Tourism and Hospitality

Fitness on an incline

by Nabila Rahhal
written by Nabila Rahhal

Over a decade ago, gyms or fitness centers in Lebanon evoked images of steroid pumped men grunting loudly while lifting heavy weights, or leotard clad women enjoying aerobics classes led by smiley and energetic trainers with questionable training abilities. The Lebanese fitness industry has since grown significantly, inspired by global trends of wellness and healthy living. This growth stretches across the industry and manifests itself in the increased number of fitness centers, the variety of sports activities available and the rising awareness of the importance of hiring certified trainers.

Growth in fitness

Emile Baroody, Vice President of Baroody Group sal, a sports company established in 1912 which represents Technogym, a commercial fitness equipment brand, places the industry’s annual growth at about 15 to 20 percent over the last five years, based on his own estimates.

Naji Saliba, managing director of Young Trading Co, established in 1997, which represents Life Fitness, an American brand of commercial use fitness equipment, also cites significant growth over the past three years, naming at least four gyms which have opened in Beirut and Mount Lebanon in the last three years.

Components of the industry

The fitness industry is divided into two main categories. One is the purchasing of equipment for residential, personal use. The second is commercial use and is itself divided into various subcategories including hotel gyms, corporate gyms, fitness facilities in residential compounds and health clubs.

The use of fitness facilities in residential compounds is the one that has seen the most growth since 2009, according to Saliba. Both Saliba and Baroody list more than ten residential developments which have bought fitness equipment for the residents’ gym and Saliba places the budget for these gyms at $100,000 each.

[pullquote]The latest trend in commercial fitness equipment is for it to be technologically connected overseas[/pullquote]

Speaking of hotel gyms, Saliba says this particular sub market has not witnessed a significant growth because no major hotels have opened in Lebanon in recent years. Baroody says that, with the exception of the five star or international names, hotels in Lebanon do not view their fitness room as an important revenue source for their outlet and as such do not invest in good quality fitness equipment, preferring instead to buy cheaper Chinese brands or second hand machines. “It is a short term vision because in the long run, clients will appreciate hotels with a professional quality gym,” admits Baroody, adding that some five star hotels in Lebanon make money out of their hotel gym by opening it up to non-guests for an annual membership fee.

Increased interest in fitness centers

Fitness centers remain the biggest category of commercial fitness in Lebanon, with Saliba placing 90 percent of the country’s gyms in Beirut, Mount Lebanon and the North up to Tripoli.

Patrick Bejjani, founder of 4 Actions Academy which educates and certifies fitness and personal trainers, has a long history in the health club industry, starting out as a trainer before establishing 4 Actions in 2011. Bejjani finds that, in general, the Lebanese show a greater interest in attending health clubs and training sessions today than they did in past years. “There is definitely more interest in working out. You see it in the increased number of gym memberships, in the social media posts of people using the gyms and in the general vibe of wanting to be healthy,” says Bejjani. Saliba believes this growth in the fitness club business is led by women who are working out more now, especially with personal trainers.

Investing in fitness

Because fitness equipment for commercial use is built to last at least ten years, it is not cheap, with both Saliba and Baroody placing the cost of machines between $5,000 and $25,000, depending on the specifications and how technologically advanced the equipment is.

Baroody explains that, while five years ago the most important criteria for gym operators in selecting machines was the cost and length of the warranty, today they prefer instead to base their selections on their gym’s needs, such as safety of the machine, its durability and its entertainment options.

The latest trend in commercial fitness equipment is for it to be technologically connected overseas, with Saliba explaining that Life Fitness machines are now networked to the main office in the USA so that whenever a malfunction occurs, Headquarters informs the local representative first. Technology and entertainment are also central components of gym equipment selection, with many of today’s cardiovascular machines equipped with smart screens which create virtual scenes for runners (such as running on the streets of Paris) or allowing cyclers to connect with and race each other within the gym.

Despite the high costs of the machines themselves, the biggest expenses for a gym operator is rent. “The gym equipment and decor may be expensive, but it is an investment which is made once and lasts ten years. Rent, on the other hand, is an annual expense,” says Saliba, adding that some gym operators own the facility’s property and as such are able to generate profit much faster than those who have to pay rent.

The costs of operating a gym do not end with the rent and equipment. They include other overhead costs such as electricity, water and maintenance, with the bigger gyms that have pools or sports fields incurring even more charges, explains Saliba.

According to Bejjani, monthly membership fees and the cost of personal training (PT) sessions have not significantly increased over the past five years and still range between $130 to $200 at the good quality gyms and $40 to $60 for most PTs. He explains that, while prices have remained stable because they cannot afford to be raised considering the limited income of most Lebanese, the expenses for gym operators have nonetheless increased.

The rise of the small gym

Elevated expenses have caused gym operators to migrate towards establishing smaller gyms rather than the traditional big gyms which boasted membership of 1,000 members or more. The concept of the smaller gym focuses on the new trends of Crossfit (Olympic style exercises) and functional training (exercising the way the body moves), thereby saving on rent and fitness equipment. Saliba adds that popularity for this type of gym is growing in Lebanon, naming four which have opened in the last year alone.

Bejjani and Baroody have noticed that small studios or boutique gyms are also on the rise, pointing out six personal training studios which only offer sessions with a personal trainer and do not provide membership. According to Bejjani, the reason for this shift is that private trainers who develop a big clientele list are tempted to set up their own practices, making more money that way than when they have to give a percentage of their earnings to the gyms that employ them.

Personal trainers

Trainers are arguably the heart of any gym, capable of bringing in increased revenue when they garner a loyal customer base who come specifically to train with them.

Fitness instructors, however, are not yet represented in the ministries and don’t have a syndicate or an order to represent them. This is despite the fact that they, like physiotherapists who do have syndicate representation, work in the healthcare industry and are liable to causing serious injuries to clients if not well educated in their business, laments Bejjani.

Although certification programs for fitness trainers have always been available in Lebanon, they have only recently become a proper industry, adopting international standards and increased awareness about the professional significance of having certified trainers.

[pullquote]The concept of the smaller gym focuses on the new trends of crossfit and functional training, thereby saving on rent and fitness equipment[/pullquote]

Realizing the new potential in this burgeoning business, and looking to bring international standards to the fitness industry in Lebanon, Bejjani quit his job as a personal trainer at Fitness First and established 4 Actions in 2011, becoming the sole agent of the double accredited International Fitness Professionals Association (IFPA) in the Middle East and North Africa.

Bejjani started by offering IFPA courses at the Panacea gym in exchange for educating the gym’s trainers for free, but quickly moved from giving the course in several other gyms to finally renting his own premises in Abraj Center, Furn El Chebak, in 2014. “With my growing list of students, I felt I needed a home base where students could interact with each other, relax and read up on fitness,” explains Bejjani who has graduated over a 1000 students up until today. The course costs $800 and Bejjani admits that in Lebanon he is only able to break even, whereas he is able to make real profit when he teaches the courses in Saudi Arabia or the UAE.

Personal training is a growing business in Lebanon, attests Bejjani, with the trend moving towards group personalized fitness where a maximum of five clients train with a PT at lower cost than solo PT sessions. “The last five years saw a big growth in personal training because people want to gain the most out of their workout session. There is more profit for gym operators in this as well, since trainers can charge between $50 and $100 per hour, of which the gym gets a cut. So naturally they encourage it,” explains Baroody.

The future of Lebanon’s fitness industry

While the Lebanese fitness industry has been steadily on the rise, there is of course always room for further growth. Saliba says the penetration of active gym users in Lebanon is low, placing it at 3 percent, in comparison to the USA which has 14 percent market penetration. “There is still room for the market to grow because in Lebanon we have a comparatively lower use of fitness equipment per capita when compared to other countries in the region such as Dubai,” says Baroody.

Whether this growth in the fitness industry manifests itself in the creation of more gyms or into other forms of sports training remains to be seen. Either way, it is a positive sign that more and more people are getting out and moving their bodies in the hope of achieving a healthier lifestyle.

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Tourism and Hospitality

50 shades of hotel Le Gray

by Thomas Schellen & Nabila Rahhal
written by Thomas Schellen & Nabila Rahhal

When you sit down at a sidewalk table of Gordon’s Café in downtown Beirut on a balmy late September afternoon, you can sip your espresso or pot of Sencha (green tea) in the middle of the city, nestled between the restored historic Beirut Municipality building, and the nation’s symbol-laden Martyr’s Square, with a view of the port basin and the coastal mountains behind it. As such, Gordon Campbell Gray, CEO of the company that operates Le Gray Hotel, does not hold back from declaring that he feels, “Le Gray has the best location in Beirut.”

However, this is a doubled edged sword since, says Campbell Gray, “when there is trouble, it is the worst [location] because it all happens outside our front door.” This summer, since civil society and political protest movements have regularly converged in downtown Beirut from August 22, “it all” meant roadblocks and cordons of riot police, tense standoffs between demonstrators and security forces, and, one September Sunday, even the sight of political thugs assaulting protesters who dared call certain politicians “corrupt”.

Campbell Gray had a bird’s eye view of the attacks by thugs, from the balcony of the suite he was staying at for one of his frequent business visits to Le Gray, and it shook him. “I have always loved Lebanon but my love affair has been cracked for the first time. Although I am quite an optimist, it’s really depressing at the moment,” he tells Executive the day after the disturbing event.

According to him, the hotel staff dealt professionally with guest needs during several tense hours that day, but no effort could shield Le Gray from losing business this summer, including last-minute event cancellations. And the troubles in front of their door were not the first in the hotel’s six-year history of operations. From construction delays forced by the unstable Lebanese situation in the mid 2000s to travel warnings amid regional unrest in more recent years, it seems safe to assume that Le Gray experienced more unpredictability and tough business cycles than periods where management could comfortably anticipate the results of the coming quarter.

Campbell Gray refuses categorically to disclose any operational results of Le Gray just as he will not say how much CampbellGray Hotels, the company which operates Le Gray under his leadership, invested into making the hotel the group’s flagship property and how much or little these investments had been paying out.

But here is where the story takes another surprising turn. Despite everything that happened to curb business this summer, the group is planning to invest in refurbishing previously unused areas located behind the hotel’s current atrium, adding 16 new guest rooms, a ballroom, a lobby lounge, a private screening room and a chocolate shop to Le Gray. Scotsman Campbell Gray declines to provide an investment amount for the expansion that will be carried out starting this month [October] but does tell Executive that it will be “millions, upward of $10 million.”

The investment is not a singular endeavor for Campbell Gray Hotels but rather a part of an expansion project focused on the Middle East. In the following conversation with Executive, Campbell Gray provides more about that growth.

E    Can you tell us more about the new property in Abdali, Amman?

Basically everything is under the umbrella of Campbell Gray Hotels, but this new concept being built in Abdali is Le Gray Living which consists of offices, a hotel and apartments. We’re curating all the retail so we are in charge of the whole thing. All of this will be going into Le Gray Living which will be brought to Dubai as well.

E   So are you starting to compete in the field of large complexes with things like serviced apartments and retail spaces which, in this region, one normally associates with a multi-level operator such as Emaar Properties?

I think the scale is smaller since we are private. We are not trying to compete at this level [of a mega operator such as Emaar] because I’ve never thought that big is beautiful.

E   The CampbellGray website says that you are refurbishing the Phoenicia Hotel in Malta, and that it is a Grand Hotel. Your first globally noted property, the One Aldwych in London, was often described as a boutique hotel. How do you align such divergent identities?

I never thought of One Aldwych as a boutique hotel; I wanted it to be a modern classic and do all the things that a five-star hotel offers, [but] in a slightly more modern and relaxed way. I also wanted to create an inclusive atmosphere. What we did was eliminate the possibility of a two tier approach [in dealing with guests]. This relates all the way round – when anyone joins the company I personally do the induction and say that we are all the same and merely have different responsibilities.

E    Looking at the style of properties that are operating or are under development, it seems you lean toward extremes. You have Beirut, with Amman and Dubai coming up, plus Malta, and then there is a resort in Scotland that you are working on. Can one present them in the manner of similar properties in a branded group?

We want them all to be little masterpieces in their own right. I’m excited about Malta because it’s completely original. I think you can stay in this [Le Gray Beirut] and [also] enjoy the Malta property. It’s going to feel comfortable and a little old fashioned but not a vestige of the past. The idea is to make it comfortable and sex it up a bit but without turning it into something silly. The brief that I have to make this really interesting is to put Malta on the agenda for people who have never been there; I first promote the country and then the hotel. It also was how I promoted this [place]. It was about Beirut. I said you must come to Beirut and by the way, you must stay with us.

E   How about factors in hotel operations that are often said to be crucial, such as achieving economies of scales through large brands and having the advantage of a big group’s booking networks?

We have a wonderful relationship with Leading Hotels of The World [a network of independent luxury hotels]. For us, that works beautifully. The great advantage today, with internet accessibility, is that people can do so much online. So many of my favorite hotels in the world are privately owned one offs and statistically they nearly all have a higher RevPar (revenue per available room) and occupancy [than the hotels under big brands] because there is a desire for individuality.

[pullquote]We want [all our properties] to be little masterpieces in their own right[/pullquote]

E   Do you have investors in Le Gray?

Yes, I have local investors; we always try to partner with local investors which I think is very good. I want the product to be beautiful and I believe with the right finance directors and people around me, the bottom line can’t miss.

E   Are you more of a proprietor or an operator in your way of working?

We have been both and we can be both. I have recently merged my company Campbell Gray with the Audeh Group and that has given quite a bit of firepower to invest. The Audeh family owns the [Le Gray Living project] in Abdali and so there are no [other] investors in that project.

E   How busy does this partnership make you and do you have anything else up your sleeve?

At the moment we have three hotels being designed at the same time and this is really tiring because everything has to be detailed and the food has to be thought out properly, the chefs hired, the teams trained… I couldn’t do any more.

What I am very aware of is that there is a huge desire for individuality everywhere, and if you want to roll out twenty hotels in one year, how can they be fabulous? I know what it takes to create a hotel and I am doing it with a new brand, a more affordable one which is codenamed Baby Gray. It is huge work to create this brand. I am thinking through every detail to make it affordable, attractive, sexy, and young. The big thing now is developing the Baby Gray. I think you could put a Baby Gray in Dubai, [or] in Barcelona, and it could travel anywhere. It is less expensive to create and has less staff, with a very good business model. We could roll that out more because they can be replicated quite easily.

E   Do you see it growing regionally or globally?

The word global is a little pretentious, but we are being asked by investors to [develop it] in quite interesting places and if somebody said we would love to do a Baby Gray in Buenos Aires or Iran, I would say, “I’ll meet you there tomorrow.” My only main criterion [for selecting a location] is that it has to be a city where I would like to wake up in the morning.

E   What is your primary passion?

I am passionate about everything I do – I am a creator. My passion is to curate things that are successful. So when I say that I am not a money person, I do not personally need to make money. But I am very keen on making a business that has to be successful and I am meticulous about it being a good business model.

E   Do you think Le Gray became a gateway to the region for CampbellGray Hotels as it was so successful despite the challenges which you encountered in Beirut?

Definitely. It was unintentional because I had never considered the region before, ever. I saw this place as an outpost and kind of an adventure but it got bigger than I ever expected it to be, so it exposed us to the region. The reason why they wanted us in Dubai or Amman is because they had stayed here [in Beirut] and thought ‘I would like that [too]’. So the answer is a big yes, unexpectedly.

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Oil & gas 2015Special Report

Forbidden no more

by Mona Sukkarieh
written by Mona Sukkarieh

Lebanon was most likely a marginal topic on the sideline of nuclear discussions in Vienna, but the nuclear agreement between Iran and the P5+1 group is expected to have direct implications on local Lebanese politics. Since the deadlock in Lebanon is largely a reflection of regional deadlock, it would be reasonable to expect a possible regional appeasement to contribute to unlocking the situation in Lebanon. The immediate post-Iran deal period is expected to be a period of hesitation and testing until the time is ripe for broad arrangements. While the overall regional balance is expected to tip in favor of the Iranians, in Lebanon, arrangements between Iranian-backed factions and Saudi-backed factions are inevitable, both at the political and business levels.

While the world prepares for investments in Iran, a Lebanese-centered approach considers how the deal could free up Iranian investments in Lebanon, particularly in the energy sector, long limited by sanctions, and a certain reluctance from some Lebanese. In the past, Iran expressed repeated interest in the Lebanese energy sector. Tehran offered to rehabilitate the country’s two refineries (currently inactive and used for storage only), build a power plant under favorable terms, and supply Lebanon with oil and natural gas. These projects faced a number of challenges and their feasibility was not always ensured.

Supplying Lebanon with gas and/or oil

Supplying Lebanon with gas faces a number of challenges. Gas can be exported either by pipelines or chilled to a liquid form and transported by specialized tankers. The first scenario, (exporting gas to Lebanon via pipeline), requires building the pipeline which has to pass through some of the most unstable countries in the world. With regards to the second scenario, Iran had several projects for building liquefied natural gas (LNG) plants and even started working on one, but work was suspended due to sanctions. Developing LNG capabilities is costly and it is going to take Iran several years to build the necessary infrastructure, even if Iran is considering a floating LNG platform. Supplying Lebanon with gas is not feasible in the short term, but could become a possibility a few years down the road. On the other hand, supplying Lebanon with oil and other petroleum products would be less problematic.

[pullquote]Tehran has repeatedly proposed to supply lebanon with electricity[/pullquote]

Electricity

Lebanese demand stands at approximately 2,500 MW per day (with peak demand exceeding 3,000 MW), while the available capacity is limited to 1,500 MW, causing severe shortages, covered mostly by private diesel generators. The 2010 Policy Paper for the Electricity Sector proposes measures to improve performance, and, more significantly, cut the energy bill by $1.5-2 billion per year. The paper suggests achieving this by reducing dependency on expensive imported oil, and gradually converting existing power plants to operate using natural gas. At a conference in December 2014, an LPA board member estimated that 65 percent of the power generation capacity could be generated using gas. Power plants in Deir Ammar and Zahrani are fit and ready to receive natural gas. With some minor modifications, two other power plants, in Tyre and Baalbeck, could be made to receive natural gas. LNG import terminals and a coastal pipeline are planned to support the implementation of the conversion process. The pipeline is set to supply major power plants along the way, in addition to factories and industrial plants.

Tehran has repeatedly proposed to supply Lebanon with electricity over the past few years (Iran exports around 25,000 MW per day and has a surplus of production estimated at around 6,000 MW), and build additional power plants at favorable conditions.

Participation in exploitation of potential oil & gas resources in Lebanon

In 2013, the only Iranian company that sought to pre-qualify for Lebanon’s first licensing round, the National Iranian Drilling Corporation, failed to do so. Also, notably absent from the list of companies that pre-qualified for the tender are any Qatari or Saudi companies. The indifference Saudis and Qataris demonstrated towards the sector at the time was likely part of a broader policy to ostracize a government they perceived as dominated by Hezbollah, a Shiite, pro-Iranian political party. Qataris and Saudis seemed largely focused on the composition of the government back then and did not take into consideration the possibility of a cabinet reshuffle or a change in the balance of power in the country, which ultimately happened with the resignation of then-Prime Minister Najib Mikati, and the appointment of Tammam Salam as Prime Minister.

The idea of a second pre-qualification round is being considered. While it may be justified on certain technical grounds – the initial pre-qualification round was organized in February-March 2013 – it is believed that one of the undeclared reasons justifying the organization of a second pre-qualification round is to make room for new companies hailing from friendly countries. This was best illustrated by Mohammad Qabbani, a Future Movement MP and head of the Parliament’s Energy Committee who told Al-Manar TV in December 2014 that organizing a second pre-qualification round would allow companies “from Kuwait, Saudi Arabia and Qatar” to participate in the tender and “help us exploit our resources”.

Similarly, it would not be far-fetched to imagine an Iranian company applying to pre-qualify, more likely as a non-operator. In a meeting with Energy Minister Arthur Nazarian on September 8, Iranian Ambassador to Lebanon Mohammad Fathali expressed the readiness of Iranian companies for cooperation in the exploration and exploitation of potential oil and gas resources.

Refineries

In the past, Iran has offered to rehabilitate Lebanon’s two refineries. But it remains to be seen what Lebanon intends to do with them. Previous feasibility studies on the repair and modernization of the refineries questioned the utility of the project, from an economic point of view.

[pullquote]Notably absent from the list of companies that pre-qualified for the tender are any Qatari or Saudi companies[/pullquote]

Backed by an extensive and influential network of Lebanese-Iranian businessmen, Iran perceives Lebanon as a platform for developing its business presence in the Eastern Mediterranean, a region of rising strategic importance for Tehran. As usual, here too, there is competition. Iran’s Deputy Foreign Minister for Asia and Pacific Affairs Ibrahim Rahimpour visited Cyprus on September 20, a visit that followed Cypriot Energy Minister Georgios Lakkotrypis’ visit to Tehran in February 2015, highlighting both countries’ determination to strengthen cooperation. Rahimpour reiterated Iran’s offer to help Cyprus in the field of exploration, drilling, refining of oil and gas, and training of specialists. Timing is of essence, and as the experience with the first licensing round shows, Lebanon does not take into consideration the time factor.

In the past few years, few projects of cooperation between Lebanon and Iran were able to materialize, for political and legal reasons. With the lifting of sanctions, one of these obstacles has been removed. But, without a legal argument, it is going to be much harder now to justify automatically rejecting cooperation with Iran. In today’s context, dealing with Iran could be met with a form of suspicion by certain Lebanese. The energy sector, unlike other more “sensitive” areas of cooperation (such as military), can represent a good start.

Iran may even surprise the reluctants in Lebanon by adopting a non-confrontational approach. Iranians are more likely to diversify their business partners in the country (whether Lebanese or non-Lebanese, depending on the project), and will probably seek to initiate projects that would be perceived as benefitting the country, and not just a particular segment of society. The opposite would indeed be counter-productive.

In the past, there is no doubt that Iran’s determination to break the embargo could have motivated much of its overtures towards Lebanon’s energy sector. Once sanctions are removed, will Iranians be as motivated to be involved in Lebanon’s energy sector as they were before? If the answer to this question is uncertain, it is on the other hand certain that the competition at the geopolitical level with Saudi Arabia will encourage Iranian initiatives directed towards Lebanon.

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Oil & gas 2015Special Report

A matter of clarification

by Matt Nash
written by Matt Nash

While Lebanon opened its first offshore oil and gas licensing round in May 2013, international companies have not yet been able to submit bids because cabinet has not approved two necessary decrees (one outlining the tender protocol and model exploration and production sharing agreement, and another delineating offshore blocks up for bid). In April 2014, shortly after Prime Minister Tammam Salam formed his government, cabinet appointed a ministerial committee to study the draft decrees before approving them. The committee finished its work in July and sent the draft decrees back to the Lebanese Petroleum Administration (LPA), an advisory body with regulatory powers which reports to the Ministry of Energy. In a written response to Executive’s questions for this report, the LPA says the updated drafts of the decrees have been submitted to the prime minister “along with a request to put them on the council of ministers’ agenda.” Executive sits down with Minister of Energy and Water Arthur Nazarian to discuss the decrees, state revenues from seismic data sales, transparency and whether or not Israel is stealing Lebanon’s gas.

E   The government has been receiving revenue from the sale of seismic survey data. How much revenue does the government have from these sales to date?

I don’t think these are the questions you should ask. Governmental officials can ask, no problem. The audit court can ask. But this is not public information. Am I allowed to ask you how much money you have in your bank account?

E   No, but…

This is the same thing. This is not public information. We cannot say we have this much or we have that much revenue. This is state secrecy. But any government official or the audit court can ask, that’s no problem. Anyway, it’s in an account in the central bank. Of course, it is all transparent.

E   If you say so. Are there any plans for how to use the money?

Not for the time being, no.

E   A ministerial committee was formed on April 2, 2014 to study two decrees prepared in early 2013 necessary to move forward with the first licensing round. The committee submitted decrees back to the LPA in July of this year. It met twice, correct?

We met two or three times. But individually, the LPA went to each one of the committee members and met with them or their advisors. If [members or their advisors] had some questions or clarifications, the LPA answered. It was all discussed.

E   Can you tell us what specific changes to the decrees resulted from the committee’s comments and questions?

There were too many comments from variuos ministers to give a specific answer. The Ministry of Finance had financial questions. The Ministry of Environment had some environmental concerns. Each ministry had comments. Some of them were incorporated, some of them were not because they contradicted the LPA’s professionally drafted recommendations.

E   So, was this more of a learning exercise for the various ministers or did they have numerous relevant comments which resulted in substantial changes to the decrees?

Not every minister is an expert in the oil and gas industry, so it was a learning experience. But some of them had their own advisors who knew about the subject, so there were some informed questions or clarifications. Some changes to the decrees were made, but not, of course, substantial changes. The LPA drafted the decrees, and they are knowledgeable on the subject so the decrees were already well drafted. The LPA also had assistance drafting the decrees from foreign experts, the Norwegians for example.

E   There is an article in the pre-qualification decree that allows a non-qualified company to partner with a qualified company to pre-qualify as a joint venture. MP Joseph Maalouf calls this a loophole that invites the possibility of corruption and says it must be closed, meaning the decree should be changed and the three joint ventures that benefited from this article should be disqualified. Do you agree?

The article allows for joint ventures. A certain company can partner up with another company and they jointly apply to be pre-qualified. And they are pre-qualified because both of them have the credentials. It’s not that a non-qualified company applies with a qualified company. It’s a joint venture. A qualified company and another, any company, become one company. The credentials of both will become qualified.

E   MP Maalouf says specifically that this is a loophole that must be closed. It was the first point he made when describing his oil and gas transparency law to us. Do you agree?   

We gave him explanations to all the questions he asked. If there is any loophole, he should clarify where the loophole is. You can say there’s a loophole. It’s a saying. But if you specify the loophole, then we will see.

E   MP Maalouf did. He pointed very specifically to this article and said it’s a problem and it needs to be fixed. Did he say that to you and do you plan to do anything about it?

We answered each and every one of his questions. We gave an explanation.

E   Do you know who wrote this article in the pre-qualification decree? We know the decree was drafted by the LPA, approved by the ministry and then finally approved by cabinet. Only the final published version, not the drafts. Who wrote this article and what was the rationale behind it?

Do you think everything should be public?

E   Yes.

There are certain people, parliamentarians or government officials, that have the right [to see draft legislation], and they represent the people, no? MPs represent the people. So if anybody has any questions, they can ask through their members of parliament. We cannot go to the public with every issue and ask everybody for their comments because I don’t think anything would be finalized. It would never end.

E   Can you give more detail on what specific steps are underway for Lebanon to implement the Extractive Industries Transparency Initiative (EITI)? For example, has the LPA or the ministry drafted an unequivocal statement of intention to join the EITI, the first step in the EITI standard?

There are things that need to be prepared locally before we take the first step published in the standard. Implementing the EITI doesn’t involve only the Ministry of Energy. It’s government wide. When the LPA says steps are underway, this means the preparations are underway locally to take the first EITI steps. The first step for the EITI is this unequivocal statement. However, for the government to commit to this statement, there is some work to be done locally with the Prime Minister, Minister of Finance, and others. We are preparing the ground so the government is ready to make such a statement. Once we have the approvals, and relevant ministries are ready, and it is in line with our laws and so on, then we can commit to the EITI. This is what the LPA means when they say they are preparing the ground. They’re doing analysis of the existing legal framework concerning disclosure of information, for example, and so on. If the EITI contradicts our laws, we cannot make the unequivocal statement.

E   In July 2013, former Minister of Energy Gebran Bassil spoke at a press conference about Israel’s Karish gas field, which is near the border of Lebanon’s Exclusive Economic Zone. He said Israel is capable of stealing Lebanon’s gas. Speaker Nabih Berri has said Israel is stealing Lebanon’s gas. If I remember correctly, you’ve said the speaker never presented his evidence to you…

No. I said I don’t personally have any evidence. I didn’t ask the speaker if he had any evidence. I said if there is a joint field, the Israelis could be exploiting it. A joint field can happen between any two countries. Whichever country starts exploiting a joint field first, they have a potential advantage.

E   This seems to be a very important national issue – whether or not Lebanese gas is being stolen. Your predecessor said Israel was capable of this. The speaker says Israel is doing it. Are you following up on this in any way?

Israel might have the technology to do this, we are not sure. Maybe they are stealing our gas, maybe they’re not.

E   But you’re not following up in any way? You haven’t tasked the LPA with following up on this?

The LPA prepared a report describing what is technically feasible in theory. And this report was submitted to the cabinet. Now for an actual investigation, you need to be in the field to actually assess whether this is occurring or not, and that we cannot do ourselves. It is possible they are stealing our gas, we’re not saying it’s not.

E   The speaker says Israel is actually stealing Lebanon’s gas. But Lebanon is taking no actual steps to find out if this is true?

Maybe Berri has evidence I’m not aware of.

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Oil & gas 2015Special Report

A wealth of data

by Jeremy Arbid
written by Jeremy Arbid

The third time proved the charm for Italian oil and gas company ENI in the past 12 months. In late 2014 and early 2015, ENI and South Korean partner KOGAS found nothing when drilling offshore for hydrocarbons in Cyprus’ exclusive economic zone (EEZ). On August 30, 2015, however, the company announced the discovery of a “supergiant” gas field dubbed Zohr – estimated at 30 trillion cubic feet (tcf) – not far from its dry wells, but in Egypt’s EEZ.

While the Lebanese Petroleum Administration (LPA) tells Executive that, “It’s a bit early to evaluate how we should position ourselves in terms of further studies and assessments” of Lebanon’s EEZ in light of the ENI discovery, the dry wells have already led to some reanalysis of the data collected covering Lebanon’s offshore. The LPA says that two more studies of the data were performed to “better understand the sedimentations and the potential reservoir parameters in light of the recent failures of ENI in Cyprus,” without indicating what results these studies achieved.

Lebanon’s EEZ has already been extensively covered by both 2 and 3-dimensional seismic surveying. A new interactive map on the LPA’s website details where surveying has been conducted in both offshore and onshore Lebanon. The map also shows the delineation of the offshore blocks and those that will be tendered for exploration and production – information yet to be officially declared via a delayed decree. According to the LPA, blocks 1, 4, 5, 6, and 9 will be up for bidding whenever the licensing round moves forward.

An advisory body to the Ministry of Energy and Water with some regulatory powers, the LPA has been cautious about playing the numbers game when it comes to offshore prospectivity. As the ENI examples highlight, data only goes so far. Drilling is the only reliable way to know what lies below the seabed. That said, the LPA has previously offered so called P50 estimates for offshore blocks 1, 4 and 9. A P50 estimate means that there is a 50 percent chance of finding a certain volume of oil or gas. The LPA said that each block had a P50 estimate of at least 13 tcf.

And while offshore re-evaluation of data will continue, says the LPA, the real survey work in 2014/2015 was done onshore.

Onshore exploration: a brief history

The LPA’s map also shows where exploratory wells have been drilled onshore in the past. Exploratory wells drilled by the Iraq Petroleum Company (IPC) – before 1928 IPC was named the Turkish Petroleum Company, and many Western oil firms owned controlling interests in the company – implies a longstanding interest in Lebanon’s petroleum prospects since at least the 1930s and ‘40s. In 1938 a concession was granted by Lebanon to the IPC, forming the Lebanese Petroleum Company to control the exploration license. Delayed by the Second World War, the company did not begin drilling until the late 1940s.

According to IPC’s 1948 company handbook (pages 12 – 14), “Road making, building and work preparatory to drilling was then undertaken and a well spudded-in in May, 1947, on the Jabal Tarbol structure, in the presence of Lebanese Ministers and officials. By the end of 1947 it had reached a depth of some 4,500 feet, and by June 1st, 1948, 6,400 feet.” Later, in the 1950s and 1960s, the company drilled a number of wells across Lebanon at Yamour, Nahr Ibrahim, Al Qaa, Adloun, and Tall Znoub – none were successful. Demonstrating that even back then the investment costs of exploration were high and carried a significant amount of risk.

Onshore exploration: present day

NEOS GeoSolutions, a US based company, surveyed 6,000 square miles mostly onshore Lebanon in late 2014 and early 2015 with local partner PetroServ as an underwriter with $7.5 million invested. The new survey, as Executive has previously reported, provides a baseline of data indicating where potential oil or gas reservoirs might be located and narrows the focus of any future data acquisition. More data helps reduce risk and gives companies coming to explore more precision in where they plop down their drilling equipment in the physical search for petroleum, as well as, hopefully, reducing the number of wells they have to drill before striking it rich.

Just a few months ago, NEOS said the survey data helped identify onshore “sweet spots,” but, says PetroServ president Ziad Abs, companies are yet to purchase the resulting data, and further studies are needed before estimating onshore prospectivity. NEOS hopes to conduct additional studies, says Amanda Jane, NEOS’s Lebanon Project Manager, in an email to Executive. The company’s next step, depending on how the Ministry of Energy and Water decides to move forward, would be to conduct parametric drilling. The drilling aims to establish the precise boundaries of rock layers and as Jane points out, “serve as calibration points for seismic and non-seismic” surveying in the future.

When will drilling begin?

The million-dollar question is impossible to answer at this point. Lebanon’s first offshore licensing round launched back in 2013 technically remains open and cannot close until cabinet passes two decrees. The LPA’s website says that once the decrees are passed, bidding will close a maximum of six months later. Regulations for onshore exploration seem less advanced. As the LPA’s Wissam Chbat explained at a conference in June, bits and pieces of existing legislation (namely laws from 1933 and 1975 along with a cabinet decree from 2011 and a Ministry of Energy decision from 2013) mean Lebanon can legally move forward with an onshore licensing round, but the LPA and the ministry have drafted a new law specifically tailored to regulating onshore exploration and both prefer using that as a framework instead of what’s already on the books. Additionally, neither the ministry nor the LPA have indicated that tender protocol, model contracts or block delineation have been drafted for Lebanon’s onshore acreage. As to whether onshore or offshore exploration is a priority at the moment, Minister of Energy and Water Arthur Nazarian tells Executive in written answers to questions, “Preparations for both onshore and offshore petroleum activities are moving in parallel and they complement each other.”

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Oil & gas 2015Special Report

Greasy politics in oil and gas

by Jeremy Arbid
written by Jeremy Arbid

A picture of Fouad Makhzoumi meeting Pope Francis sits on a mantel next to photos of other global figures in the salon of his multi-story mansion in Lebanon’s posh Ramlet el Baida district. Executive had asked for a meeting with the businessman, philanthropist, and politician to discuss Lebanon’s potential petroleum resources. Makhzoumi has thus far organized two conferences aiming to build consensus in Lebanon’s oil and gas sector, and is planning another conference for later this year focusing on corporate ethics in the oil and gas industry.

Makhzoumi is chairman and chief executive officer of multinational company Future Pipe Industries, a manufacturer of pipe system solutions for the water, oil and gas, and industrial sectors. He is the man behind the Makhzoumi Foundation, a local non-governmental organization providing vocational training, healthcare, and micro-financing to underprivileged individuals. His political career includes founding Lebanon’s National Dialogue Party, a self-described secular political party publishing al-Hiwar newspaper.

E   What is your vision for developing Lebanon’s oil and gas sector?

I [returned]to Lebanon from the Gulf in the early 1990s. For me, everybody that succeeds abroad has an obligation to come back and pass on some of their experience. Unfortunately, we were wrong because what we have seen is a system that does not allow professionals to come in.

I believe that if we want to go for real development, we need to go for the underdeveloped regions. Plus, economically it makes a lot of sense – I need land, I need access to main roads, I need access to the borders because most of our industry is for export – it makes sense. I would like to concentrate not on Batroun where the minister would like to – Batroun is a touristic [area], and people there are not hungry. Where we need to develop instead is in Akkar and in the South. In Akkar I have two options – one is to train for oil and gas, and the second is to plan for the reconstruction of Syria. This should be the vision.

E   In your view, is oil and gas just another political bargaining chip?

Oil and gas is the future of our country, that’s why we went for it. Historically what we have seen is that every potential income generating sector is divided [along] sectarian [lines]: telecommunications, Sukleen, the airport, the duty free, the port. This is yours and mine, but we will both approve the transaction in the cabinet and the parliament so that nobody can claim [corruption]. [The 1940s] was the first time we drilled for oil in this country, so we have known about it for 60 plus years. But the regional powers, Syria and others – why would they allow Lebanon to become economically independent when really there are so many political issues that are still boiling?

The whole dynamics of the region is changing. For Lebanon it means [that] until this regional solution is settled, why would you allow warring parties in Lebanon access to cash in order to stop being in a position [where] they have to negotiate for a settlement. You starve the country – which is what’s happening. During this period our politicians figured maybe let’s see if we can divide the future wealth of Lebanon among ourselves, so that when the deal is allowed, then I [as a corrupt politician] have my concessions on this one, my option of 10 – 20 percent, my upfront fees, and this way we can secure [wealth for] our [families]. And this is what we have fought to stop.

E   How might they divide the future offshore oil and gas wealth?

It is easy. Lebanon is divided geographically [and] by sect – Shiite, Sunni, Druze, Maronite. So each one of these [former warlords, who now lead these communities] decided that if [a discovery is made out at sea, nearest to their] territories then it is theirs; not theirs [in the sense that] there is a registered certificate with it, but it is theirs politically under the [notion that] ‘I need to develop my people’ and to create jobs for them. But most of their people have nothing to do with the deal, because the deal is personal.

E   When you say politicians have divided up the country and each one has his area, would they have some sort of role in the partnership of a joint venture?

No, you know better. To allow the government to sign with ENI or Total, or with Gazprom, it means [the company would] have to [take care of a politician’s son] so that [the politician] basically has an option [to gain] 10 percent of that field if you were to find gas or oil.

E   How does that work?

It’s very simple. Instead of paying you a fee to be my [official] representative I can get two things from you: an upfront fee to [ensure] the government will sign with you, this is the cash part. And then, like a derivative, in case you start drilling I [as the corrupt politician] have the option to own 10 percent of [a concession], [and] sometimes it’s running up to 30 percent, against which if there is an actual [discovery] I can sell that to a third party. So it means I am buying [potentially] hundreds of millions of dollars on a piece of paper that [I] can sell at anytime and get out.

E   Aren’t there rules in the law to limit this sort of behavior?

In every country in the world the first thing you do is create an authority which is non-political. You get professionals, civil society members – you get everybody involved. What we have done – the [Lebanese Petroleum Administration] they are all professional – but at the end of the day, each represents a sect; the Greek Orthodox, Maronites, Sunnis, Shiites, Druze, and Greek Catholic. The fact that I appointed you as my religious, sectarian group – you better be nice with what I tell you because I will have them kick your ass out. So now we have a series of ceilings – the LPA has to report to the [Ministry of Energy and Water], the ministry has to report to the Prime Minister, the Prime Minister will have to go to the Parliament. But actually the people who are deciding are the ones who appointed you to be a member of [the LPA].

E   What is your motivation in organizing the National Wealth Forum for Oil and Gas?

Before [this year’s June] conference I went down to visit the LPA [and I asked them to] show me what [they] do. They were very defensive. I said it’s one of two things: either you show me what you do or I’m going to attack you. So recruit me, and since I’m not for sale you have to recruit me based on facts. We spent a few hours there. These are good people, they have good intentions. Unfortunately they have political bosses. So instead of trying to undermine the LPA and to join the band by attacking them, let’s capitalize on their strengths, give them the platform to explain what problems they’re having, and this way you create enough consensus behind them so that slowly you can move them away from the political influence that they are put in.

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Oil & gas 2015Special Report

Show us the money

by Jeremy Arbid
written by Jeremy Arbid

Though Lebanon’s oil and gas sector is effectively on hold, it doesn’t mean policymakers have stopped showing up to work. Lawmaking is not a high-speed process, even with a functional parliament and cabinet, and when it comes to building the legal framework governing the nascent sector, more time to draft bills and build consensus could arguably be a positive thing.

The most recently proposed oil and gas legislation is an anti-corruption bill introduced by Joseph Maalouf, a member of  parliament’s committee on energy, in April 2015. The MP has introduced the draft law aiming to mitigate illicit activity in Lebanon’s yet-to-emerge oil and gas sector and tells Executive that it has been fast tracked into committee by Parliament Speaker Nabih Berri, a promising sign for the emerging sector. The minutes from a September 8 committee meeting however do not indicate whether the draft law was discussed. In any case, the parliament has not legislated this year and is unlikely to do so given the current political impasse and vacant presidency since May 2014.

Anti-corruption law

At a macro level, Maalouf’s law examines where corrupt activities may occur along the full lifecycle of an oil and gas project. He tells Executive that, “We took the process from the 3D mapping [seismic surveying] all the way to pre-qualifications, qualifications, and [tendering] the contracts. Within the contracts [we look at] each step that will happen and where the decision points are. We said that at this point there is possibility for corruption – any place where there is a decision point which someone could influence, we went into the details.” The law also covers downstream activities and the decommissioning of future wells, not only the first steps in an oil and gas project.

“I believe this is the one sector where we’re starting from scratch,” Maalouf says. “You can build foolproof systems easier when they’re already dismantled. Unfortunately, a lot of the corruption that exists in Lebanon has been ingrained in our social and political reality for decades.” The law itself prescribes penalties for a number of infractions including prohibiting ministry of energy staff – that includes the Lebanese Petroleum Administration (LPA) – from soliciting payments and gifts or accepting any type of consulting work or partnership in oil and gas activities while in office. The law provides the General Prosecutor with the authority to investigate and prosecute the law’s stipulated crimes, some of which may be punishable by three years jail time or a fine equivalent to the financial value of the infraction, or both.

But, Maalouf says, the law by itself is not enough. Transparency measures need to be systemic. In order to be most effective, Maalouf adds, the measures need to be in place at varying levels throughout the sector’s legal framework. In addition to his draft law, Maalouf says Lebanon must also ratify an access to information law, a law protecting whistleblowers, and establish a national anti-corruption agency. “These will move us from being linear to looking at the system across the board. The challenge in these and in other laws even when they’re enacted and even [with] the ministerial decrees for implementation, is that some of the laws are not being implemented period,” he says.

Robust legal framework needed

For their part, the LPA points to the Offshore Petroleum Resources Law (OPRL) and the Petroleum Activities Regulations (PAR) – a collection of decrees implementing the OPRL – as the foundation to safeguard transparency and accountability. Article 162 of the PAR requires any entity or individual involved in Lebanon’s petroleum sector to abide by local laws and the laws of their home country. Additionally, the decree forces those working in Lebanon’s oil and gas sector to abide by two international anti-corruption conventions: the United Nations Convention Against Corruption ratified by Lebanon into law in 2008, and the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Lebanon has signed but not ratified the latter convention which in theory means that countries coming to operate in Lebanon won’t have to abide by it. The decree, however, demands that they do.

[pullquote]Unfortunately a lot of corruption in Lebanon has been ingrained in our social and political reality for decades[/pullquote]

Additional legislation from the United States – the Foreign Corrupt Practices Act and a not-yet-finalized part of the so-called Dodd-Frank Act – as well as the European Union’s 2013 Accounting and Transparency Directives may also help Lebanon curb illicit behavior by individuals and entities hailing from those jurisdictions (see overview page 24).

Finally, the LPA says the required steps to adopt the Extractive Industries Transparency Initiative (EITI) – a tool for the disclosure of information that Lebanon’s civil society organizations could use to keep a watchful eye on transactions between the state and petroleum companies – are underway (see story page 28). Maalouf says the move to adopt the EITI can be initiated by either the LPA or the Ministry of Energy and Water (MoEW). He prefers having the commitment written as a law and ratified by parliament so that reporting requirements are mandatory.

Transparency measures pending approval

Cabinet is the ultimate authority for oil and gas policy in Lebanon and must approve all decisions related to the sector. Since 2013, two successive cabinets have been studying two decrees necessary to close the first offshore licensing round – one stipulates the tender protocol and outlines a model exploration and production sharing agreement between the state and oil companies, while the other deliniates the offshore blocks available to be licensed. The model contract draft decree includes two articles addressing transparency, the LPA says in a written response to Executive: “Article 41 of the EPA model (right holder conduct) contains provisions to insure transparency that are also based on anti-corruption and anti-bribery provisions. Additionally, Article 42 stipulates provisions concerning conflicts of interest between the direct or indirect interest of the right holder and its affiliates, and the interests of the state.” As the model contract is still awaiting cabinet approval, it is yet unclear when the decrees might be placed on the cabinet’s agenda for debate. Cabinet also has the legal authority to alter them so their final text is also, at this point, uncertain.

After nearly one year of being reviewed by a ministerial committee, the LPA tells Executive that all relevant ministerial comments have been incorporated and that the decrees are now with the prime minister’s office waiting to be added to cabinet’s agenda for debate. While this is a hopeful sign, Prime Minister Tamam Salam told the Washington Post in a September interview that, “We cannot reach an agreement between the political factions to adopt a policy to help us explore oil and gas in our economic zone.” So it seems unlikely that the two decrees will be passed in the near term.

A systematic local legal framework to complement international legislation is crucial to curb corrupt and illicit behaviors once Lebanon’s oil and gas sector moves forward. Ideally, these rules will be in place and implemented before the government signs any contracts but, Maalouf admits, the priority may be focused more on passing the decrees in the cabinet than legislating in the parliament. What follows are real examples from Lebanon’s nascent petroleum sector that anti-corruption legislation will help mitigate:

1) The potential for bribery

Earlier this year, a former executive of PetroTiger Ltd – an oil and gas company registered in the British Virgin Islands, a go-to jurisdiction to mask ownership identity – pleaded guilty in U.S. federal court to conspiracy to bribe a Colombian government official. The executive admitted to conspiring to make illegal payments to the Colombian official to the tune of $333,500 for his assistance in securing a $45 million contract.

That type of bribery is just one of the illicit activities people like Fouad Makhzoumi (see Q&A page 34) fear will be common in Lebanon’s oil and gas industry. An unsubstantiated allegation surfaced recently in al-Diyar, a local Arabic language publication. The author claimed an unnamed Lebanese official solicited a bribe from Italian oil and gas company ENI, one of the pre-qualified operators in Lebanon’s first offshore licensing round. Responding by email to Executive’s inquiry on the matter, ENI says the allegation is “completely false.” Tougher anti-bribery legislation can help ensure news items like this are never true.

2) Who ultimately benefits?

The garbage crisis has reinvigorated scrutiny over the registration of companies in jurisdictions that obscure or completely withhold ownership and shareholder information – Sukleen’s parent company Averda is owned by two companies registered in the British Virgin Islands.

When it comes to Lebanon’s oil and gas sector, disclosure of ownership is important, Maalouf says, because it will reveal who ultimately benefits from a company and also removes a layer of ambiguity that government decision makers could use to mask personal relationships or familial ties to companies. Executive last year looked into the Lebanese companies bidding in the offshore licensing round and found Apex Oil and Gas has obscured its ownership. The company is registered in Hong Kong – so it should be categorized as a Chinese participant, not Lebanese as the LPA still identifies it – and its true owners include UniGaz CEO Mahmoud Sidani and Chamber of Commerce, Industry and Agriculture of Beirut and Mount Lebanon Chairman Mohammad Choucair.

[pullquote] A systematic local legal framework is crucial to curb corrupt and illicit behaviors [/pullquote]

Maalouf says measures in his draft law will require the disclosure of beneficial ownership. In addition, Daniel Kaufmann, president of the Natural Resource Governance Institute and an EITI board member, tells Executive that governments and companies should expect beneficial ownership to be an EITI reporting requirement in the not-so-distant future (see Kaufmann Q&A page 28). According to the pre-qualification decree for Lebanon’s first offshore licensing round, the government is already collecting partner and shareholder information from those pre-qualified companies – details it has previously declined to provide to Executive.

3) Tracking draft legislation

There is limited transparency in the way legislation is drafted in Lebanon generally, and writing the rules for oil and gas has been no different. For example, the aforementioned company Apex has no experience in the oil and gas industry. It pre-qualified because existing legislations says that a company with no experience can find a qualified partner and qualify as a joint venture (see Q&A page 38). Last year Stephen Dow, a lecturer in energy specializing in emerging markets at the University of Dundee, told Executive that allowing non-experienced companies to pre-qualify in ultra-deep water jurisdictions like Lebanon is uncommon but not “intrinsically evil.” MP Maalouf says letting inexperienced companies pre-qualify is a legal loophole that needs to be closed – a conclusion Executive drew last year. He will try closing it, he says, but had no information about who wrote the provision or why it ended up in the legal framework.

While the procedure for how these decrees were drafted is publicly available information – the LPA produces a draft it sends to the Ministry of Energy and Water; the ministry can alter that draft or not, and then sends the draft to cabinet for approval. Cabinet, as has been mentioned, can also alter the draft. The various iterations of a decree are never published, and the only version of the decrees publicly available is the final version as approved by cabinet. Executive asked Maalouf if there is a legal mechanism to monitor the drafting process, “If you’re asking if we can track the content, have traceability in every step of the process, then the answer is no.”

4) What about the money?

That state revenues from seismic data sales – the first earnings from Lebanon’s oil and gas sector – are not being publically disclosed does not bode well for the potential billions more to come. In searching for clarity on the issue, Executive has not alleged theft or wrongdoing of any public official. Yet the government has stonewalled the question, trivializing its importance. When Executive asked then Minister of Energy Gebran Bassil in an October 2013 interview about the status of the money, he downplayed its significance, “You know this 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.” Then he sued the magazine.

The Ministry of Energy, in a written response to Executive’s interview request, says one pre-qualified company bought additional offshore seismic data in 2014 and that no data has so far been sold this year. Qabbani suggested that the government’s share of revenues from data sales may have grown to $50 million – it was last publicly announced in March 2013 to total $34 million – but added that when he sought clarification on the issue he did not receive a response. Energy minister Arthur Nazarian tells Executive sales the revenues are “in an account at the central bank” but refuses to provide more detail (see Q&A page 38).

Executive has repeatedly requested clarification on the issue because of its importance as the first revenues of Lebanon’s oil and gas sector and the government’s repeated commitment to transparency. But until today, Executive has not received an official explanation concerning how the accounts are structured.

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Oil & gas 2015Special Report

Transparency legislated

by Matt Nash
written by Matt Nash

Starting next year, major players in the oil and gas industry will have some extra financial reporting to do. Any company listed on a European Union member state stock exchange (whether or not it is registered in the EU) or domiciled there will have to publish payments to foreign governments on a project-by-project basis beginning January 2016. A similar rule is under development in the United States as well, although it will likely not go into effect until later. The 2013 EU directive – according to a European Commission (EC) press release – is the result of campaigning in the late 1990s and early 2000s by civil society organizations around the world for more transparency in an industry long associated with bribery and corruption, particularly in impoverished but resource-rich developing countries. The goal of these measures, as the EC puts it, is to “provide civil society in resource-rich countries with the information needed to hold governments to account for any income made through the exploitation of natural resources, and also to promote the adoption of the Extractive Industries Transparency Initiative (EITI) in these same countries.” Unlike the new legal requirements for industry, the EITI is voluntary and puts the onus to report on governments. Some countries, however, are making the initiative’s requirements mandatory by codifying a commitment into law.

Given that Norway – which is not an EU member state – is currently implementing a similar reporting rule on its own, half of the 12 companies currently pre-qualified to drill as operators offshore Lebanon would be legally required to do project-by-project reporting if and when exploration and production begins here (three more companies are based in the US and could have similar reporting requirements in the future). This international push for transparency would go a long way toward making the bribing of Lebanese officials more difficult for international oil and gas companies operating in the country. This would alleviate the fears of corruption that local businessmen and politicians with industry ties, like Fouad Makhzoumi, have.

Following the money

Civil society players involved in the transparency push see a direct link between publishing payments by oil companies to developing country governments and more widely distributed economic prosperity in those countries. Daniel Kaufmann, president of the Natural Resource Governance Institute – an international NGO involved in transparency initiatives – tells Executive that, “There’s an enormous developmental rationale behind the transparency calls.” If citizens in developing countries know exactly what their governments are paid, they can demand those revenues be spent in certain ways or at least cry foul when they go missing, so the logic goes. As for whether or not development benchmarks can be legislated the way transparency was, Kaufmann does not see a practical way forward. “You cannot do development by edict, by law, unfortunately; otherwise we would have solved it a long time ago,” he says.

Block boundaries. Source: Lebanese Petroleum Administration & Executive.

Block boundaries. Source: Lebanese Petroleum Administration & Executive.

Lebanon is still years away from even knowing for sure whether or not it will have oil and gas revenues, yet local legislation exists – and more is being drafted – aimed at developing a clean hydrocarbon industry (see story page 36) with money well spent. The barrier to transparency and good governance moving forward – as always – will be proper implementation and enforcement of the laws in place if and when the money starts flowing.

Three questions for NRGI President Daniel Kaufmann

E: Oil and gas companies are not always completely honest about who their owners are. Some even register in jurisdictions that allow actual ownership to be obfuscated. The notion of beneficial ownership, therefore, calls for finding out who is really profiting from a business. Where does beneficial ownership stand today as part of the Extractive Industries Transparency Initiative (EITI)?

Beneficial ownership is part and parcel of the expansion of the EITI requirements which began a year ago. Before EITI was very narrowly focused on the disclosure of revenues – the payments that companies made to foreign governments. But then it expanded very significantly to also include disclosure in terms of contracts, enterprise finances – and beneficial ownership is a crucial part of that expansion. It is quite complicated, requiring political will and consensus with many stakeholders. It’s in a pilot phase and not yet under fully fledged required implementation, but that is the direction it is moving, and we consider it an absolutely crucial part of the triangulation of information. It is very useful to know the payments, the revenues coming to the budget – if one doesn’t know what the original terms of the contract [were], how can one assess whether it is a good deal or not? And [knowing] who benefits [is important] because if there are interlinkages with politicians it might not benefit the whole population but only some cronies and elites.
So [beneficial ownership] is a crucial aspect but there is still a way to go before fully fledged required implementation. We are reviewing the results and lessons of the pilot phase so at the board level we can have discussions as to how it should be implemented. Because let’s face it, there are also practical issues regarding implementation. Do you always rely on public government registries? The answer is probably not. Instead, one goes to a company and basically asks them to fully disclose and there are ways to monitor and vet.

E: Is there a benefit to adopting the EITI for a country like Lebanon before signing exploration and production agreement (EPA) contracts?

Absolutely. Already you can start setting up the systems for transparency once the contracts come about – the structure of reporting. Many of the countries that might not be rich in natural resources are adopting the EITI because there are also issues of transit pipelines and the revenues from those. Or if it is an important financial center, or there may also be trading issues involving oil and gas at ports. So it is not all about production – for instance we’re working very hard for the Swiss to implement the EITI and they don’t have [a significant extractive industry] but they have very important trading companies.

E: How important is international legislation like the United States’ Dodd-Frank Act or the European Union’s Accounting and Transparency Directives to hold multinational companies accountable, and what can be done regarding governments?

The mandatory disclosure requirements following the Dodd-Frank initiative and the EU Directives essentially puts the pressure on companies to do their part to disclose. Why do I mention companies? In terms of the responsibility of the recipient government to also disclose that’s where the EITI is an important initiative. So what’s important [is that], eventually in Lebanon if there are deals for exploration and production, international companies report, and that will be governed by the EU Directives and the Dodd-Frank. That should be good enough, but from a Lebanon perspective it’s going to be making the government accountable and that’s where the EITI comes in – some countries are enacting legislation to implement the EITI to make it internally mandatory.

Revenue plans

The 2010 law governing offshore oil and gas activities calls for the creation of a sovereign wealth fund (SWF) with a dual purpose: spend some, save some. Article three of the law elaborates, “the capital and part of the proceeds [from oil and gas activities] shall be put in an investment fund for future generations, leaving the other part to be spent according to standards that will guarantee the rights of the State and avoid serious, short or long term negative economic consequences.” In an indebted country with poor service provision and crumbling infrastructure like Lebanon, hashing out the details of what gets spent, what gets invested, and how will be an important policy debate to follow.

One apparently settled revenue-related dispute is whether Lebanon should open all 10 offshore blocks for bidding in the first licensing round, or award rights to only a few blocks at first and have multiple licensing rounds over the course of several years, if not decades. Parliament Speaker Nabih Berri allegedly favored the first game plan, which would have increased the state’s chances of bringing in cash as quickly as technically possible, which can still take up to a decade, because a commercially viable discovery is more likely if 10 blocks are being explored instead of only two. One drawback of licensing all blocks together is losing the ability to negotiate from a position of power in the future. If some blocks are held back from the first round of licensing and a big discovery is made, there will arguably be more interest in future rounds and the state might be able to secure better terms. The Lebanese Petroleum Administration (LPA) website lists five blocks as “open” (see map above), suggesting they will be the only ones up for bidding in the first licensing round. In a written response to questions for this report, the LPA speaks of “gradual licensing” as a way to “smooth revenues.”

The waiting game

When Lebanon will move from planning how to manage revenues to actually managing them is anyone’s guess. A commercially viable offshore oil and/or gas reservoir cannot be found until holes are drilled into the seabed. Lebanon intended to award offshore drilling rights to oil and gas companies in February 2014, but cabinet’s failure to pass two decrees (one outlining the tender protocol and model exploration and production sharing agreement, the other delineating offshore blocks up for bid) stopped this very important part of this sector’s development in its tracks. While the LPA notes that “this delay has a high opportunity loss cost,” lost time has not necessarily been wasted. Additional oil and gas prospectivity survey data has been collected in the past 12 months, and the LPA says it is re-interpreting existing offshore data in light of dry wells in a Cypriot offshore block that borders Lebanon’s acreage with plans to do more analysis in 2016. The more quality data available to drilling companies, the less time spent before well sites are chosen. Often countries have no data before signing exploration and production agreements, so when those deals are signed here, drilling could begin faster than industry average. That said, the 2010 law governing offshore sets a maximum limit for the exploration phase at 10 years.

Still a roll of the dice

Given how far away Lebanon is from production – assuming it ever gets there as the possibility of not finding a commercially viable discovery can never be ruled out – speculation on how current price trends will impact the future is arguably useless. Worth noting, however, are three wells drilled in the past year and the reminder they bring that fortune can so easily change. In late 2014 and early 2015, Italy’s ENI and South Korea’s KOGAS drilled two wells in a Cypriot offshore block near Lebanon’s offshore acreage. Both were dry. Around the same time the second disappointment was being burrowed into the seabed, France’s Total announced it wouldn’t even drill in the Cypriot blocks it had licenses for because the risk of failure was too high. After a 2013 downgrade in the estimated size of Cyprus’ only offshore find – a field called Aphrodite – the news made the already questionable proposal to build a multi-billion dollar liquefied natural gas export terminal seem even more unlikely. Not far to the southwest of the dry wells, but just across the Cypriot maritime border in Egyptian waters, ENI found the largest field yet in the eastern Mediterranean in August – dubbed “Zohr” and estimated at 30 trillion cubic feet of gas, it is larger than the previous record holder, Israel’s Leviathan. The find is so close to the Cypriot border that, at time of writing, there were speculations in the Cypriot press that it might bleed over, meaning Nicosia would get a cut of revenues under an earlier agreement with Cairo. Either way, Total said in response that it would re-evaluate plans for the neighboring Cypriot block to which it has rights. Even in times of decreased investment because of the price pounding, ENI’s discovery has certainly put the eastern Mediterranean back in the headlines.

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LeadersOpinion

Stopping the spill

by Executive Editors
written by Executive Editors

War is coming. The battles ahead will not be fought on land or sea. They will be waged in parliamentary sessions and cabinet meetings. Our enemy is readying for an invasion so our defenses must be impenetrable. As Lebanon slowly develops an oil and gas industry, we need weapons purpose-built to prevent the systemic corruption that is destroying this country from winning territory in this new sector. The law is our sword in this fight, so we must forge it well.

All too often, people living in Lebanon denounce the country’s perceived lawlessness, wishing it were more like Europe or the United States of America. There seems to be a notion that elected officials, corporate bigwigs and average citizens in the EU and US are more upstanding or less prone to corruption and dirty dealing. That, however, is simply false. If there is less corruption in the EU and US than there is in Lebanon, it is only because these jurisdictions implement and enforce their laws, not because people there are somehow morally superior. Building a clean hydrocarbon industry in Lebanon will not be easy, but it’s also not impossible.

To stop corruption from spoiling this sector will require the strict enforcement of well prepared and effective legislation. The evolving legal framework, as they say, looks good on paper, with the exception of a loophole that allowed two local businessmen to establish a company in Hong Kong, obscure their ownership and pre-qualify for a licensing round with no previous experience aside from finding a qualified partner. MP Joseph Maalouf’s oil and gas transparency law is welcome and should be fully approved and ready for implementation before the first exploratory wells are drilled. The challenge moving forward will be enforcement. Lebanon already has plenty of good laws, the problem is that nearly everyone (citizens, police officers, elected officials) ignores them. This cannot be allowed to happen with oil and gas. We need vicious and well-trained watchdogs both inside and outside the system.    

If hydrocarbons are found and exploitable, they will belong to every Lebanese. If and when the money comes, its management must be absolutely transparent. The government wants to create a sovereign wealth fund which is a potentially great idea. Drafting the law that will govern that fund must be a public process. Debates about how the fund should operate must be held in public, not behind closed doors. The fund law must also create an independent authority to monitor revenues in order to complement the parallel oversight work that local NGOs will be conducting. Transparency must be the cornerstone on which this industry is built. For a start, the public deserves to know why there is already a loophole allowing unqualified companies to bid for the exploitation of our potential resources. We must be prepared. We must be vigilant. We must win this time.

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Protest MovementSpecial Feature

The leaders of a leaderless movement

by Executive Editors
written by Executive Editors

An awakened anger against the Lebanese government’s corruption and ineptitude has given birth to a growing country-wide popular movement. Young and old, rich and poor, political and apolitical, the movement has seen all sorts of people take part. But what these protesters do have in common is one very important thing: they are not coming to the streets under divisive sectarian or political banners. Rather, they are coming down united against a government which has swamped them and their country in garbage for over two months now, all the while lining their pockets and washing their hands of any responsibility.

Executive sat down with representatives of five groups that have either formed or reformed since the beginning of the protests to find out who they are, what their demands are and what they hope the future holds for them and for Lebanon.

These groups have been in the media and public limelight for the past couple of months, and, while many of them prefer to be seen as facilitators of the movement rather than leaders, they understand that their organizing has placed them in a position where they must be held to account for their words and actions. Simply opposing the government’s proposed solution to the garbage crisis was not enough. So, on September 28, representatives from each group attended a press conference in Beirut in which they put forward an alternative solution to the garbage crisis with the help of key environmental experts. The main points of the plan stipulate that all garbage that has been thrown in open dumps must be collected, local municipalities must take over responsibility of sweeping, collecting garbage and recycling, and that clear conditions on waste management must be put in place by the Ministry of Environment, supervised by the Ministry of Interior, civil society organizations and environmental experts.

How the detailed plan is received by the government and the wider public is yet to be seen. But what is clear is that these groups mean business, and not business as usual. They have had enough of empty rhetoric and false promises, and are willing to work hard to make sure the anger expressed on the streets this summer is translated into tangible change.

Five groups profiled:

Page 1: Shabab 22 Ab (August 22 Youth)

Page 2: Akkar Manna Mazbale (Akkar is Not a Dumpster)

Page 3: Tolaet Rihitkom (You Stink)

Page 4: Hellou Aanna (Leave us Alone)

Page 5: Bedna Nhasseb (We Want Accountability)

1. Shabab 22 Ab (August 22 Youth)

Stirred by the growing popular movement against this summer’s garbage crisis, a group of young people from Beirut decided to come together to support the larger groups such as You Stink by doing something a little different. After days of informal meetings to bounce ideas back and forth, and following the unprecedented police crackdown on August 22 and 23 on mostly peaceful protesters, the August 22 Youth group was officially formed, Facebook page and all.

Mahmoud Abouzeid, a communication studies graduate and core member of the group, says the catalyst for the official formation of the group was the media’s reaction to a group of youth protesters on August 23 who were labelled as mondaseen, ‘infiltrators’, a derogatory term used to categorize youth from poor, marginalized areas. “Those people are the essence of the protests, they are willing to give everything…they have nothing,” says Abouzeid. And so the group was formed with the aim of offering a different perspective than that put forward by much of the mainstream media.

The group is formed of a dozen or so core members who attend regular meetings, usually three to four times a week, and coordinate with the other groups to plan protests and direct actions. Beyond these core members, new faces come and go, volunteering their time if and when they can. Within the core group, there is no hierarchy or leadership, but each person is assigned a specific role – such as media coordination – to make the group’s work more efficient and organized. Coordination meetings with the other groups happen on a daily basis, though the August 22 Youth group does not always have someone present there, preferring to spend its time on the streets. Financially, Abouzeid says the group is not collecting external donations because it so far has no need for them. Rather, group members donate from their own pockets to pay for things such as printing and posters.

22shab

While the group agrees with the demands put forward by other groups, it has chosen also to deal with a slightly different set of priorities. One main focus point is to work closely with Beirut’s most marginalized youth to ensure their voices are heard in this growing movement. They contacted youth from Beirut’s poorer communities following the violent August 23 protest to hear their take on the situation, and created a joint Whatsapp group to keep them involved in their activities. When several youths were arrested following another protest, the August 22 Youth group went down to the police stations where they were being detained to put pressure for their release. Many of these youths don’t know what their rights are before the law, such as the right to a lawyer when detained. The group’s aim, therefore, is to make sure these individuals are informed of their rights as citizens and are made to feel like an active part of society. The group also offered support to the dozen or so who embarked on a two-week hunger strike (eventually called off on September 17), joining them in solidarity for 24 hours and organising a day of music and unity outside the Ministry of Environment where the hunger strikers were camped out.

The August 22 Youth group has in parallel embarked on a full-swing social media awareness-raising campaign. Using their own expertise and equipment, the group has been shooting interviews with youths from various social and religious backgrounds to discover their personal opinions on the movement. The videos are routinely posted online and shared widely around social media to provide an alternative to the mainstream media which Abouzeid says “just picks what it wants to show.” Moreover, it is important that the voices of these youths be acknowledged by the public as being as intrinsic to the movement as those of the well-known leaders from the larger groups. The group would eventually like to turn these interviews into a short documentary about the growing social movement.

[pullquote]The August 22 youth group tries as much as possible to steer the conversation towards action on the ground[/pullquote]

When it comes to coordinating with the other groups, Abouzeid maintains that the August 22 Youth group tries as much as possible to steer the conversation towards action on the ground. Rather than “wasting time by spending seven hours of a meeting arguing over details,” they could be walking the streets and interacting with people instead. This is where cracks in the movement start to show; when egos take over from real community organizing, says Abouzied, the movement will falter.

A more specific aspect of community-organizing the group is involved in concerns the current environmental crisis. The group understands that in many ways the state has especially failed the country’s poorer citizens, and if the garbage crisis is to be solved in these marginalized communities, it is going to have to come from the residents themselves. “We started an awareness campaign with advice from environmental experts,” says Abouzeid. “It’s very detailed but simple to explain to those people in the communities how to recycle. We are working on an animation, baby steps on how to recycle. We contacted people with experience in recycling. Some of them would collect garbage and then sell recyclable plastic [and other materials], making [money] doing this. We wanted to show people that once you decide to do something, you can do it. You can even benefit from [recycling] financially. You start individually, then it moves to your neighbour, then to the neighborhood and eventually to the city. And, ultimately, this is what’s dangerous to the current system. Once people are aware and know how to solve their own problems, that is when the regime will start falling.”

2

When asked if the group has a coherent political or economical vision for the country, Abouzeid emphasized that, aside from the fact that the group’s members hail from different political backgrounds and therefore there cannot be one distinct ideological vision, the movement itself is far from reaching this stage yet. The youth group is not and does not pretend to be a political party, he says. However, he adds, one way to change the system and tackle corruption would be to reform the electoral law so that citizens could finally vote based on proportionality. A fair voting system would help ensure higher accountability, allowing citizens to put pressure on their elected officials to make sure transparency is enforced, both in the public sphere as well as in the private sector. For now, however, the group’s long term project involves dealing with the country’s waste management, making sure they coordinate simultaneously with the other groups, environmental experts, local municipalities and the public to raise awareness and eventually come to a consensual agreement on how the country’s garbage should be dealt with. “Our aim as a movement should be to achieve a big win,” says Abouzeid, “which will probably be related to the garbage issue. Once we gain this win, we can move on to other demands, such as electricity, and eventually to issues like reforming the electoral law. We need this big first win, however, to gain credibility from the people. This way the people will support us more and, eventually, will move beyond just thinking in sectarian terms. There are other solutions and they can be a part of it.”

The August 22 Youth group is clearly riding a difficult wave; while it wants to be part of the larger movement, its heart lies with the youth in the communities of marginalized neighborhoods. Balancing the two is a challenge, especially when tensions rise and lack of trust between groups and activists is palpable. But reaching a middle ground is the group’s primary concern, says Abouzeid, who insists that individuals in the movement should put their petty differences aside in favour of unity and giving the voice back to the streets.

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