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Non-evasive action

The new petroleum industry is already too dirty

by Executive Editors

Lebanon’s authorities have some explaining to do. For reasons no one has ever explained, companies with no qualifications have been allowed to participate in Lebanon’s first offshore licensing round, provided they find a qualified partner. We don’t know who made the decision. Cabinet approved the decree allowing for it in February 2013. According to the law, the Minister of Energy and Water, based on a recommendation from the Lebanese Petroleum Administration (LPA), presented the decree for approval.

Executive has been unable to verify who inserted language to allow companies with no experience to piggyback their way into the sector, but we are certain it is a bad idea. If Lebanese companies want to bid, they simply need to acquire a qualified concern. If they’re too small for such an acquisition, then they’re too small to shoulder any of the heavy lifting — and liability — needed to drill in deep waters. The only reasonable explanation for this loophole is to allow connected politicians and businessmen to turn their influence into income.

It is perhaps unsurprising, then, that in deep water jurisdictions like Lebanon, such a practice is not common, according to Stephen Dow, a lecturer in energy law at the University of Dundee, who specializes in emerging markets. If Lebanon is allegedly following international best practice in establishing a local oil and gas sector, it is off to a bad start.

[pullquote]One company that the LPA presented as ‘Lebanese’, Apex Oil and Gas Limited, is actually registered in Hong Kong, through a process specifically designed to obscure ownership and executive leadership[/pullquote]

Our investigation into two companies that used this mechanism to enter the bidding round illustrates how the loophole opens the sector to unseemly and questionable behavior. One company that the LPA presented as ‘Lebanese’, Apex Oil and Gas Limited, is actually registered in Hong Kong, through a process specifically designed to obscure ownership and executive leadership, and appears to be connected to an international web of shell companies. The LPA did not offer the public any information about Apex in its publication describing the various prequalified companies, nor would it answer the simplest of questions about its jurisdiction of establishment.

The other Lebanese company Executive investigated, Petroleb, openly admits that what it brings to its partnership is connections. Connections should not and must not matter. It is an enormous red flag that a company believes knowing the right people somehow provides a commercial advantage in a bidding process that should result in the company offering the state the best terms being rewarded a contract. It is as though this company knows something we don’t, but something we fear, namely that this sector will be treated the same as every other sector, where connections and corruption are rampant.

But while mistakes have been made, it is not too late to mitigate the worst of their effects while setting the oil and gas sector on a firmer, more accountable footing. First, the LPA should be legally obligated to publish all future recommendations it makes to the Ministry of Energy and Water. Currently, most oil and gas decisions are made by either the cabinet or the energy minister after recommendation by the LPA. While specific, commercially sensitive items — say, the precise terms of bids — could be redacted, LPA decisions themselves should be public. Doing so would add a layer of accountability, requiring ministers to justify their decisions if they deviate from the LPA’s professional advice. Were such a rule in place at the beginning of the offshore licensing process, we would know who inserted the loophole Apex and Petroleb are exploiting into the legal framework. And looking forward, such a rule will be indespensible when it comes time to award multimillion dollar contracts.

Second, authorities should require companies to disclose a minimum amount of information to the public: at the very least, the Lebanese should know who wants to be trusted with extracting any wealth the nation has under its sea. At a minimum, shareholders should be identified, along with the stake they hold in the company; the board of directors or other responsible operating parties should similarly be made known. Finally, some level of financial disclosure would be imperative to combat corruption. The details of such disclosure rules would need to be devised with input from experienced regulators, government officials, economic and policy experts, as well as the affected businesses themselves.

Of course, the final piece of the puzzle would be to learn from our mistakes: in future licensing rounds, the government must close the piggybacking loophole. Fool me once, shame on you; fool me twice, shame on me.

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Executive Editors

Executive Editors are the collective voice of the magazine. Stories written by Executive Editors are the culmination of discussions, brainstorming, research and information-gathering by our editorial team. Over decades, our editorial team has applied a blend of seasoned expertise and a discerning eye to bring you insightful and engaging and substantive reads that eschew sensationalism.

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1 comment

Ziad October 2, 2014 - 4:47 PM

Unfortunately, we do not have corporate governance…REAL performance measurement and corporate disclosure!

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