 in the ‘public trust in politicians’ category. The oil and gas industry is among the world’s most secretive, with Middle Eastern countries among the least forthcoming with their information, according to the pro-transparency group Revenue Watch.

Put these facts together and it is perhaps no surprise that many Lebanese are confident that any gains the country makes from offshore hydrocarbons will end up not in the new schools and transport networks the country so badly needs, but in the back pockets of the political classes. Assuaging these fears may be difficult, but if Lebanon’s politicians and policymakers are serious about doing so then being open and transparent in the process is the easiest route.

While political meddling has temporarily delayed the march toward extracting offshore resources, so far Lebanon’s Petroleum Administration (PA) has shown an admirable commitment to transparency. All of the representatives on the six-member body — charged with negotiating Lebanon’s agreements with international oil companies — come with international hydrocarbons backgrounds and, transparency groups say, have begun their operations in an open manner. So far they have released on schedule the names of the companies that have applied to bid on Lebanon’s offshore resources, those that successfully pre-qualified and the terms of those qualifications.

Diana Kaissy, MENA coordinator for Publish What You Pay (PWYP) — an organization that campaigns for transparency in the extractive industries, sums up the PA’s record as “so far, so good.” “They have been leading a transparent process as far as the licensing agreements are concerned. So far everything is out in the open.”

A personal approach

But while the PA may have been striving for transparency, there are questions being asked about the process by which Lebanon’s negotiations are being run by caretaker Energy and Water Minister Gebran Bassil. Best practice in oil and gas negotiations is to remove politicians from the fray, with supposedly independent technocrats negotiating with the international oil companies to avoid politicizing the issue. The PA is meant to be that body.

Read the full interview with the minister

A senior source with knowledge of the negotiations told Executive that Bassil has controversially been contacting oil and gas companies, seeking to meet them personally. This is highly unusual and potentially suggests Bassil’s role in the process needs evaluation. “I have never seen this anywhere in the world, not even in deeply corrupt countries like Nigeria and Algeria,” the source said. Several of the largest companies in the bidding round have expressed their discontent at Bassil’s conduct, the source added. “The companies are saying that it is not the way it should be done.”

Lebanon’s 2010 Offshore Petroleum Law strongly suggests that until the bids have been submitted, the minister should not be negotiating with the companies. Article 17 states that: “after the closing date for submission of an application for Petroleum Rights, the Petroleum Administration shall proceed with an evaluation and propose a short list of applicants to the Minister.” It is only after this stage that the “Minister, assisted by the Petroleum Administration, shall negotiate with short-listed qualified applicants.”

Sami Atallah, director of the Lebanese Center for Policy Studies, which has been working closely on oil and gas, said it is important that politics are kept out of the process. “Ideally the negotiations should be run by technical experts with enough skills and financial resources to get the best deal. Politicians should be kept out of it.”

Johnny West, founder of the pro-transparency organization OpenOil, explained that best practice in the hydrocarbons sector demands that it is clear who is responsible for negotiation. “Informal contacts of any kind are going to greatly decrease transparency,” he said. “Best practice requires a clear understanding of who is responsible for negotiating, with as wide a consultation as possible.”

Related article: How political bickering is endangering Lebanon’s gas future

Another major concern for transparency is over the money raised from the sale of seismic surveys. In March Bassil announced that the government had raised $34 million from selling information about their potential reserves, and that number has risen significantly since. Senior figures had been under the impression the funds would be under the control of the PA in order to develop Lebanon’s hydrocarbons infrastructure, including investing in education programs for training young Lebanese. As yet the PA has not received anything.

Quizzed on this issue, Bassil was non-specific. “You know this [amount] is very small compared to what we will be gaining, so I don’t know why you are … there is no ambiguity at all. This money is put in an account on which everybody agreed, and the minister of finance has approved. Without their approval we could not have opened an account,” he said. Asked to specify why there was ambiguity, Bassil said: “You are asking questions I am not really aware of, about details that are not really important.”

This seeming breakdown between Bassil and the PA is also manifest in a dispute over staff — with the body struggling to reach agreements on employments. The body, like many in Lebanon, must legally be made up of the same number of Christians and Muslims, with the six men coming from different political backgrounds. Bassil has allegedly been applying pressure on the PA to appoint certain candidates, as have other politicians. The source said “all the members have pressure on them, but they are doing their best to remain independent.”

One way to reduce the perception of pressure behind the scenes would be to introduce more formal channels of reporting. Currently the Petroleum Administration reports primarily to the energy minister, but has had little oversight from parliamentarians more generally. To formalize a new structure the PA is seeking to establish a system whereby it will report to both the minister, the government in general, the prime minister and the president. It is understood that this body could be established by the end of the year.

This kind of oversight will be necessary if and when Lebanon gets to the extraction stage and begins to make revenues. Under Lebanon’s 2010 Offshore Petroleum Law any revenues from hydrocarbons must first be put in a sovereign wealth fund (SWF) before being spent. The Santiago Principles, an IMF-backed set of 24 guidelines for best practice in managing SWFs, declares as its fourth principle that “there should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the SWF’s general approach to funding, withdrawal, and spending operations.”

The 2010 law is vague on how Lebanon’s fund will be managed, declaring instead that a specific law will be established in due course to regulate it. It is essential that the process of drafting this law is transparent and includes input from all relevant actors, including civil society.

Environmental concerns

One further blotch on the government’s record is the failure to release the strategic environmental assessment (SEA). This document, legally required by the 2010 law, is meant to guide the government and the PA on the potential environmental impacts of any extraction, ranging from air pollution to more catastrophic scenarios such as spillages.

The minister has declared numerous times that the document will be made public, without putting a specific deadline on it. In March government officials declared that the SEA would be released on May 1. That day came and went, and the document is still not in the public domain. As such, the Lebanese public and civil society have little knowledge of the potential environmental damage that extracting hydrocarbons could have.

Bassil himself has proven rather unwilling to discuss the SEA. When asked by Executive why it had not been published on schedule, Bassil said: “I am not aware of this … I am not at all aware that we were supposed to publish on a certain date.” He did insist, however, that the environmental impact would be relatively limited. “I think people are trying to put some ambiguity about something that is really irrelevant.”

Few environmental experts would agree with this assessment. Kris van Orsdel was a senior policy analyst for American environmental group Ocean Conservancy in the period immediately after the devastating 2010 Gulf of Mexico oil spill. He is now a freelance consultant and has been paying keen attention to the eastern Mediterranean, with his environmental fears ranging from pollution to a catastrophic oil spill. Van Orsdel stressed that it is standard industry practice to publish the SEA and that the failure to do so was worrying.

“The currents and species that move through the eastern Mediterranean or live there move through the drilling area.  A robust and sound environmental assessment would look at not only what is at the drilling location but what is the impact to the entire ecosystem, on the water and coast,” he said. “These findings should not only be brought to the regulators and government, but be broadly shared and discussed with communities that could be impacted. The public should have an opportunity to decide if the assessment is complete.”

He cautions that a failure to develop proper environmental standards could lead to disaster. “Having lived in the Gulf of Mexico and worked through the Deep Water Horizon debacle, the largest problem that I fear for the region is a catastrophic event like that occurring,” he said. “Whether that event occurs by accident or is intentional, oil and gas activity comes with managing risk.”

While a spill is avoidable, the impact on Lebanon’s coastline is less so. With it looking less likely that Lebanon will share a liquefied natural gas plant with Cyprus, the country will require facilities for hydrocarbons processing, storage and delivery.

Ricardo Khoury, senior environmental engineer and managing partner at energy consultants ELARD, estimates that an area of 100,000 square meters may be needed for supporting off-shore development in Lebanon. The choice of location is, he says, crucial. “It will have a major impact on the country; it is going to change traffic schemes, labor trends [and] have important implications on waste management,” he said.

While it may be that the government has good advice on this issue, the fact that the SEA has not been published means it is impossible to know if environmental factors are being considered. PWYP’s Kaissy says that in terms of transparency, the failure to publish openly is worrying. “This is something to push for … It shouldn’t be a precedent for other things that will not eventually be published. Let’s get all our facts straight, get them out in the open, and start questioning why it hasn’t been published,” she said.

Voluntarily transparent?

The Lebanese are far from alone in wanting to know where their hydrocarbon revenues go, with a global trend towards transparency in the extractive industries. In April the European Union backed a law demanding that all payments over 100,000 euros ($130,000) made by oil companies to governments must be publicly declared. This follows the 2010 Dodd-Frank law, which issued a similar ruling for American firms (though it is currently being challenged in United States’ courts). Of the 12 firms that have bid to become operators in Lebanon, eight of them come under one law or the other, while a ninth ­— Norway’s Statoil — is also bound by transparency legislation. If Lebanon wants to signal its intent to meet the highest standards of transparency, one method would be to sign up to international treaties — the most prominent currently being the Extractive Industries Transparency Initiative (EITI). The EITI, launched in 2002 by civil society organizations but soon given the backing of the then-British Prime Minister Tony Blair, is a list of seven basic requirements for countries wishing to be declared compliant. Requirements include the conducting of independent audits, the publication by governments of revenues received, and the engagement of civil society througout the process. As such, there would be less space for ambiguity over the country’s spending of funds.

“There are other transparency initiatives that exist but what is unique about the EITI is that it has gained a lot of international support,” PWYP’s Kaissy said, including from the G8 countries. To be declared EITI-compliant countries must apply and then fulfill the desired criteria.

The Petroleum Administration is currently reviewing entry to the EITI, while Bassil indicated to Executive that he was in favor of joining. Asked if there were any potential complications that could prevent the signing of the EITI, he said: “I am not aware of any. Any global initiative which Lebanon can be part of, which abides by the UN regulations and laws and gives us the good image that we deserve regarding what we are doing in this sector, we can be part of it.” This would, at least, assuage some of the doubts.

Note: On November 25th 2013, the Ministry of Energy and Water contacted Executive to dispute this article. While Executive defends the contents above, we have agreed to publish the ministry’s response in full below as we believe in the principle of the right to reply.

 

From the Ministry of Energy and Water

The Article contains false allegations and accusations with no evidence and is based on information from unidentified sources. Such practice questions the author and the magazine’s credibility and integrity; and compels us to clarify the points below:

Point 1- Lack of Transparency and Monopolization

The interest of the 46 pre-qualified IOCs that applied to the 1st licensing round in investing in Lebanon assures the trust they perceive in the management of the licensing round by both the Ministry and the Petroleum Administration (PA).

In addition, International Organizations and Embassies commended the transparency of the licensing round. During their visit to MEW on March 12, 2013, Deputy Assistant Secretary of State for Energy Diplomacy Amos Hochstein and Acting Deputy Assistant Secretary of State for Near Eastern Affairs Lawrence Silverman “praised the Minister of Energy for his efforts and hailed the ministry’s levels of transparency and professionalism in meeting the highest international standards.”

The Ministry and the PA are engaging with prominent international organizations including the Norwegian Oil for Development Fund, the World Bank, and UNDP, to put in-place an efficient and transparent management system while abiding by the best international practices.

Once the bids received, the Minister assisted by the PA, would negotiate with the short listed applicants and report the results to the Council of Ministers where the decision of the award is taken. Hence the Minister cannot monopolize control to the national process.

Point 2- Minister Bassil has controversially been contacting oil companies.

The article confuses between contacts which is part of MEW’s role in promoting attractiveness for investors and negotiations that would take place between the companies and the Lebanese side represented by MEW assisted by the PA as stated in article 18 of the law 132.

The Minister, being the competent authority for managing the petroleum sector, is executing his duties by providing assurances to the companies in relation to political delays. The Minister did not “controversially” contact any company. Any meeting held is based upon the request of the IOCs in accordance with the official channels.

Point 3- PA is seeking to establish a system …

The proposed new governance attributed to the PA in the article is not sought by the PA nor mentioned by any of the three layers of governance (the PA, the Minister of Energy and Water and the Council of Ministers) as per the law 132 ratified by the Lebanese parliament on August 24, 2010. Any change to the established governance structure, including reporting of the PA is not needed nor recommended and it requires an amendment to law 132 by the Lebanese parliament.

Point 4- Ambiguity regarding the financial returns

With regards to the budget of the Petroleum Administration (PA), paragraph 20.4 of Article 20 of Decree 7968 (The Petroleum Administration) stipulates that the Minister of Energy and Water needs to include the annual budget allocated to the PA, within the planned budget of the Ministry of Energy and Water submitted to the Ministry of Finance. In addition, Article 22 of the same Decree stipulates that the PA budget funds shall be deposited in an account at the Central Bank of Lebanon in the name of the treasury, and prohibits the PA from opening bank accounts in private banks or even opening a special account in the Central Bank of Lebanon.

Accordingly, the provisions of Decree 7968 do not entitle the PA to receive funds from any source.

 

Point 5- Breakdown between Bassil and the PA is also manifest in a dispute over staff

It should be noted that the PA is still in the first phase of the recruitment plan, almost a year after operating with no staff members until recently where a very limited and basic number of employees were hired .A proper and necessary structure is being created to manage the PA. The recruitment is based on qualifications and expertise and will meet the highest standards.

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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