BusinessQ&A

Makram Azar

by Natacha Tannous
written by Natacha Tannous

E   Where do you think the next economic bubble is?

It’s the broadly defined technology sector, in which you need to differentiate how you approach and analyze each one of these ventures because some of them will be very successful – as the 90s showed us with Amazon, Google, Apple, etc. – yet, many of them will not be successful. So with experience you learn how to do due diligence on companies, but I think there are certain aspects or segments of the technology and media sector that people are excited about today that you have to analyze very carefully.

E   What are the big changes you have noticed since the crisis in the banking industry?

There have been many changes in the banking industry … [it] is in a much better place now, from a regulatory and compliance standpoint. I think, from a deal-making standpoint, there was obviously more excitement for leverage before the crisis that has come down a little bit, though we are seeing some improvements in these levels over the last couple of years. However, in terms of mergers and acquisitions (M&A), the activity and deal-making is back to the levels we had reached before the 2008 crisis, and one can observe many large transactions that have been announced over the last few months on both sides of the Atlantic. Therefore, I think M&A is back, and the backdrop is relatively healthy at the moment, but with the uncertainty recently created in elections around the world, there has been a bit of caution, so we will see what happens next.

E   If we turn to the United States, President Trump’s economic agenda now seems a little bit uncertain given what happened with the healthcare bill. Do you think there will be a major, or even a small setback with the tax reform, given the divisions that exist in the Republican Party?

I don’t have a crystal ball, but I don’t think the same would apply to taxes [as] usually the Republican side is in favor of reducing taxes. They will therefore probably be less resistant than on the healthcare reform. On the tax side and deregulation, I expect those to go through. We are, however, still in the early days of the new administration.

E   With regard to the UK, now that Article 50 has been triggered, what do you think will be the downside for the country?

The British Pound has already taken a hit following the referendum, so I don’t expect much more pressure there – it even reached levels under 1.20 against the [US] dollar on the cable – and now we are back to a better level. But, I believe it is a double-edged sword, as the low currency makes investments in the UK, as well as exports, more attractive – it works both ways. Moreover, following the referendum, the expectations were for a much more negative economic performance, but the reality surprised everyone. In fact, there has been a lot of resilience in the UK economy following the Brexit referendum and the decline in the pound. The next couple of years will probably provide some uncertainty now that Article 50 has been triggered, and uncertainty is never really good for investments or for people with a long-term view, given that they need to have visibility. It is, however, in the benefit of both the UK and the rest of the European Union to agree to a good deal, because the EU also benefits from the UK. If you look around this neighborhood, whether Belgravia, South Kensington or London more broadly, there are many Europeans that live here and work in the City, so the UK should be able to negotiate a reasonable deal that is beneficial to both parties – as Prime Minister [Theresa] May has mentioned several times. I, however, believe that it will take time to have that visibility, and it will also depend on the elections in France, Germany and other countries that are important for the European Union, and on the [upcoming] negotiations. So, it’s [too] early to say. However, we have seen, through the recent announcements from the Qatari delegation, billions of pounds [worth] of investment in the UK, irrespective of Brexit, and the same was announced by other countries from the Gulf over the last months. The UK has a long history of being a good trading partner for many regions around the world, not only for Europe. I strongly believe that given the importance of the City of London – not only as a financial center for the rest of Europe, but also as the deepest pool of capital in Europe – it’s in the benefit of both [the EU and the UK] to reach a good deal, and I think the worst case scenario, as Prime Minister May has mentioned, is no deal, instead of a bad deal.

E   You just mentioned that politics will continue to be at the fore in Europe, so what do you think is the next shock in Europe? A Frexit, with France leaving the EU?

Well, that would be a big one, but nothing is surprising anymore. I think the fact that there are two rounds in French elections, unlike the referendum in the UK, or the elections in the US, make it harder for Mme [Marine] Le Pen to be elected in the second round on May 7. But, we’ve been surprised before, both by Brexit and the US elections. It’s hard to predict, but Germany and France are at the core of Europe, so obviously if one of the two goes, it would be a big blow to the concept of Europe.

[pullquote] The Dutch elections showed a new turn in the populist movement in Europe, and the next big test will be in France [/pullquote]

E   So, where do you think we will be in December 2017?

Ha! I learned a long time ago not to make such predictions because I was actually in Davos – where I go every year – in January 2008 with all the big CEOs of the Wall Street banks, alongside the private equity firms, and we all saw what happened less than a year after that. When I went back in January 2009, many of those CEOs had lost their jobs. So, it is hard to predict what could happen in less than a year from now. All the more so, 2016 was another lesson; it was very hard to predict the black swans that were Brexit and Donald Trump in the White House. Nevertheless, I’m cautiously optimistic. The Dutch elections showed a new turn in the populist movement in Europe, and the next big test will be in France. If the French elections go as planned, there will be less to worry about. Moreover, on the US side, at least from an economic standpoint, [things] are going well, so on that basis I am cautiously optimistic for the rest of the year.

E   Based on that, do you still think the euro will still be around in 10 years?

Well, if I cannot predict one year, it’s hard for me to predict 10! But it really depends on the French elections, so we will find out soon.

E   You are originally from Lebanon, if you were the Lebanese president what would be the first thing you would do?

I left Lebanon a long time ago, but I still take a vested interest in its politics and future direction. It’s obviously a tough question, and I think it would take a lot of political headache to achieve, but I strongly believe that if we can overcome the religious fragmentation in Lebanon, it would be a great achievement – so, any move in that direction would benefit the country and would benefit the region because more religious tension can only lead to conflicts, pressures and obstacles.

E   How attractive do you think it currently is to have deposits in Lebanon?

For a Lebanese person it is very attractive because they get a very attractive return on their deposits, even in dollar terms, much more so than what they can get outside the country. It is a timely thing that you mention, but in the context of Barclays [and Eurobonds], we raised $3 billion in the last [few] weeks for the Republic of Lebanon, which is a record amount of capital raised for the country in a series of transactions, as there were three tranches. We saw demand of over $17.5 billion for the $3 billion that we closed on, so it was almost six times oversubscribed. Interestingly, a lot of the demand came from Lebanon, obviously, but a record level of demand came from international investors, much more so than at any point in the past. This also highlights that Lebanon has become increasingly attractive as a destination for foreign investors, which is a good thing to see in the context of Lebanon, given what is going on in the Levant.  It’s a positive indication of the direction of travel that Lebanon is taking, particularly after the recent election of the president and the more peaceful arrangement that the parties have reached – all the more since the economy is on a better track now as well. So, to answer your question, deposits are attractive for both Lebanese investors and foreign investors.

E   Are deposits/Eurobonds the least risky investments in Lebanon, appreciating the level of political risk in the country?

I believe the components are very linked, in Lebanon in particular. Given the interconnection between the central bank and the Lebanese banks themselves being the main buyer of sovereign paper and the bonds, I think the three components are very well linked to each other.  So, I don’t think it is very risky to invest in deposits in banks because those are very well regulated by the central bank, and have been for a very long time, and in turn, I think the Lebanese banks support the government in their bond issuance, so the three components are there to safeguard the security of the investments of investors and depositors.

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Economics & PolicyGold Trade

Glittering in the shadows

by Sunniva Rose
written by Sunniva Rose

Lebanon is historically notorious for its lack of metals and similar natural resources. This makes it even more astonishing that almost one quarter of Lebanese exports are constituted by a precious metal: gold. In 2016, non-monetary gold accounted for 23 percent of total exports, which were worth a little over $700 million according to customs data. Most of this gold was exported to South Africa.

Since mining of gold is non-existent in Lebanon, a second look at trade figures confirms that Beirut mostly acts as a transit point in the gold trade. It imports gold from Egypt, which is a smaller producer, from Switzerland, which is not on the list of the top 100 producing countries, and from several West African nations. Imports of non-monetary gold in 2016 reached nearly $1 billion, or about 5 percent of total imports.

According to the United Nations trade classifications, gold is considered monetary only when it is held in reserve assets by monetary authorities and related institutions. Non-monetary gold includes bullion, including coins, bars or ingots, and gold in powdered or other unwrought or semi-manufactured forms.

Although imports and exports of gold have a ballooning effect on Lebanese trade statistics, there is very little value-added or actual contribution of the gold trade to the economy. “Numbers are not important enough for gold to really contribute to the Lebanese economy. Even though jobs are created in the jewelry sector, margins are small,” explains Chris Boghos, who, along with his father, manages  the family business Société Boghos that trades in gold both regionally and internationally.

Investigating gold as an important element of the Lebanese economy may thus be a fool’s errand, and any assumption that the high value of our gold exports translates into substantial contributions to our GDP would be misguided. The lure of gold nonetheless is not to be underestimated in the context of our economy. There are many questions about possible links between the gold trade – here as in many other countries – and concerns over organized crime. On the brighter side of this precious metal, local consumption of gold has productive contributions from jewelry production to investments.

A small node by global standards

Lebanon is the 27th largest buyer of gold in the world, behind regional hubs such as the UAE, Turkey, Jordan, Kuwait and Iran, while the biggest importers are Switzerland, China and India, according to the United Nations Conference on Trade and Development (UNCTAD). In terms of exports, Lebanon ranks 61st, far behind global producers such as South Africa, Russia, and Burkina Faso.

There are only a handful of refiners in Lebanon. According to one trader, these are not registered with the London Bullion Metal Association (LBMA), which lists bars and refineries that are acceptable in London and in other markets. For reasons that are unclear; gold from West Africa transits through Lebanon before being exported to be refined. Part of it is then re-imported and stamped with the name of LBMA-recognized refiners such as Valcambi, Metalor or Rand, confirming its value. Lebanese customs figures show that a little under $300 million of gold remains in the country. Some is bought by jewelers, some by investors.

As a prominent Lebanese trader puts it, gold has always been a safe haven in uncertain political times and has an added lure to local investors. “Do not forget we are in the Middle East. Especially in Lebanon, people have lost their money and savings many times. The political risks in the area make people purchase more gold. Even though Lebanon has a strong banking system, there is always more comfort in knowing your money has been invested in gold. It is a measure against inflation and is the real essence of having safe wealth,” says Boghos.

In 2016, 41 percent of gold imports came from the West African countries of Togo, Ghana, Benin, Guinea, Mali and Burkina Faso. When asked why gold transits through Lebanon rather than being exported directly to refineries in countries like Switzerland or South Africa, professionals are vague in their answers. “Historically, Lebanon has always played the role of a commercial intermediary between Europe and Arab countries, East and West,” says  economist Elie Yachoui.

“We have kept a little of this role. Of course, it helps that we work with Lebanese gold exporters based in West Africa,” confirms a trader speaking on condition of anonymity. He adds, “The same trader usually has offices in different countries and can easily transfer the gold from country to country to centralize his exports from one place. This strategy is adopted because his gains are small, around 0.25 percent; he would make maybe $100 per bar that is worth $40,000.”

Whenever terms like gold mining and impoverished African nations appear next to each other, questions over illegal practices and money laundering tend to come up in the media and international civil society. Thus, it cannot be a surprise that gold trade from West African countries is a focus of investigations by a four-year-old network called The Global Initiative against Transnational Organized Crime, which works on human rights and development issues where organized crime is considered to be increasingly pertinent.   

[pullquote] If an NGO has reported that a mine employs children, Switzerland won’t trade with it [/pullquote]

Marcena Hunter, a senior research analyst with The Global Initiative and one of the authors of a recent report on the financial flows linked to gold mining in Sierra Leone, confirms that practices are engineered to obfuscate where gold originates and could have some Lebanese involvement. For example, Lebanon imports from Togo and Benin, which are not significant gold producers, she says. “It is likely [that] a lot of the gold being exported out of Togo has been smuggled into the country. Togo itself produces very little gold. Previously, a lot [of] gold exported from Togo was thought to come from Ghana; currently a lot is thought to be smuggled from Burkina Faso,” she wrote in an email to Executive.

Another reason why West African gold transits first through Lebanon before being re-exported is that it becomes harder to trace, explains a second Lebanese trader, who also spoke with Executive on condition of anonymity. According to him, a lot of small refineries in Switzerland cannot work directly with many West African mines. “If an NGO has reported that a mine employs children, for example, Switzerland won’t trade with it. So maybe professionals are avoiding these regulations by using Lebanon as a transit point,” he says.

One of the examples of an effective naming and shaming is the report published in September 2015 by the Swiss NGO Public Eye, which accused a major Swiss refiner, Valcambi, of importing gold from a non-producing country, Togo. The gold was allegedly smuggled from Burkina Faso, where it is extracted by children and adults “under abysmal conditions.” In the same report, Public Eye mentions that Wafex, a trading company owned by the Lebanese Ammar family and based in Lomé, the Togolese capital, played a role in exporting this gold. Executive was unable to get in touch with Wafex on the phone or through social media to obtain their comment on this report.

After the report’s publication, Valcambi promptly issued a press release in which it said that all “refining activities regarding imports from Togo” were suspended pending an internal investigation. Last February, Valcambi announced that the investigation revealed no abnormalities. In an email to Executive, Valcambi referred to “stringent” Swiss laws against money laundering and the financing of terrorism and emphasized that monitoring of compliance with the law is done by the Organization for Economic Co-operation and Development (OECD). Valcambi claimed that large Swiss gold refiners have adopted OECD and LBMA due diligence recommendations to avoid getting entangled in child labor or human rights violations.

A variety of explanations

According to Lebanese customs, Switzerland is one of only two export destinations for non-monetary gold that transits through Lebanon. However, it is the smaller destination and seems to be becoming less important in this regard when compared with gold exports to South Africa. In relation to Lebanon, the role of this country grew from 71 percent of Lebanese gold exports in 2013 to 89 percent in 2016.

One explanation why South Africa’s share has been increasing, put forward by one of the anonymous trader mentioned above, is that South Africa’s anti-money laundering and anti-child labor measures are less strictly observed than in Switzerland. None of the South African refineries, such as Rand and Gauteng, nor the South African diamond and precious metals regulator responded to Executive’s questions on this matter by the time this article went to print. The Ministry of Finance in Lebanon, which supervises local customs authorities, also declined an interview. 

However, this does not automatically imply that anything sinister is going on. One of the traders who spoke to Executive anonymously stressed that Lebanon implements strict due diligence rules, and that South Africa has similar regulations to Switzerland. He instead pointed to a commercial explanation. “The reason Lebanon exports more to South Africa is that it’s cheaper. The price difference for refining gold is approximately 5 to 10 cents on the ounce, which is important to us,” says the trader, whose company is a major player in the Lebanese gold market.

Lebanese customs figures show that in 2016, gold exports to South Africa tripled (up 226 percent) in terms of value in comparison to 2015. “We decreased our commissions, so we are able to increase our market share. People who were selling through Dubai realized we had better rates,” disclosed the trader, without giving further details on prices. He maintained that his Lebanese company offers other advantages to sellers. “We pay the gold trader on the spot, as we trust our clients. However, most buyers wait until the gold is refined to know how much it is worth, which can take a few days.”

Another shift in trade could be related to taxes. As Boghos points out, Dubai imposed a 5 percent tax on imported gold jewelry in early 2017, and this could have played a role in a recent increase in the amount of gold transiting through Beirut.

Jewelry has its own demand

What complicates the picture further is that Lebanon doesn’t only import gold from West Africa or newly refined gold from other countries; one important component of imports is scrap gold. Jewelers acquire scrap gold from old jewelry and other golden items for reuse in new pieces. Jewelry is Lebanon’s number one manufactured export, with over 1,000 gold workshops and small factories that for the most part export to the Gulf, Boghos says.

[pullquote] Dubai imposed a 5 percent tax on imported gold jewelry in early 2017, and this could have played a role in a recent increase in the amount of gold transiting through Beirut [/pullquote]

Trade sources for scrap gold can vary according to geopolitical circumstances, as was the case for Egypt last year. In 2016, Lebanon imported 30 percent of its gold from Egypt, a relatively new trend. In 2013, only 9 percent of gold came from there. “Following the recent political and financial instability that Egypt has witnessed, people started selling their jewelry, which is then melted, for extra cash,” explains one trader.

According to the same trader, unregistered scrap gold is also smuggled into Lebanon from Syria, presumably for tax avoidance or even attempts to circumvent sanctions against the regime in Damascus. “According to Lebanese law, you are supposed to declare any gold that you import or export, but no one will notice 5 or 6 kilos of gold bars in a passenger’s pocket. There is no tax on raw gold, however, which means that big quantities are rarely undeclared. Jewelry has a higher chance of being smuggled, as it is taxed between 5 and 10 percent,” the trader explains.

As indicated by the import and export data, gold consumption in Lebanon can be estimated at a little under $300 million for 2016. In constant price, taking December 2015 prices as base, local consumption went up 10 percent between 2015 and 2016. According to a source, this increase in consumption is linked to the fact that Lebanon slowly started moving toward more transparent banking when it promised, back in May 2016, to adopt the OECD’s Common Reporting Standard (CRS) starting in 2018.

The CRS facilitates – supposedly automated – financial information exchange between countries that is relevant for taxation in a similar way to the United States’ Foreign Account Tax Compliance Act (FATCA). “People who do not want their banking information revealed started buying gold instead,” the source adds.

Even without the added potential usage as means to avoid taxes, it is no simple task to assess reasons for gold demand and movements in the trade of gold. In the turbulent recent years of the global economy, this precious metal has seen prices fluctuate greatly – on a five-year trajectory from April 2013 to April 2017 one can find a high of almost $1,800 per ounce and a low of little more than $1,050, as well as a price near $1,300 in April 2017.  Demand also reflects what investment recommendations are in vogue at any given time and how asset allocations are distributed between gold and other securities.

According to Boghos, another factor driving up local gold demand was a drop in prices late last year. “In November and December 2016, we saw prices go from $1.3 the ounce to $1.128 per ounce. As prices were cheap, demand quadrupled. Lots of this gold will be saved, and lots will be sold again to make a margin. It will then be recast and transformed into a new bullion or jewelry,” he says.

This gold might find its way into many different hands. “Gold is bought by households as gifts for newborns, baptisms, communions, weddings and divorce, engagements or savings. Companies also buy gold as bonuses for their employees. Like banks, they also diversify their investments by buying gold,” Boghos adds.

However, buying gold as an asset only represents about a quarter of local consumption, reckons one of the two traders questioned by Executive. “Out of the $300 million that is bought in Lebanon, we cannot know what amount stays here. A lot of expatriates that come to Lebanon for the summer buy gold jewelry which then exits the country unregistered,” he explains. As for now, he expects prices of gold to go up because of rising geopolitical instability; an opinion which Boghos shares, “In this case, there will be even more demand and consumption,” concludes Boghos.

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LegislationOil & GasSpecial Report

Transparency cookies are in the oven

by Jeremy Arbid
written by Jeremy Arbid

The tools to monitor Lebanon’s hoped for oil and gas sector are nearly on the workbench. In January, the government committed itself to joining a global transparency initiative, and in March, a draft law promoting the future sector’s transparency was finally shown to the public. Taken together, they could help Lebanon build a clean oil and gas industry.

But, the draft law is no longer being billed as an anti-corruption bill. Instead, the law, under preparation for at least the past two years, is now being touted as legislation to support transparency in the petroleum sector. The name change can be likened to a marketing tool – the word corruption was in the law’s title, it would suggest that there is a battle to wage, and that the sector is already dirty. Pitched differently, as promoting transparency, represents a glass-half full approach – it both sounds prettier and presents a better image.

The law has passed through several drafts in the last couple of years, which Executive covered in its 2015 and 2016 special reports on oil and gas. In late March, it was  released to the public and is now ready for Parliament to debate and vote on.

Earlier this year, Lebanon committed to joining the Extractive Industries Transparency Initiative (EITI). The EITI is a voluntary global transparency initiative led by governments, companies and civil society, and is a tool to facilitate the disclosure of information. Its standards include releasing such information as: the allocation of rights, production data, revenue transfers to local jurisdictions, the industry’s social impact, and revenue management. It promotes transparency by encouraging the government, the companies awarded exploration licenses, and civil society to share information and decide what additional data should be published.

The draft law goes hand-in-hand with EITI by codifying its current standards. The law would mandate that signed contracts, the terms of the licenses, beneficial ownership, as well as payments from companies to the government should all be published.

“Every single item found in the EITI is there; it is a very good reflection,” says Diana Kaissy of the Publish What You Pay NGO on the merits of the draft law. The main distinction between the proposed legislation and the EITI is that the latter involves for civil society. “That’s the big advantage of the EITI. But the EITI is tied to political will, so even if that disappears we could fall back on the law,” Kaissy tells Executive.

If the release of so much data were mandated by the draft law, the EITI could then be used to collect other information, such as data on environmental prudence and protection, social impact and corporate social responsibility. Were the law ratified, Kaissy says, “We can really go wild and be very creative in the EITI report.”

It is not clear whether Parliament will vote on the law before the government signs its first exploration contracts in November. And, to be truly effective the law would require auxiliary legislation. The bill points to a yet unlegislated anti-corruption commission as the arbitrator when compliance comes into question or infractions occur. Walid Nasr, the Lebanese Petroleum Administration’s point man for strategic planning, downplayed the lack of that body in the near-term. “Many of the provisions of the [draft] law are related to publishing information and don’t require any other party,” Nasr tells Executive, adding that much of what is written in the draft law is already integrated in oil and gas regulations. But, if there were infractions, like bribes, or non-compliance by the government or companies in providing or publishing data, then the anti-corruption commission would definitely matter.

As for the EITI, Nasr says the government has already committed to joining and is waiting to sign contracts later this year to learn which companies will be participating in the transparency initiative. Civil society will join the government and companies, but faces a long road of preparation to choose its representatives and demonstrate their capacity and credibility for enforcing oil and gas transparency. “This is something civil society needs to work on to have really strong representation and an active role,” Nasr says.

The EITI is coming, but it will be up to civil society to force the government to stick to its promises of transparency.  The onus is on civil society to figure out how it will bring together non-profits that have competing interests. The government will move forward regardless, with or without the EITI and the draft law. Civil society must be an active partner in the former and must lobby Parliament to ratify the latter.

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Oil & GasQ&ASpecial Report

Maximizing oil and gas potential

by Matt Nash & Jeremy Arbid
written by Matt Nash & Jeremy Arbid

In an effort to maximize the benefits for the local economy from the oil and gas industry, the Lebanese Petroleum Administration (LPA) has included provisions in the model exploration and production sharing agreements to help domestic companies. The contracts state that when oil and gas companies need to procure goods, they must give preference to qualified local suppliers, even if the suppliers’ price is up to 5 percent more than a foreign providers’. For services, local contractors will get preferential treatment, even if their prices are up to 10 percent more than a foreign supplier. Executive sat down with Walid Nasr, the LPA’s head of strategic planning, to take a closer look at how a Lebanese oil and gas sector might impact the private sector.

E   Take us to Day 1, the contracts have been signed, what happens next?

In the contract, the companies are required to operate from Lebanon, and are required to open a branch locally. This is where the first activity starts; they have a branch, they recruit [a] few people to work at the branch, and then what we mean by operating from Lebanon is that they need actually to do the services and logistics from Lebanon – unless there’s big justification not to do so. But, in principle, this is what the contract says. And then, they need to use as many goods and services from Lebanon as are available, and this will grow gradually, of course because we don’t have an existing oil and gas industry in the country. But, we have the potential to have one, and it depends on which services we are talking about. For example, for legal and financial services, shipping, transportation, communication, I think with some effort from the Lebanese private sector, they can start getting involved. In the contract, we have a provision to give incentives for local goods and services, so if the Lebanese companies offer the quality and the services required by the operator, they’ll get preferential treatment. It’s also in the regulation that all contracting and subcontracting has to be done by public procurement. This is extremely important because the operators will have to procure every single thing they need [publicly], whether it’s goods or services, and Lebanese will have the opportunity to apply, compete, and get those contracts.

E   And will that be done via the LPA’s website?

No, this will be done by the companies directly. We’re working on [the details of what this will look like], but definitely [all procurement notices] will be public. The tools and the [exact mechanism are] being designed now and will be agreed upon with the operators. But, the important fact is that it [will be done publicly]. Everyone will have the opportunity to see what’s required, and apply if they have the services and can compete.

E   Aside from contracting and subcontracting incentives for local businesses, is the LPA working with the private sector to prepare for the birth of this industry?

It’s not our job to do it, and the operator will have to [contract out various goods and services]. I think the Lebanese private sector is good enough to grasp opportunities, establish itself, and provide these services. Of course, we would encourage that, but it’s not the LPA’s job to [get the private sector ready]. So, the operator will have to say, ‘We need such and such services,’ and any company that can provide [them], Lebanese or non-Lebanese, they can compete and get it.

E    When it comes to project finance, are there are big opportunities for local banks or will most of the operations be financed from abroad?

Typically the operator [will finance the project] because we require a consortium with a minimum of three companies [one operator and at least two non-operators] for prequalification, and the financial requirements are high. The operator needs to have, at minimum, total assets of $1 billion, and non-operators [must have] $500 million, so already the consortium will have a lot of capital available. And, those three companies – they may be more, but at least three – usually have their own funding sources. But, of course, as with all the services these companies will need, if Lebanese banks wish to, they can provide certain financing for these companies and agree on some things. But, by law nothing is mentioned, the operator is free to get its funding from anywhere.

E   Oil and gas projects, especially in the exploration phase, tend to be valued in the hundreds of millions of dollars. In other emerging markets, do local banks play a big role or does the finance come from abroad?

I’m not aware of the specific cases of local banks. But, what I know is that which is usually industry practice for any business – the operator will search for the least expensive source of funding. So, I presume they are open to getting funding at the cheapest rate. If Lebanese banks are willing to get into this venture and provide cheap financing, or at least competitive financing, I think they have an opportunity. But, we need to always emphasize that exploration is risky. If the bank or the operator wants to get into an agreement on funding this risky operation at a competitive rate and they both agree, they can do that.

E   What about local insurance companies, I know they were asking for regulations allowing local insurers to pool capital and requiring contract winners to insure projects locally. Did that ever get written into the rules?

No, they have to compete. If they can provide the operator with the coverage that operators need at a competitive price, why not? But, that’s their job.

E   One could argue a Lebanese oil and gas industry could boost the country’s dormant capital markets. The model contracts require each company that is part of a winning consortium to open a local branch office. Did you consider requiring companies to turn the consortium into a locally registered company, some or all of which must be floated on the Beirut Stock Exchange?

I think it can be done in the future. But, we need to start somewhere. It’s a frontier area, it’s our first licensing round, first well to be drilled, so let’s take it step-by-step.

E   Finally, should natural gas be found offshore, as many expect, what are the plans for using it domestically?

We’re planning, with the ministry of energy, to start increasing the demand for natural gas in Lebanon. First, it’s environmentally better, not as much as renewables, but it’s much cleaner than using fuel oil or diesel oil, and it’s relatively cheaper. If we manage to extract our own gas, we’ll be using indigenous gas and ensuring energy security. We did studies on this. The first client [for local gas] will be the power generation sector. Of the [country’s] current [electricity] generation capacity, around 60 or 65 percent could be generated using natural gas, and [any] new plants will all be operating using natural gas.

The next client after power is the industrial sector. Today the industrial sector is facing difficulties, especially as they can’t compete with industries in other countries, and the main factor [behind this] is [the high] energy bill [they pay because of generation shortages from the public utility, Electricité du Liban]. If we can provide the industrial sector with a cleaner, cheaper, more sustainable source of energy, they may be better able to compete. [Down the road, we may have] an opportunity for new industries to be established that depend more on energy [like petrochemicals].

So, the short-term is power, the medium-term is industry, and the longer-term is [getting] the commercial residential sector to be able to use natural gas. Here, you have two options, either you gasify the commercial residential sector [which requires building a residential pipe network to deliver the gas] or you [encourage more residential electricity use] and the electricity will be [generated from] natural gas, which is more reasonable and cheaper to do.

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April 2017Issues

April 2017

by Executive Editors
written by Executive Editors
space

EDITORIAL 

Illustration by: Ivan Debs

The devils must go

LEADERS

Stonewalled

A mixed response: making use of the new law

An industry-wide upgrade

Overhaul in governance and legislation is required

Taxation without representation

Budgetary process must be transparent 

COVER STORY

Tax squeeze

Online threats continue to proliferate 

Taxing tax reforms

Fresh thinking needed to secure the banking system

Interview with Georges Corm

Protecting the startups from the get-go 

SPECIAL REPORT
INSURANCE

Vital and seeking vibrancy

Lebanese insurers’ march into a mysterious future

A desperate chase for consolidation

Accurate roadmap needed for mergers

More acquisition than merger

Al Ittihad al-Watani takeover by NASCO Insurance Group

Lapping up management of health and diseases

Changing TPA business models in medical insurance
Taking the long view
A Q&A with acting ICC commissioner Nadine Habbal

Going further

A Q&A with Lebanon’s leading insurer

 

ECONOMICS AND POLICY

The long goodbye

Government & waste management scheme not fully implemented

De-risking green power

Financially sustaining sustainable energy

Far off the target

Mismanaging Lebanon’s water

ENTREPRENEURSHIP

Bolstering Lebanon’s game development

Translating passion into a career

HOSPITALITY AND TOURISM

When snacking becomes healthy

Local producers bite into growing market

Of burgers and pizzas

Classic Burger Joint and Tomatomatic franchising

LAST WORD

Investing in women

Worldwide commitment needed
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IssuesMarch 2017

March 2017

by Executive Editors
written by Executive Editors
space

[media-credit name=”Illustration by Ivan Debs” align=”alignright” width=”246″][/media-credit]

EDITORIAL

Recourse to reform

After a four-year Parliament extension, we demand elections in 2017

LEADERS

Dashing our hopes for reform

It’s time to break the silence on the CMA

Protect us from the modern plague

Lebanon remains overwhelmingly vulnerable to cyberwarfare

Rare opportunity

People now have the right to request information from government entities

COVER STORY

The battle between good and evil goes virtual

Online threats continue to proliferate 

Cyber(in)securities 

Fresh thinking needed to secure the banking system

Securing the entrepreneurship system 

Protecting the startups from the get-go 

The Lebanese cybersecurity landscape

Providers and markets

Propaganda goes viral

Communication continues to morph in the digital age

The public sector’s vulnerability to a cyberattack

A Q&A with OMSAR’s IT security expert, Ihab Chaaban

Cyberthreats in the GCC and the Middle East

Building legislative defense shields

How to protect your email from cyberattacks

A step by step guide

BANKING & FINANCE

Roundup of numbers and sentiments

Rise of financial optimists

HOSPITALITY AND TOURISM

A grand hotel plots a new course

Phonicia Beirut’s GM talks upcoming plan and her vision for 2017

LAST WORD

Lebanon’s national budget

A strategic instrument for adequate policymaking
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Economic ImpactOil & GasSpecial Report

Investment expectations

by Matt Nash
written by Matt Nash

Walid Nasr’s eyes rolled so far back his head, Executive worried he was having an episode. The Lebanese Petroleum Administration (LPA)’s head of strategic planning was clearly disappointed. Only a few moments into an event organized by the Lebanese Forces, the emcee had wasted no time in estimating the value of Lebanon’s undiscovered offshore oil and gas. Whether she said it was hundreds of millions or billions USD, Executive forgets, as any such forecast is not worth remembering. As promising as Lebanon’s offshore may be, (with each new discovery in the east Mediterranean only adding to the hype), only actual drilling brings any certainty.

That said, revenues are no doubt the first thing to come to mind when one thinks about the oil and gas industry, followed closely by images of a country and economy transformed (think back to the billboards promising bullet trains built with resource money peppering Beirut in 2013). In an interview with Executive, however, Nasr explains, “To get an answer on all the [economic] impacts [the industry could have], you need four important factors: the volumes (discoveries and how large they are), the cost of production, the market price and your actual market. Those four variables are totally unknown.” The LPA, he says, has done scenario planning based on a variety of estimates, but “those series of results are not actual numbers that will be published because they are based on a lot of estimates and assumed values.” And this is only measuring the direct economic impact from the sector (i.e., revenues and employment). The LPA is also embarking on an exercise to estimate the multiplier effect the sector would have throughout the economy. “To have an actual number in ripple effect, you have to know all the variables I talked about [on] one side, plus you need data from the country itself, like the national accounts, economic indicators, facts and figures about other relevant sectors. This is what we are trying to collect, and you know the challenges regarding accurate data and the availability of data,” Nasr says. A sober and pragmatic economic approach to building an oil and gas industry is key, he argues, pointing to a problem already manifesting itself in the education sector.

[pullquote] A country can wait more than a decade between signing an oil and gas contract and the first revenue flows [/pullquote]

Lebanon’s first offshore licensing round opened in 2013, with an expectation for exploration and production sharing agreements to be signed in the first quarter of 2014. Many of the country’s universities took this deadline seriously – even if if its politicians did not – rolling out courses and majors in fields like petroleum engineering and the like. “This is a major problem,” Nasr says, “because the students that have already graduated can’t even find [local] training opportunities, since the industry doesn’t exist. We need to go step-by-step and be really gradual in thinking and moving forward.”

A slow start

Oil and gas is a long game. Contracts tend to last 30 years or more. For offshore acreage like Lebanon’s – which has never been drilled – this means that if contracts are actually signed as planned in November 2017, the country’s economy is still many years away from an oil and gas boost. An October 2014 guide from the United Kingdom’s Department for International Development estimates that – at the long end – a country can wait more than a decade between signing an oil and gas contract and the first revenue flows, as companies decide where to drill (exploration phase) and evaluate any discoveries made (appraisal phase). The guide states, “It is important to note that in the majority of instances, [oil and gas] activity is unsuccessful at the explore and appraisal phase – no potentially viable oil/gas sources are found, or when exploration wells are drilled no oil/gas is discovered or the reserves are not sufficient to justify the size of investment required to extract them. The majority of projects will therefore not reach stages three [development], four [production] or five [decommissioning] of [a typical project] life cycle.”

In Lebanon’s case, keeping its first offshore licensing round open for more than three years has given it a data advantage. It is not uncommon for a country to open a licensing round on acreage that has never been surveyed. Nearly all of Lebanon’s offshore, however, has been covered by 2D and 3D seismic surveys, with the data being interpreted and reinterpreted over the years. This means that the companies that win contracts will start with a pretty good idea of where they might want to drill. Some additional surveying may still be needed, but the bulk of the work that can make the exploration phase take up to five years has already been completed.

Lebanon’s exploration phase, by law, can last up to 10 years. However, the model contracts the state hopes to sign soon narrow that timeframe to five years, divided into two periods (the first a three-year period, and the second a two-year period extendable for another year with sufficient justification, according to the model contract). Companies are obliged to drill at least one well in each of the periods, though they can opt for more. An exact work program (drilling plans and other components) during the full exploration phase is one of the items (with multiple sub-components) companies bid on when submitting an offer. While this seems a strategy in part based on the aforementioned wealth of data and designed to get the sector moving relatively quickly, the actual impact on the economy in the first years after the contracts are signed is likely to be minimal.

Day 1

Zooming in a bit, as soon as contracts are signed, the winning companies will have to open branch offices in Lebanon. With a theoretical maximum of five contracts being signed, this translates into some very minor FDI flows into real estate (it applies to each company in a consortium, so if two contracts are signed – each with a three-company consortium – that is six branch offices). On employment, it’s impossible to guess at this point, but it seems clear that a few branch offices will only require limited staff. And while the model exploration and production sharing agreement includes a much-talked-about requirement for contractor staff to be comprised of 80 percent local citizens, Nasr stresses this a target and “a gradual thing.” “Knowing the situation and to be very pragmatic, we know that we cannot supply 80 percent of professional Lebanese experts from day one, it’s not something doable. However, we kept this target so that companies make every effort to recruit as many Lebanese as possible,” he explains. “Every year the companies will have to submit a recruitment plan – what they need in terms of human resources – and they also do public recruitment, so they would announce the professions needed and Lebanese can apply. If they have the qualifications and skills needed they receive preferential treatment, if they don’t, companies are not obliged to recruit any Lebanese who doesn’t fit the criteria.”

Additional surveys that companies may want to conduct will only have a limited economic impact. An offshore geological survey can cost millions of dollars, but most of that would not actually enter the local economy. However, Nasr notes that for past offshore surveys, “when those [survey] companies were working here, they used some Lebanese services like legal firms, logistics, whatever they needed to actually implement the survey, but of course this is a small percentage of the total investment.”

Feeding the beast

In an effort to pull maximum investment into Lebanon, the rules call not only for hiring locally when possible, but for sourcing goods and services locally as well. In fact, the model contracts give local companies an advantage, requiring oil and gas corporations to use a public procurement procedure when contracting and subcontracting for every good and service,  and demanding locals be given preference even if their prices are slightly higher (10 percent for services, 5 percent for goods) than an equivalent foreign supplier. In the earliest days this might not amount to much in terms of opportunity for the private sector, but if commercially viable discoveries are made, the opportunities (and revenues) will begin flowing. Again, Nasr will not put any numbers on what the future might hold, but notes, “I think with a few efforts from the Lebanese private sector, they can start getting involved.”

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CommentOil & GasSpecial Report

Russian expansionism

by Mona Sukkarieh
written by Mona Sukkarieh

There’s no shortage of headlines about Russia’s grand design for the East Mediterranean gas resources. An unrealistic understanding of the strategic significance of these resources and the role they could play in weaning Europe away from Russian gas fuels these claims. In reality, we have yet to see a Russian breakthrough in the upstream oil sector of the countries surrounding the Levant Basin.

Cyprus has recently concluded a successful licensing round, awarding exploration licenses to Italy’s Eni, France’s Total and US-based ExxonMobil, alongside the latter’s partner Qatar Petroleum. No Russian company participated in this round. In the previous round, Russia’s Novatek and GPB Global Resources (part of state-owned Gasprombank Group) presented an offer together with Total but ultimately failed to win a license. In 2012-2013, at the height of Cyprus’ financial woes, it was reported that Cypriot officials were tempting the Russians with rights to gas exploration in the country’s Exclusive Economic Zone in return for a second loan from Moscow. It was even rumored Gazprom would offer Cyprus a private bailout plan, as reported in The New York Times, but the Russians were not tempted.

Russia’s interest in Israel’s gas sector has been more palpable. It has made several attempts to enter the Israeli gas market, with no success so far. In 2012, Gazprom bid for a 30 percent stake in the Leviathan gas field. The Russian company reportedly submitted the highest bid but lost to Australia’s Woodside Petroleum (whose bid was ultimately aborted). In 2013, Gazprom signed a letter of intent with the Tamar gas field partners to buy and export liquefied natural gas (LNG) through a floating facility. It never materialized. More recently, Russian President Vladimir Putin and Israeli Prime Minister Benjamin Netanyahu addressed the issue of Leviathan’s development in their latest meetings, with the rationale being that Russian involvement in the Israeli market would contribute to securing Israeli offshore drilling platforms and installations from cross-border threats, particularly those that of Hezbollah. But, here too, we have yet to see concrete results. It will be interesting to follow the results of the first Israeli offshore licensing round and see whether Russian companies place bids, and more importantly, if they will be awarded contracts.

[pullquote] Russian energy companies have yet to match Russia’s growing political influence in the region [/pullquote]

In December 2013, the Russian state-controlled Soyuzneftegaz was awarded an exploration and production license in Block 2, off the Syrian coast. In September 2015, its chairman decided not to proceed with the project because of the risks involved, and announced that the project would go to another Russian company. On April 21 this year, Syrian President Bashar Assad was quoted as saying that his government has started signing deals with Russian oil and gas companies. No details have yet been disclosed.

In Lebanon, three Russian companies prequalified in 2013 for the first licensing round in offshore oil and gas. All of them sought a non-operator role (and some of them partnered with western operators at the time), which came as a surprise for those expecting a more visible presence by Russian companies, and behind them, the Russian state. In the latest prequalification round, one of these companies, Lukoil, sought to modify its status and qualify as  an operator for the tender, but the attempt was unsuccessful. 

The picture is different in Egypt, where Russian companies are more active and are looking to expand their presence. Lukoil is involved in three upstream projects in Egypt, while Rosneft is negotiating a 30 percent stake in Zohr, Eni’s massive 2015 gas discovery.

Generally speaking, Russian energy companies have yet to match Russia’s growing political influence in the region.

There are two ongoing licensing rounds in the region: the Israeli bidding round will close on July 10, the Lebanese on September 15. By the end of the year, we will see if Russian corporations express interest, and – more importantly – if one or more is awarded a license. Where Russia will choose to set its foot, and who will award it a license, are both equally important questions.

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Oil & GasRegional DevelopmentsSpecial Report

Troubled waters

by Matt Nash
written by Matt Nash

From a technical standpoint, the East Mediterranean is a challenge because the seabed is generally more than one thousand meters below the surface. Ultra-deep water, in industry parlance. From a geopolitical standpoint, the complexity is arguably even greater.

Many problems among a variety of neighbors

Production of East Med gas began in Egypt in the late 1960s. Activity remained localized for over thirty years until discoveries were made off Israel and the Gaza Strip in 1999 and 2000. For political reasons, the relatively small Gaza find remains undeveloped, while exploration continued apace offshore Israel, resulting in discoveries – namely Tamar in 2009 and Leviathan in 2010 (see map below) – that have helped spark intense interest in the so-called Levantine Basin, a subsea structure shared by Lebanon, Israel, the Palestinian Authority, Syria, Cyprus, and Turkey, at least from Turkey’s perspective. In 2012, Cyprus was elated by news of the Aphrodite discovery, but for all the gas Israel and Cyprus have found, not a molecule has yet been exported. In fact, most of the gas (including everything in Tamar, Leviathan and Aphrodite) remains buried for lack of a clear means to move it out of the region, among other reasons.

In essence, there are two ways to move gas: via pipeline or in liquid form. Shipping gas as a liquid requires liquefying it, which itself requires very costly infrastructure (think hundreds of millions of dollars) regardless of whether the facility is built onshore or offshore. Back in 2013, Cyprus was touting plans to build an onshore liquefaction plant, although the country’s lone discovery did not – and still does not – justify the cost, meaning without more gas (from Israel, for example), there would not be sufficient reason to build an onshore plant, and this plan is currently on hold apparently in favor of a pipeline to Greece. Egypt was also an export route option for East Med gas. As noted, Egypt has been in the natural gas business for decades. However, it has not been the best manager of its resources. Egypt has two onshore liquefaction plants, evidence of past export hopes. Domestic demand far exceeded expectations, however, and for years now the liquefaction plants have either not been used or were used far below capacity, opening an export opportunity for Israeli and/or Cypriot gas. The late 2015 discovery of the “supergiant” Zohr gas field in Egypt’s offshore near the maritime border with Cyprus may change just how much spare liquefaction capacity Egypt can actually offer. In that context, politics have re-entered the equation. The latest Israeli-Cypriot export plan involves a very long subsea pipeline to Greece, and then on to the rest of Europe. Pipeline plans come and go, but a Europe desperate to diversify its gas supplies (over 30 percent of European gas imports come from Russia), an Israel desperate for a political line to Europe, and currently stranded gas earning nothing for anyone could give life to a project that might have been dismissed in a different geopolitical context.

[pullquote] For all the gas Israel and Cyprus have found, not a molecule is yet being exported [/pullquote]

What this means for Lebanon

Even before the Zohr discovery, available evidence suggested Lebanon’s coastal waters were well worth exploring. Zohr changed the game and in the past year, companies prequalified to bid on Lebanon’s offshore blocks have successfully won acreage offshore both Cyprus and Egypt (see company table). While this is no guarantee companies prequalified in Lebanon and working in the neighborhood will bid here, it is a positive sign. In contrast, Israel is also holding a bidding round, but extended its closure from April until July, reportedly due to lack of interest from the major oil and gas companies currently working in Egypt and Cyprus. Receiving bids, of course, is only the first step on a long journey.

It is arguably too early to delve deep into potential export routes for Lebanese gas (remember, we have not found anything yet and have not even really begun searching), but it is worth noting that Lebanon is arguably in a better position than Cyprus or Israel, namely because of existing onshore infrastructure. The Arab Gas Pipeline (AGP) already connects Lebanon to potential buyers in Syria, Jordan and possibly even Egypt, depending how much domestic demand gas from Zohr will meet. How much damage the AGP has sustained during six years of conflict in Syria is unclear, but fixing stretches of a pipeline is clearly cheaper than building an entirely new one. On top of that, building a relatively short additional leg out of Syria can connect the AGP to Turkey, and Lebanese gas to Europe (although the hypothetical leg connecting Homs in Syria to Turkey is currently a war zone, meaning this is not a short-term option).It’s also important to remember the commercial aspects of the oil and gas business. Lebanon is not drilling for resources, profit-driven companies are. Barring a serious disruption in the energy industry, natural gas is expected to be an important part of the global energy mix even if the world keeps its climate change commitment to reducing the use of fossil fuels and stemming the global rise in temperatures. Floating gas liquefaction technology was born to bring stranded gas to market. If companies find quantities worth selling in Lebanon, history suggests they will manage to find a way to bring it to market.

Recent offshore gas activity in the East Mediterranean (Click to view full image)

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Oil & GasOverviewSpecial Report

Into the blue

by Matt Nash
written by Matt Nash

Potential is the most important word to keep in mind when thinking about a future Lebanese oil and gas industry. In November (provided there’s a functioning government at the time), the country is scheduled to begin offshore exploration, which could provide a revenue stream flowing decades into the future and kickstart a local industry services sector. Fifty-one mostly foreign companies have pre-qualified to get in on the action (see list below), and despite  weaker prices per barrel than Big Oil would like, there is clearly appetite for investment in east Mediterranean acreage – industry slang meaning, in this case, drilling and production rights in blocks of a country’s Exclusive Economic Zone (EEZ). Evidence, from both drilling in the neighborhood and abundant subsea survey data covering nearly all of offshore Lebanon, suggests there could be good news in the country’s near future. That said, detailed predictions about what to expect (which companies will bid to win a contract, how much gas or oil will be found, how much it will be worth) remain as useless today as they have been previously. What is undeniable, however, is that Lebanon’s slice of the gas-rich East Med is on radars near and far.

Terms and conditions

Some four years behind schedule, in September Lebanon will accept bids from oil and gas companies keen to explore its offshore. The rules say each bid must come from a consortium of prequalified companies (one operator, the company actually overseeing the complicated work of drilling hundreds of meters into the seabed, and at least two non-operators). Bids will be based on a model exploration and production sharing contract with a potential lifespan stretching more than 30 years. Certain technical and financial provisions in these contracts have been left undefined, and filling in these blanks is the heart of the bidding process.

The financial offer is the more important of the two in terms of bid evaluation (i.e., on a 100-point scale, it is worth 70 points). Lebanon’s plan for an oil and gas fiscal system (i.e., how the state captures rent from potential resources) has been loudly maligned, but not very well understood. There are certain fixed revenue mechanisms in the contracts, the most talked-about being a 4 percent royalty on natural gas, and a sliding royalty on oil ranging from 5 to 12 percent, based on volumes. Were these royalties Lebanon’s only straw for syphoning revenues from the sector, they would be laughably low, and the critics of this one component of the overall fiscal system would be correct to complain. However, royalties are only part of the story. In addition to paying Lebanon’s corporate income tax (currently set at 15 percent but expected to rise to 20 should Parliament approve a long-promised new oil and gas tax law), companies will bid on the parameters of further revenue sharing with the state based on the volumes of resources (if any) found. The details are complicated (and covered by Executive in the past), but in essence, no matter what exact numbers companies put in their bids, if enough oil and/or gas is found to justify extracting it, the state will begin sharing profits from resource sales immediately, with the state’s share growing over time. Not every country uses the same model, but it is common and – as a system – perfectly capable of maximizing the state’s take from the sector. This is all to say that there’s no way to predict what revenues Lebanon can expect at this point, but the system in place has been proven in other markets and attacks against it are likely to be driven by alterior motives.

The technical bids are arguably more exciting. Evidence from both drilling in the neighborhood and abundant subsea survey data, which today covers nearly all of offshore Lebanon, suggests there could be good news in the country’s near future – and that is not hyperbole. The aforementioned delay, abundant data and regional evidence have pushed Lebanon to be more ambitious than one would expect of a country that has never drilled an offshore well (a frontier area, in industry parlance). If contracts are signed in November, winners will be committed to drilling at least one well (if not more) in the first three years (as opposed to after 7-10 years, which can be the case in other frontier areas). What many people fail to realize is the value drilling offers in terms of useful information that itself can be of greater value in the future. For all the large natural gas discoveries nearby and talk about Lebanon’s potential, we actually know nothing about Lebanon’s offshore. Absolutely nothing. Drilling will change that, even if no discoveries are made. One arguably learns as much from “failure” (a dry well) as from success. The truth is out there, and the first real answers on Lebanon’s potential will come relatively quickly after contracts are signed.

Slow and steady wins the race

Oil and gas is a long game. The contracts Lebanon hopes to sign soon will last more than 30 years, provided a discovery is made (if companies do not find anything in Lebanon’s offshore, the sector could well be very short-lived, although all available indications suggest this will not be the case). A big discovery will no doubt intensify interest in Lebanon’s offshore in the same way large gas fields in Israeli, Egyptian and (to a lesser extent) Cypriot waters make the whole East Med an exciting exploration area. With this in mind, the Lebanese Petroleum Administration (LPA), the sector’s not fully independent regulator, pushed long and hard for gradual licensing (i.e., offering chunks of offshore acreage over time instead of signing contracts covering the entire offshore all at once). From a strategic point of view, gradual licensing allows Lebanon to leverage knowledge gained from drilling to get better terms in the future and also potentially expand the timeframe over which revenues from the sector pour into state coffers. At one point in the past four years, some politicians were against gradual licensing. Ultimately, however, the LPA won. Of the 10 blocks into which Lebanon’s offshore is divided, five are on offer in the first round, with no obligation for how many contracts the government must sign.

Managing expectations

If the deadline is respected, Lebanon will be doing more than signing contracts in November; it will be establishing a potentially valuable new sector. However, even if all goes as well as possible, oil and gas will not transform Lebanon’s economy. In the first few years, most Lebanese likely will not notice a difference. Even 30 years from now, if Lebanon is a regional gas powerhouse, the oil and gas sector will not be an economic pillar the way banking and tourism are. While there will be direct job creation, exact numbers are hard to predict, but thousands and thousands of jobs is an unrealistic expectation. The industry will need services (from housing and transportation to catering and local legal advice), and many local companies may find new opportunities, but again, not in a volume to actually re-configure the economy. In fact, one risk the LPA is actively trying to avoid is known as Dutch Disease, or the rapid refocus of an economy on one sector to the detriment of all others.

The $1,000,000 Question

As noted, it is far too early to guess what revenues Lebanon can expect from potential oil and/or gas finds. It is also a bit too early to say for certain how those potential revenues will be managed. A 2010 law governing offshore exploration and production calls for all state earnings to be deposited in a sovereign wealth fund. The law gives the fund a dual, and potentially contradictory, mandate: save some, spend some. Writing a separate law fleshing out the sovereign wealth fund will function as the sector’s next political priority after contracts are signed. The success of drilling will determine just how quickly the sovereign wealth law needs to be written.

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