Following the recent gas discoveries off shore from Israel and Cyprus, Lebanon is keen to kick off exploration activities in its waters. Like many other prospective oil and gas producers around the world, it must draft contract terms, regulations and laws to direct investment behavior in the country and set up institutions that effectively control the actors involved in its nascent petroleum sector. Of course, it will want to do it right.
Successful governance of the petroleum sector is only possible with capacity. The state needs qualified people and competent institutions to design the terms of oil and gas investment and to steer the petroleum sector according to the government’s broader resource development plan. Capacity is also critical for monitoring the performance of oil companies, assessing their development plans, auditing costs and collecting revenues from the sector.
Prospective petroleum producers must focus on building this capacity. But the hitch is that they must do so at a minimal cost. After all, their resource base is still unknown. They do not yet have an accurate picture of their reserves to know whether, how much, when and for how long oil revenues will flow to the treasury.
If general state institutional capacity is high enough, they can draw on these people and processes to build up an existing ministry of natural resources. The experience of countries like Trinidad and Tobago show that in countries where state and human capacity were relatively high at the beginning of petroleum development, the ministry of petroleum has successfully managed the sector.
Conversely, in countries where state institutions are weak, concentrating power in the ministry has not brought about successful governance. For instance, in Gabon, the Democratic Republic of Congo and Sierra Leone, accountability has been poor and the technical and financial performance of the sector has also been low.
The World Bank’s Governance Indicators rank Lebanon in a somewhat similar position to Uganda, a new African oil producer. Both countries rank in the mid-range percentile globally for government effectiveness (Lebanon 43rd and Uganda 37th,) and regulatory capacity (53rd and 49th), but they score a low 19th percentile for control of corruption. In such a context, Uganda’s major discoveries and new production justify — and even require it — to build up its petroleum, legal and accounting capacity. In contrast, in Lebanon, building administrative and regulatory capacity is desirable, but significant investments will only be warranted when discoveries are made.
The existing state institutions are capable enough to devise the terms of exploration activities, with select inputs from sector experts. Clearly, in the immediate term, Lebanon’s strongest efforts in terms of capacity building will have to be focused on establishing strong processes of transparency and accountability. An oil sector in which decision-making and executive bodies are accountable, both to the country’s leadership and to the public, is most likely to promote broad-based national development and avoid some of the most serious governance maladies that often stem from oil.
Accountability is strengthened by a clear, formal delineation of roles and responsibilities among actors involved in the sector, with strong processes for data collection, auditing and public disclosure; and the ability of government institutions to exercise effective control over the activities of public officials and other actors with responsibility for the sector.
As was Uganda’s experience, the interest of both government and the public in the governance of the sector rises exponentially with the size of discoveries made. Strong accountability processes are best implemented before discoveries. A political commitment to getting it right sets the tone for the future.
At the beginning of 2012, Lebanon’s Minister of Energy and Water Gebran Bassil promised the appointment of the board for the Petroleum Administration (PA) within a month, the beginning of the tender process within three months and for the first contracts for exploration to be enacted within the year.
As yet, come November, the sector is stuck in a stasis without the PA; due to political bickering and horse-trading, Lebanon’s political oligarchy is yet to name the board. This does not bode well for the future of this nascent sector.
Valerie Marcel is an Associate Fellow at Chatham House, where she leads a project on Governance Challenges for Emerging Oil and Gas Producers. She is also the author of ‘Oil Titans: National Oil Companies in the Middle East’