CommentOil & gas 2014: On hold

Beyond EITI

by Sami Atallah
written by Sami Atallah

This article is part of Executive’s special report on the oil and gas sector. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

 

A paradox confronts countries endowed with oil and gas resources. Despite their riches, these countries tend to grow slower in the long term, have higher income inequality, be more corrupt and even become authoritarian. This, of course, is not the fate of all such countries — many have managed to turn the oil curse into a blessing. Those that did had two things going for them: a high level of human capital and good institutions that upheld checks and balances on power.

Although Lebanon is well endowed with human capital, its institutions are generally weak. The Taif Agreement redistributed power more equally across the three key institutions — the presidency, the parliament and the prime ministership — that are associated with the three dominant sects, and in many ways, undermined the political system. For one, the executive authority became diffused to an extent that it is no longer obvious who is in charge. The members of the parliament seem less interested in legislating and holding executive authority accountable and more interested in providing services to constituents. The political parties have mastered the game of electoral survival by crafting election laws through redistricting and vote counting in ways that get them reelected with little to show for. They have resorted to clientelistic strategies of buying votes and providing services in return for political loyalty. Furthermore, the judiciary and the oversight agencies whose job it is to hold the government accountable were at best sidelined but most often intentionally weakened through political interventions or bureaucratic understaffing.

In sum, the political elite govern the country largely by the logic of dividing the spoils among themselves through illegal subcontracting of projects, violating tendering requirements, as well as contracting companies despite conflicts of interest. This has resulted in high levels of corruption, embezzlement, mismanagement and waste benefiting the political elite at the expense of the rest of the population.

It is against this backdrop that the Lebanese Petroleum Administration (LPA), the body entrusted to govern the oil sector, came into being. Between November 2012 and August 2013, the LPA proceeded rather efficiently and with more transparency than most Lebanese institutions in approaching the sector. It held consultative meetings and workshops, and managed to lay the groundwork for the launch of the offshore licensing round. Now it is waiting on the government to pass the last decrees for the process to continue, and has found itself caught up in the Lebanese political mill with no clear way out of the deadlock.

The challenges awaiting Lebanon to transform oil and gas into sustainable development are many and go beyond the work and responsibility of the LPA to include ministries, oversight agencies and the government at large.

In reaction to this challenge, many local and international actors are advocating that Lebanon sign up to the Extractive Industries Transparency Initiative (EITI), which aims to enhance transparency in the sector (see “Safety in numbers“). The EITI is a voluntary coalition of government, oil companies and civil society organizations (CSOs) whose aim is to promote transparency and accountability in revenue management. Countries that express interest in the EITI must pledge to work with the private sector and civil society, appoint an individual to lead the process and produce work agreed upon by all stakeholders. Within a period of 18 months, the multistakeholder group (MSG) must publish a report that discloses the revenues — taxes, royalties and other sources — received by the government. It is argued that once the data becomes transparent, this will lead to accountability.

However, despite the best of its intentions, the EITI will most likely not solve Lebanon’s problems. For one, the output of the MSG, which is the audit report, compares how much oil and gas companies paid with how much the government received. In accounting terms, they are effectively telling us whether the numbers agree — but what it does not tell us is whether the numbers are correct. In other words, there is no way we can know from this exercise whether Lebanon got the optimal government take or whether its royalties are high enough. This is particularly important in Lebanon since the country’s procurement process in other sectors has generally been at best opaque.

Furthermore, other problems arise in regard to the audit report published by the EITI group: the fact that companies work on an accrual basis — which records sales and purchases when commitments are made, regardless of when cash is actually transferred — whereas governments typically work on a cash basis makes audit reports liable to manipulation. Another problem is that reports do not necessarily show how much each company is paying the government.

The second issue is that the EITI’s work is based on the inaccurate premise that transparency “can only lead to accountability if there is an understanding of what the figures mean and public debate about how the country’s resource wealth should be managed.” Although the disclosure of information and public debate is necessary, it is by no means sufficient to hold the government accountable. The audit report published by the EITI can definitely — if written succinctly and clearly — inform and even enlighten citizens but it will likely not lead to accountability. Lebanon is particularly notorious for this as many violations are reported by oversight agencies in their yearly reports or the media but little or nothing is done about them. In a nutshell, the system has rarely held anyone accountable.

The fact that CSOs are represented in the MSG may be a good thing at first as it shows strong inclinations for an inclusive process. However, it is important to note that generally, CSOs are the weakest link in the group made up of the government and oil companies. To assume that they will be able to stand up to both parties or even that they are independent is a gross assumption. CSOs have no formal enforcement mechanism and may not be representative of the public. Another concern is that CSOs in the MSG may end up being coopted.

However, the major shortcoming of the EITI is that it focuses on one element of the value chain: transparency in revenue. In other words, it ignores the challenges facing the country in upstream activities, especially in awarding contracts, and the downstream activities of revenue distribution. In fact, the source of the oil curse problem is not only about outright corruption per se. It is not necessarily about money disappearing into pockets of officials, but rather about money being spent inefficiently. In fact, cross national studies have shown that the problem of the resource curse is largely of two kinds: it draws people out of the productive sectors and into rent seeking, and it allows politicians to use resource rents to generate support through inefficient allocation of jobs in the public sector. Lebanon is particularly vulnerable to these ills since its democratic system is highly personalized and patronage networks and clientelism are rampant.

Although the EITI is a first step toward accountability, it falls short of what we aspire for. In fact, one major concern is that once Lebanon signs up to the EITI, it gives the impression that we are doing something about transparency or that the government is fulfilling its obligations by meeting the requirements of global initiatives. The EITI would, in this instance, become the end rather than the means. More worryingly, investing in the EITI may divert resources from the real issues that are beyond reconciling the taxes and royalties paid by companies to the government.

We need to go beyond the EITI and adopt a more comprehensive approach that tackles the various phases of the oil and gas value chain, from the preparation phase of awarding contracts all the way to how revenues are spent and their effects on the country. In each phase, we need to think creatively about how to push for transparency and accountability despite the current constraints. I do not believe that there is a textbook case to adopt, and hence we need to think of ways to break the opaqueness of the system and push for an accountability mechanism for the system to be credible. We need to find ways to break free from our poor institutions and establish new ones. The parameters of such an institutional infrastructure could be as follows:

For one, the LPA must have more autonomy vis-à-vis the Ministry of Energy and Water (MoEW) and must have control over its own budget. Its decisions — pending that they do not infringe on the competitiveness of the process — must become public before they are submitted to the ministry so the public can monitor how policies are changing, who is changing them and why. Any decision or policy must be accompanied by explanation and justifications. Furthermore, oil companies must be forced to reveal all relevant material to a public body, or otherwise risk losing their contracts.

The government, with the MoEW, must develop an energy policy so we have a sense of where the sector is going, how oil and gas discoveries factor in and how the government plans to deal with their effects on the economy.

The parliament and particularly the energy parliamentary committee must play a more effective role. To do so, it must develop its technical capacity so it can review, contribute and debate the government’s policy outlook. It must not only be consulted by the LPA and the government, but it must hold regular public hearings on oil and gas policy in addition to the MoEW, LPA, Court of Audit and other relevant oversight agencies to answer questions. These hearings must involve experts and CSOs. The committee’s purpose is primarily to hold the government accountable but also to establish a national consensus on oil and gas policy.

As for CSOs being more informed, they must build their capacity by learning about the sector. They must hold their own debate and discussion on how best to monitor the oil and gas sector. To be more representative, they ought to pool their resources to organize a coalition or a network. In this way, they can more effectively participate in the parliamentary public hearings.

On the policy level, the government and concerned ministries must develop policies to prevent people from leaving their productive sectors in favor of rent seeking, which is very common in resource rich countries. Furthermore, we need to constrain politicians from using oil revenues to generate public jobs in return for political support.

While adopting the EITI may provide a good start toward proper utilization of revenues from oil and gas, alone it would be woefully inadequate. For Lebanon to turn its oil from a curse into a blessing, it must lock in a better institutional architecture than the one we currently have.

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Leaders

Raise your glass

by Executive Editors
written by Executive Editors

Arak is in a bad state. Although it was the drink of choice for many Lebanese up until the Civil War, tough competition from whiskey and other spirits has driven it from all but a few traditional settings. And don’t even mention trying to penetrate the youth market. Indeed, as the eyes of both the country’s private and public sectors are focused on the more glamorous local wine production industry, arak production is sinking deeper into oblivion (see “In Flavor of Arak“).

But this should not be the case. Lebanon is known for its arak production: ask anyone from a Lebanese village about arak and they will spend impassioned hours telling you stories of how they or their neighbors distill it at home — or at least used to. They will also tell you what their favorite brand of commercial arak is, and why, and how many health benefits the drink has. As such, arak is the only spirit the Lebanese can place a national claim on, much as the Mexicans are known for their tequila and the Japanese for their saki. Arak is the only drink that is truly ours. It is an integral part of Lebanon’s traditions and culinary heritage — and if promoted in the right way, it could once again be a source of national pride.

We know the drink has the potential to make a comeback. In the late 1990s, its Greek cousin ouzo — which is also made from distilled grapes and flavored with anis — was facing the same issues of decreasing sales and the perception that is was an old person’s drink. So Greece’s big ouzo producers started marketing campaigns, filled with images of couples and friends drinking ouzo, targeted at young Greeks and the many tourists that visit the country. Essentially, they were trying to make ouzo hip again. It worked, and today ouzo is synonymous with the Greek islands’ way of life: not just popular among the younger generation and a must-drink for tourists, but also a growing export.

This is what should be done with arak. Both Massaya and Arak Brun have attempted individual marketing campaigns for their arak, but a more collective branding effort is needed to make a real impact. Just as Lebanon’s major wine producers gathered to form the Union Vinicole du Liban (UVL) to promote Lebanese wine, arak producers — many of whom are also wine producers and members of UVL — should form a league to promote the story of arak.

This story could capitalize on arak’s traditional roots to maintain its base of older drinkers while appealing to a younger generation. To capitalize on the latter, a wider strategy should involve distribution channels to the country’s nightlife outlets. Bars like Mar Mikhael’s Train Station are already experimenting with arak based cocktails, while pubs like Anise serve a wide variety of arak brands to favorable responses. More such efforts are needed and should be encouraged by arak producers.

Once arak consumption is revitalized in the local market, it will become easier to promote to the global market through tourists who will come to Lebanon and enjoy drinking it so much that they will take a bottle or two with them when they leave. The Lebanese diaspora should also be encouraged to take an active role in promoting arak as their country’s specialty drink.

A glass of icy cold arak is as Lebanese as a plate of tabbouleh or hommos, and it should be just as integrated in our collective repertoire. For all of our sakes, but especially their own, it is a time for the country’s arak producers to lead the effort in doing so.

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Beer, wine & arakBusiness

In flavor of arak

by Nabila Rahhal
written by Nabila Rahhal

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

No Lebanese mezze table is complete without a pitcher of milky white arak and its accompanying little glasses. This anise infused drink made from distilled grapes, which turns white when water is added, is part of the Levant’s culinary heritage as a whole, and is an integral part of Lebanon’s, which has the highest number of commercial producers and where villagers take pride in producing their own homemade — or baladeh — arak.

Is homemade the best?

There are no official figures available for the annual production of arak, but in addition to commercially-produced varieties, arak baladeh — or homemade arak — is prevalent. Producing the drink at home is a standing tradition among villagers, possibly due to the relative ease of making it. All that is needed is grapes, anise, a still — known as a karakeh — and the know-how.

Even though many of those who produce arak baladeh do so for their own consumption and as gifts for friends, some have taken it to a slightly more commercial level and sell a limited amount to Lebanese restaurants. Elias Fadel, owner of Fadel restaurant in Naas, produces 600 liters of arak annually, which he sells for $66 per bottle. Yet due to high demand, he says he can only satisfy 30 percent of his potential customers before he runs out. “I enjoy making my own arak because I can be sure of what quality grapes I put in it. I follow the best traditional procedures to make the best tasting arak,” says Fadel, insisting that one can tell the difference in taste between his four times distilled arak and other varieties that are distilled three times or fewer.

All arak producers, however, warn against arak baladeh that is distilled incorrectly, without properly removing the methanol which can cause, at the least, a throbbing headache and, at worse, blindness. “Not all arak baladeh is good and some can cause bad headaches. It all depends on the way it is done,” says Fadel. 

Quality control 

Faouzi Issa, co-owner at Domaine Des Tourelles which produces Arak Brun, has no concerns regarding arak baladeh that is meant strictly for at-home enjoyment, but says there is a danger with the lack of control in this sector when such arak is sold commercially with no monitoring or quality assurance. This is because it could develop a bad reputation for the arak sector as a whole when bad quality arak is circulated, he argues. 

This was especially true during the Lebanese Civil War, according to Saïd Touma, owner and general manager at Château Saint Thomas which co-produces Arak Touma. He recalls how anyone was able to produce arak using low quality ingredients and export it, thereby giving a bad reputation to Lebanese arak and causing both local and global consumers to lose confidence in it. 

Commercial arak producers 

Today, with the new modern stills available, commercial arak producers have the means to produce high quality arak and Fadel admits that the commercial arak producers’ equipment is more efficient and can produce better quality arak than the baladeh variety. “Give me their modern equipment and I will produce the best quality arak in Lebanon,” says Fadel. Producing high quality arak then becomes an issue of ingredients used and techniques employed.

Arak producers Executive spoke to agree that making quality arak is an expensive endeavor. “Production of high quality arak is more costly than wine because you need the best quality ingredients,” says Aziz Wardy, general manager of Solifed, which makes Arak Wardy and Arak Gantous et Abou Raad.

Every bottle of arak requires eight kilograms of grapes for distillation, compared to 1.6 kilograms needed to produce wine, explains Issa, and since the average price of grapes is 60 cents per kilogram, some producers might choose to limit costs by distilling alcohol from other sources such as molasses.

Arak producers Executive spoke to say the anise they use for their arak comes from Hina in Syria, which is considered by many distillers to be the best in the region. Due to the war in Syria, anise prices have risen from $3 to $7 per kilogram, according to the arak producers interviewed. “They deliver the anise to our winery at their own risk and so far, although they are sometimes late, delivery has been consistent,” says Touma. Due to the hike in anise prices, explains Wardy, some arak producers cut costs by using lower quality anise or anise substitutes such as anise oil or phenyl oil.

Considering the high cost of production, from the ingredients themselves to the packaging which is generally imported, and the distribution fees involved, both Fadel and Issa raise the point that it would be surprising if arak sold at $5 per bottle would indeed use the best quality grapes or anise available in the market. Here, and for lack of better measurement, price is being used as quality control.

Marketing arak

Despite it being synonymous with leisurely Sunday family lunches and a staple of Lebanese restaurants, arak consumption has been struggling to maintain relevancy outside of these markets, both locally and abroad.

When it comes to the global market, Issa says they export 25 percent of their arak production per year to the UAE, Iraq, Jordan, the US, Australia and Canada, explaining that the international market is mainly driven by Lebanese expatriates although they are trying to change this trend by introducing arak to markets such as the UK.

Wardy believes the arak export market is shrinking because it is easier to market Lebanese wine abroad and “there is more potential” in the latter. In fact, all arak producers Executive spoke to started off with only producing arak before expanding to wine production. “We decided to move into wine because the arak market has dropped recently and so we decided to shift to something else. Wine on the other hand is booming,” adds Wardy. While the arak market may have experienced a general drop in the exports market, some reckon that local consumption may be on the rise. “Fifteen years ago, we used to sell 1,000 bottles of wine per year at our restaurant and only 500 arak bottles. Today, there is a shift and the numbers have been reversed. I attribute this to the rise in arak consumption among young people,” says Fadel, speaking of the trend in his restaurant.

Masaya Arak is generally credited with the rebranding of arak’s image through its modern dark blue bottle, but a more collective effort is needed to truly market this drink. “Young minds should learn to enjoy and appreciate arak more as part of our culture. To achieve this, we need more trendy events and venues to push for this. The problem is that arak producers have a smaller market so it is hard to finance a campaign to promote arak consumption,” says Issa, who has been actively pushing for the repositioning of arak through events at his winery and billboard promotional campaigns.

Arguably Lebanon’s national drink, Arak has weathered many a storm but has remained ever present; it should not be allowed to evaporate.

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BusinessIndustry 2014

Boom times at the Régie

by Paul Cochrane
written by Paul Cochrane

This article is part of an Executive special report on industry. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

The cedar tree may be the national symbol, but when it comes to smoking the national cigarette brand Cedars, it is the Syrians that have the strongest affinity.

In fact, a correlation can be drawn between the number of Syrians in the country and sales of Cedars: more Syrians in Lebanon equals more Cedars sold. Back in 2005, in the months after the Syrian military withdrew along with thousands of Syrian non-military personnel, sales of Cedars plunged by 50 percent. Government-owned Régie Libanaise des Tabacs et Tombacs (RLT) attributed the drop directly to the withdrawal, with soldiers and low paid workers the main consumers of what was then — and still is now at LBP 750 ($0.5) per pack — the cheapest smokes on the market.

Several years on, with Syrians back en masse, sales of Cedars have rebounded, surging from 94,744 cases (of 10,000 cigarettes, or ‘sticks’ as they are referred to in the trade) sold in 2011, to 195,060 cases in 2013. With the number of registered Syrian refugees at well over 1 million, 2014’s sales have already surpassed 2011’s totals, with 108,418 cases sold in just the first half of this year.

Yet while sales are recorded, RLT does not know who the cigarettes are sold to, or if they’re consumed locally or exported by wholesalers. “We think [the rise in sales] is mainly due to the Syrian refugees, but also [due to] exports to Syria and elsewhere,” says Pierre Hedari, RLT’s head of import and export.

PrintRolling at full capacity

The turnaround in sales of Cedars is clearly a boon for the manufacturer at its Hadath facilities. “We’ve had very high sales, are at full production capacity, and will buy new machinery to satisfy the demand, having gone from one shift manufacturing Cedars to two shifts,” adds Hedari.

Overall sales of cigarettes have increased since the Syrian crisis, rising from 1.24 million cases in 2011, to 1.55 million in 2012. Sales dipped marginally in 2013, to 1.21 million cases, and in the first half of 2014 reached 539,415 cases, signaling annual sales similar to last year.

Last year’s drop was due to a rise in smuggling into the country, a negative spinoff from the Syrian conflict, estimated by international manufacturer British American Tobacco (BAT) at 800 million sticks, while the legal market is 10.7 billion sticks per year. The rise in smuggling and a downward shift in sales of Class A cigarettes in favor of cheaper Class B smokes — rising from 27 percent of sales in 2012 to 37 percent in 2013 — prompted RLT to introduce a new brand, Maestro and Maestro Light, in May.

“It’s at a low price to combat cheap smuggled cigarettes. Our goal was to sell it at LBP 500 ($0.3) per pack, but you have to give a share to the retailer, so Maestro is selling for LBP 750 ($0.5),” says Hedari. Although in its early days, sales so far have been below expectations, with Maestro accounting for no more than 10 percent of RLT’s sales. Even if the new brand does not boost consuming, RLT’s overall revenues to the state treasury from $565.2 million in 2013 to $1.1 billion are expected to rise.

And if sales of Cedars are anything to go by, RLT is on track to becoming a bigger contributor to the state coffers, with its total market share having grown from 7.6 percent in 2011 to 20.1 percent this year. Ironically, such a boon for the budget may be dependent on Syrians’ continued fondness for the nation’s Cedars.

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Beer, wine & arakBusiness

Multiple shades of amber

by Paul Cochrane
written by Paul Cochrane

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

To many Lebanese, Almaza has been synonymous with beer. Ask for a beer at a bar or restaurant, and it was a chilled bottle of Almaza that you invariably got. But the Heineken-owned Brasserie Almaza’s monopolistic grip over the beer market is over. The omnipresent Almaza is no longer the only large scale brewer in the country, with Kassatly Chtaura’s Beirut Beer having hit the shelves this summer, while a third commercial brewery is in the works.

The craft beer, or microbrewery, scene that has been dominated by Gravity Brewing’s 961 Beer since 2006, also has a new contender with Colonel Beer launched in July. It is boom times for beer drinkers — provided you like lager. 

A lager market

Kassatly’s new beer is a lager — like Almaza based on Czech Pilsner, a type of lager — as is Colonel’s biggest seller. Pale lager, typically drunk very cold, is the most popular and commercially available beer on the planet, although to beer lovers it pales in taste and complexity compared to ale, bitter and stout.

New kid on the block

New kid on the block

 

Locally, however, beer is equated with being a thirst quencher to be drunk on a hot summer day, with the bulk of beer sales in the summer months. “Most Lebanese have a low beer culture, that it should be cold and drunk from a bottle or a glass that has been in the freezer, which is why people don’t drink beer in the winter,” says Omar Bekdache, head of operations at Gravity Brewing.

Ironically, ale would be more suited to Lebanon’s moderate climate, from the brewing process, which does not require such a cold temperature, to storage and drinking the ale itself, as ales do not have to be consumed super cold. Brewing costs would also be lower, meaning breweries would have better returns.

However, market demand is not there. “Ale costs half the price of lager [to brew] but that is not the point, as you wouldn’t be able to sell it,” says Jamil Haddad, CEO and brewmaster of Colonel Beer in Batroun.

[pullquote]It is only the water that is Lebanese. The hops, barley, malt and yeast are all imported[/pullquote]

Almaza’s domination of the market since the brewery began in 1933 — bought out by multinational Heineken in 2002 — is the prime reason. Knowledge of beer is low, driven by consumers being used to primarily one taste, lager. 

Until earlier this year, Almaza had a 74 percent share of the beer market, according to BLOM Bank data (see chart). Coupled with Heineken having roughly a quarter, or 24 percent, of the 21 percent import segment, Heineken-Almaza has approximately 80 percent of overall market share. As a result, any new brewery entering the market has to take popular taste into account. 

“It is pure marketing reasons why lagers dominate the market, and I can’t blame the new breweries for bringing out lager as they wouldn’t get the same return on investment if they brewed ale, so they went the easy route,” says Elie Haber, head of the biomedical department at St. Joseph Hospital and a nano-brewer.

Creating a taste

Haber started brewing for himself several years ago, after sampling ‘real beer’ in Germany and being frustrated by the lack of choice in the Lebanese market. He has since invested around $10,000 to brew a range of beers in a small room at the top of his building in Mansourieh–Bhamdoun. Haber is one of just a handful of craft brewers who import their own ingredients and sup their home brew with friends. They were invigorated when 961 entered the market several years ago, bringing out craft brew lager as well as red and pale ales.

The underdog

The underdog

 

It was 961 that blazed the way for the new breweries today, single handedly creating a buzz around beer. Being the first to take on Almaza was a challenge, and it has been an uphill battle to change consumer behavior. “When we entered the market, people didn’t know about craft brewing. Our lager was considered completely different from what people were used to; a highly carbonated beverage. Some comments we got were, ‘Is this really beer?’” says Bekdache. “We had four beers and people didn’t know the difference, but today people ask for a porter or red ale.”

961’s foray into the market prompted Almaza to react by bringing out a malt beer, and later a light beer to diversify its offerings. Bekdache’s beer, branded as 961, also launched a separate line, Lebanese Brew, or LB, indicative of the continued demand for lager.

Like all locally brewed beers, it is only the water that is Lebanese. The hops, barley, malt and yeast are all imported. This has raised the cost of production, especially compared to Almaza which is able to leverage the economies of scale of the Dutch mother company. The same applies to bottling.

[pullquote]”Our aim is not to eat the market share of our competitors, but increase Lebanon’s average consumption to 10 liters or more”[/pullquote]

“Shipping costs are a killer. That is why it’s really hard to compare us to a commercial brewery — even the price of buying bottles is totally different,” says Bekdache.

Despite such challenges, 961 was able to corner about 5 percent of the market, according to BLOM Bank data, and go from an initial 400,000 liters per year capacity to 1.8 to 2 million liters at its new Mazraat Yachouh facility. 

Bekdache has welcomed Beirut Beer’s entry to the market, shaking up Almaza’s dominance and the two companies’ aggressive marketing is raising awareness about beer in general. “I am happy Beirut Beer is out, it’s a good thing, as they [and Almaza] can fight each other,” he says. “The market has also grown bigger, and has the potential to grow given the effect of the marketing campaigns both are doing.”

Bekaa brewed

Kassatly Chtaura, which also manufactures juices, energy drinks and wine, opened its $15 million brewery in the Bekaa Valley in July. The facility has an annual capacity of 2 million cases of Beirut Beer. “It is a state-of-the-art German built facility that runs at the push of a button,” says the firm’s export manager Reem Kassatly Ragy.

Chug-a-lug, chug-a-lug

Chug-a-lug, chug-a-lug

 

With Kassatly having the bottling and packaging facilities, half of the brewery was already there, making an annex for the brewing and fermentation of Beirut Beer a relatively limited investment, while the firm has an extensive distribution network already in place to market its beer alongside its other brands. The company was not daunted by going head to head with Almaza, believing the market is growing while having learned from the success of its winery, Château Ka, about taking on the giants.

“We believe there is demand and it is company philosophy to expand into new beverage production endeavors, so beer was a natural expansion,” says Kassatly Ragy. “Average consumption in Lebanon amounts to some five liters of beer per capita per year, whereas average consumption in the US and Europe varies from 80 to 120 liters of beer per capita per year. Our aim is not to eat the market share of our competitors, but increase Lebanon’s average consumption to 10 liters or more.”

That said, Beirut Beer is retailing for LBP 250 less than Almaza, at LBP 1,250 for a 330ml bottle, and has 220 ml and 500 ml bottles, and a 250 ml can on offer to bolster its market presence. Its entry has reinforced the penchant for lager as a beverage to be drunk cold in the summer months, reflected in its ad campaign for the small 220 ml bottle: “Cool till the last drop.”

With Beirut Beer coming out, Almaza introduced a Radler (a shandy mix of lemonade and beer) and Rayes Beer. The company also re-labeled its lager for the FIFA World Cup in different national flags, and in August launched specially-packaged bottles for Iris, a Beirut nightclub, as a way of product diversification (Almaza were contacted by Executive but were not available for an interview).

More competition is in the offing, with Interbrand, which manufacturers juices and soda under license as well as its own brands, planning to follow in Kassatly’s steps by investing $10 million to open a brewery next year.

Craft brews

While Kassatly and Interbrand are using foreign expertise to develop their beer, 961 helped the nascent craft brewing scene to take off. Bekdache and his partner Mazen Hajjar provided guidance and imported ingredients to Haber, in addition to offering support to the country’s smallest brewery, Schtrunz, run by Emile Strunc, as well as to newcomer Colonel. “We’ve worked with Emile and Colonel, they are good friends,” says Bekdache.

See you soon

See you soon

 

Strunc, who is Czech–Lebanese, is a consultant by trade and in his spare time a beer enthusiast with a master brewer diploma. His father had brewed beer at home in the 1970s, and Strunc decided to brew his own in a small room at his home north of Jounieh. Producing under 600 liters a month, Strunc brews different beers throughout the year, ranging from black ale, India Pale Ale (IPA) and summer ale, to Munchen, Vienna, Kolsch and two wheat beers, Weiss and Dunkelweiss.

Initially drinking the beer just with friends, Strunc started to sell to friends of friends, and its popularity spread. This year he has moved into a 75 square meter facility in the Ghazir industrial zone (a government requirement for commercial beer brewing), and plans to double output. “I have a commercial license and am working on the industrial license,” says Strunc. “I’ll soon have one selling point in Beirut, a high quality alcohol store that I can’t name yet.”

Haber, Bekdache and Strunc were all at the opening of the Colonel brewery in Batroun in July, reflecting the camaraderie between the microbrewers. Haddad’s main brew is Colonel Lager, at around 80 percent of production, followed by German Light (a Pilsner), Irish Red and Irish Black, which is sold in 750 ml bottles provided by Strunc. “I did a deal with Jamil [Haddad], I provide the large bottles and he provides the 330ml bottles. There is fantastic cooperation between us,” says Strunc. Haddad invested $2 million to set up the microbrewery, an eco-friendly structure made of recycled plastic bags and eco-board, that is a brewery, bar and restaurant. “What I’ve done is bring the concept of the microbrewery, with transparency between the bar and the brewery,” he says. “Basically, a microbrew is craft beer as it is limited quantity, whereas industrial beer adds corn or sugar and is pasteurized. We only filter. These three ingredients change the whole product, as otherwise you get a full belly from the sugar and corn, and a headache.”

[pullquote]”The world is changing to craft breweries and there is a new trend for microbreweries”[/pullquote]

While bringing out four beers, Haddad was careful not to hit the market with too many brews, knowing that while the sector has improved in recent years, it is still predominantly a lager market. “I learned from 961 and their mistakes, which went to the market with several flavors which confused people. You need to build on it,” says Haddad.

Colonel, which is named after a popular windsurfing spot that Haddad and his friends would frequent, has already exceeded expectations. Haddad did no advertising, relying purely on word of mouth, and its success was pushed by his hometown. “People in Batroun are treating it as their product, it is at all the beach resorts and restaurants, and now in Beirut bars. It is getting bigger and bigger,” he says.

The beer has proved so popular that Haddad has already had to change his business model. “The plan was to be on half capacity for three years and then have full capacity. But from the first day, we are at full capacity and selling out, which we didn’t expect in such a short time.”

Haddad has also sent four orders to Syria, and had demand from Iraq, but lacks capacity. “People want craft beer from Lebanon, with many dealers asking me to sell abroad but I’m not ready yet,” says Haddad.

Beer market share Exports

While beer consumption is increasing domestically, exports are a further boon. BLOM Bank estimates Almaza exports roughly 10 percent, or 2.33 million liters annually, to various destinations such as Syria, the United States, Turkey and the United Arab Emirates. 

Kassatly has export plans and is configuring excess capacity, which can be exported to the rest of the Middle East as well as Africa, a factor in the beer’s name. “Beirut is a city with a rich culture, history and heritage, and is the center of Lebanese lifestyle,” said Kassatly. “What’s more, we are really thinking internationally, so we needed a name that refers to our Lebanese origins, yet has global appeal.”

961 is also exporting, to Europe and Hong Kong, while 60 percent of LB is exported. “We sell in the US, not just to Lebanese expatriates, and have a distributor in Britain, so an English distributor for our pale ale; that is outstanding for me,” says Bekdache. Domestically, Bekdache sees craft beer becoming a sizable niche market, and with a price tag to match. “If we go into a price war, we can’t win. Our strategy from last year onwards is to sell premium beer at a premium price so the quality doesn’t go down,” he says. 

Buoyed by his success, Haddad foresees many more breweries in the future and with more types of beer on offer as the market matures. “The world is changing to craft breweries and there is a new trend for microbreweries. I think there will be 100 microbreweries here in say 10 years time.”

Correction: A previous version of this article misidentified nano-brewer and head of the biomedical department at St. Joseph Hospital Elie Haber as Emile Haber. Apologies.

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Beer, wine & arakBusiness

When size doesn’t matter

by Nabila Rahhal
written by Nabila Rahhal

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

Lebanon produces about 9 million bottles of wine annually, almost half of which are produced by two wineries alone — Château Ksara and Château Kefraya. The remaining amount is produced by well established wineries making an average of 350,000 bottles each — and boutique wineries, which produce less than 100,000 bottles, contributing altogether less than 700,000 bottles yearly.

Being a boutique winery in a country where the production is already scarce creates a unique set of challenges but also has its own rewards for the wine producers.

Quantity versus quality

Some of these smaller wineries were only recently established and plan to increase their production in the near future. “For wineries to develop, they need land to grow their grapes and these wineries have limited land. They are now buying land, albeit slowly. Also, they are relatively new and it requires time for their vineyards to mature before they can increase production,” says Neda Farah, organizer of Vinifest, the annual wine festival, which takes place at the Beirut Hippodrome in October.

Boutique 2For such wineries, Joe Assad Touma, co-owner at Château Saint Thomas, which produces 300,000 bottles and is considered more established, advises patience and discourages those looking for a quick buck or with no know-how in winemaking from pursuing such a venture. “Wineries need a lot of perseverance and patience and revenues do not come until almost 10 years into production,” he says, adding that many of the smaller wineries produce high quality wines that he would personally recommend.

Still, many have chosen this boutique niche for their wineries and aim to keep their production figures low. “I lived in Bordeaux for 17 years and many of the famous châteaux and wineries there produce 10,000 to 50,000 bottles, so I’m used to small wineries. High quality wines mean limited quantities, and since I want to produce only high end wines, my yearly production will not exceed 50,000 bottles. That’s my philosophy,” says Sebastien Khoury, owner at Domaine de Baal, a boutique winery.

[pullquote]”You can have the best products in the world but, without the right distribution channels, who is going to find you?”[/pullquote]

Although Château Marsyas has 60 hectares of vineyards, their model is not geared toward mass production, explain its co-owners Karim and Sandro Saadé. They choose to have a low yield of one to three kilograms per vine to ensure high quality wine. Jill Boutros from Château Belle-Vue emphasizes the importance of careful attention to detail at each step of production and making sure that the fermentation process is done separately in small lots to show the kind of work that goes into producing ‘artisanal’ wine.

Challenging misconceptions 

With such dedication to craftsmanship and quality in wine production, often at the expense of quantity, many vintages from these boutique wineries have a heftier price tag than the entry level wine of larger Lebanese producers. This price tag, combined with a usually small marketing budget or a ‘discovery’ approach to marketing — i.e. letting consumers discover the wine themselves as opposed to aggressive marketing — makes it hard for the smaller wineries to build a name for themselves or make a profit rapidly. “Artisanal winery is a choice, obviously, and it reflects the team’s goals but doesn’t necessarily mean quick return on investment,” says Boutros.

Khoury laments the perception of smaller wineries among some consumers in Lebanon, saying that people respect and choose bigger companies with names they know. “Here, many people think that huge budgets spent on advertising and communication is a guarantee of quality,” says Khoury.

Global and regional distribution channels

“It’s hard for the smaller wineries to find their road to market because they don’t have the proper distribution channels. You can have the best products in the world but, without the right distribution channels, who is going to find you?” says Wadih Riachi, manager at Vintage Wine Cellar. He also explains that, without a distributor, the winemakers have to visit hundreds of places by themselves to sell their wine and have to put up with some places having exclusivity contracts with certain wineries.

[pullquote]“Smaller wineries are very important as they provide diversity to the sector and help get rid of this idea that foreign wine is better than Lebanese”[/pullquote]

Because of this, on a local level, most boutique winemakers have chosen to narrow down their distribution channels and focus instead on the higher end on-trade sector. This means restaurants, bars and wine retailers as opposed to mass retailers such as supermarkets. “Eighty percent of our local market is on-trade, through specialized wine shops and around 100 restaurants. When you have a wine with a price tag like ours, it is surely a wine with a specific clientele,” says Sandro Saadé, explaining that they focus on events, such as tastings, which help people discover their wine and increase their chance of ordering it at restaurants or wine shops. Khoury says he focuses on the quality of his product and works only with restaurants and shops that understand his wines and have the same approach in their business.

Boutique 3Riachi explains that a lot of the smaller wineries bet on exports because it is easier to find a market for higher end wines abroad. He adds that this is even true for fine French wine, the majority of which is sold outside of France. “It is a bit easier to export because you do two to three shipments a year to one address with one bill and the wholesaler or buyer will be responsible for the distribution,” he says.

With regard to export markets, Boutros says they need to make an extra effort to identify distributors in various markets around the world who would be eager to represent a winery from a “unique and unknown” terroir like Bhamdoun. “Our wine is what they call a ‘hand sell’ wine, which demands special attention from those representing it. For that reason, our wines may not be interesting to a large, corporate distributor looking for a wide range of inexpensive bottles from a single producer. Our distributors typically seek out family run vineyards that grow grapes responsibly and make unique wines that are not available in wines shops everywhere,” she explains.

Small is beautiful

In a sector that is growing rapidly, and with increased consumer interest in wine, Lebanon’s smaller wineries have a major role to play. “Smaller wineries are very important as they provide diversity to the sector and help get rid of this idea that foreign wine is better than Lebanese,” says Faouzi Issa, co-owner and winemaker at Domaine Des Tourelles. He added that, given 10 years, most of these wineries will become more mature and have a bigger impact.

To Zafer Chaoui, head of the Union Vinicole du Liban (UVL) and CEO of Château Ksara, quality winemaking is in the professionalism and not the size. “The smaller wineries exert more effort than bigger wineries in order to be able to sell their products, and for their efforts to pay off, they have to have good quality wine,” he says.

Boutros sums it all up: “We’re happy where we are, farming organically and making wonderful wines. Our customers are happy, too, so… what more could we want? Small is beautiful!”

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Beer, wine & arakBusiness

It’s all in the grape

by Nabila Rahhal
written by Nabila Rahhal

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

September was a busy month for Lebanon. From the Bekaa Valley to the hills of Batroun, from the mountains of the Chouf to Jezzine in the South, vineyards were abuzz with those harvesting grapes for this year’s wine vintages.

Wine making in Lebanon is enjoying a steady growth, with over 30 new wineries launched since 2000. This rapid growth and recognition at both the local and international levels — as many wineries export more than they distribute locally — has not been struggle-free for Lebanon’s wine producers and while this expansion is certainly welcome, it also presents risks.

A brief background

Wine production is part of Lebanon’s history, with many believing that Qana in South Lebanon is the setting of Jesus’ first miracle when he is said to have turned water into wine. Before the time of Christ, the Phoenicians traded wine across the Mediterranean and some parts of Europe. When the region fell under Ottoman rule, however, winemaking was forbidden except for religious purposes in monasteries. The sector was revived to some extent with the French Mandate over Lebanon, which brought with it the French’s demand for wine and their eye for quality land which could produce it, only to have the sector decline again with the onset of the Civil War in 1975.

Chateau St. Thomas

Chateau St. Thomas

Emerging from the war and with local production at a near standstill, the five existing wineries (Château Ksara, Domaine des Tourelles, Château Musar, Château Kefraya and Château Nakad) began putting back together the pieces of their businesses. Zafer Chaoui, chairman and CEO of Ksara and current head of the Union Vinicole du Liban (UVL), recounts how Château Ksara struggled in the first few years after the war as it was in a location in the Bekaa which was still considered dangerous, and because the new board had not had the time to properly invest in the winery itself after having bought it from Jesuit priests shortly before the war. The first order of business, recalls Chaoui, was to invest in new modern equipment and high quality grapes imported from France.

The Birth of the UVL and its role in selling Lebanese wine abroad 

The structure of the wine sector improved in the 1990s with the establishment of seven new wineries and the creation of the UVL in 1997. “The idea for the UVL was to concentrate our efforts and cooperate with each other. Actually, at the beginning of the UVL’s life, we had the mission to negotiate with the government to protect our common interests but we didn’t have any common view on marketing,” notes Chaoui.

Some wine producers see the benefits of UVL membership as providing a platform for them to meet with fellow wine producers and raise issues of common interests, such as taxation, so that they don’t operate in isolation. This aside, common marketing rapidly became a main goal for the UVL after their experiences at international wine exhibitions convinced them that wines branded and unified in one pavilion under one country, such as Spanish wine or Argentine wine, had more impact than individual wineries.

“We were looking at this through a long term lens. We are there to market Lebanon’s name as a wine producing country. Once this is achieved, it becomes up to each individual winery to sell, depending on its quality. Many consumers abroad had not even heard of Lebanon so first we needed to take care of that in order to create a snowball effect,” says Faouzi Issa, co-owner and winemaker at Domaine des Tourelles, explaining the idea behind “Wines of Lebanon,” the brand name the UVL gave to their Lebanese wine promotional campaigns in the global market.

[pullquote]The younger generation, says Touma, is slowly becoming more aware and adventurous in selecting wine from the different Lebanese wineries[/pullquote]

Today, despite Lebanon producing only about 9 million bottles of wine annually in total — a drop in the ocean when compared with countries such as Greece, at more than 350 million bottles annually — it is becoming globally known. All the wineries Executive interviewed cited export markets in Europe, the United States or even Asia. “When we first started, people thought that there were only one or two wineries in Lebanon producing a certain type of wine. Now, they are more aware of the varieties of Lebanese wine,” says Joe Assad Touma, winemaker and co-owner at Château St. Thomas.

The challenge for Lebanese wine in the export market is to make the transition from Lebanese restaurants abroad into international venues and retailers. “Your export market starts with Lebanese restaurants, but the challenge is to get out of this niche market. The Lebanese expats are your first supporters,” says Aziz Wardy, general manager of Solifed, the company that produces Domaine Wardy.

The Lebanese wine boom captures the government’s interest 

The Lebanese wine sector has only truly blossomed in the last 10 years, with 23 new wineries marking their first vintage amid a growing local interest in wine. Wadih Riachi, manager of Vintage Wine Cellar, a well known wine retailer in Saifi Village, Beirut, says that, from his experience at Vintage, interest in wine in Lebanon has been growing at an annual rate of 5 percent for the past five years. Eventions, the company which organizes the annual wine festival Vinifest, recounts how when they first started in 2004 they had only nine participating wineries and attracted mainly the older generation, while today they have 30 participating wineries and 25,000 visitors of different age groups. 

Wineries have also noticed this growing local interest in wine, especially among the younger generation, which Touma says is slowly becoming more aware and adventurous in selecting wine from the different Lebanese wineries. However, more effort is still needed to discourage them from “sticking to only one wine which they know,” he notes.

Wardy agrees with Touma’s view and believes that tastings, wine tours, winery luncheons and local festivals such as Vinifest all help market Lebanese wine locally in an indirect way.

Chaoui attributes this growth in the local wine market to the competition among the now large number of wineries, which has encouraged the consumer to switch from heavy alcohol like arak or whiskey to wine. “Now we have a substantial increase in consumption per capita in Lebanon though we are still extremely far from the consumption in Europe and the US,” says Chaoui placing it at 5.6 million bottles annually between local and imported wine, i.e. less than 1.5 bottles per person.

Fueled by the efforts of the private sector, the wine industry gradually became one of the few that was performing well both locally and internationally and thus captured the interest and attention of the public sector, instead of the other way around. “We are supporting the winemaking sector because it is a highly qualified sector at the global level and because Lebanese winemakers have put in a lot of personal effort and investment to reach the required standards of quality,” says Louis Lahoud, the director general of the Ministry of Agriculture, adding that the governmental support is provided through the ministries of industry, economy and foreign affairs, each within its capacity, with “a main dynamo for action” which is the Ministry of Agriculture.

Domaine Wardy

Domaine Wardy

Lebanese wine days

The first act of support by the government was the organization of the “Lebanese Wine Day” event which took place at the George V Hotel in Paris in 2013, at the Ritz Carlton in Berlin this year and with plans for New York in 2015.

Chaoui explains that this event typically involves 300 to 400 key people — journalists, restaurant owners and distributors — who are selected from the ministries and the wine producers’ contacts because they have an interest in Lebanese wine and could help with marketing and distribution.

Aside from seeing his winery’s participation in the event as a duty to Lebanon, Sandro Saade, co-owner at Château Marsyas along with his brother Karim, sees the benefit of Lebanese Wine Day as creating a long term positive image for the country and also as a venue to target clients interested specifically in the Lebanese market. This differs from international wine exhibitions, where visitors are there for all wineries and may happen across a stand for Lebanese wine.

While all wine producers Executive interviewed agreed that government support for their sector, however limited, is appreciated and that all exposure to international markets is good, many feel Lebanese Wine Day has got off to a slow start. Some say that the event’s allocated budget could have been spent more efficiently to produce a more successful event, and others feel that the international exhibitions they attend have a more direct impact on their business in terms of marketing and sales. “If the budget was bigger, we could attract more media to promote the event, we could invite more people or have more than one event per year,” says Chaoui. Lahoud says that the ministry, through its consultations with the private sector, is working on improving the event each time.

The National Wine Institute

Perhaps the government’s most important backing for the wine sector will be through its role in the National Wine Institute (NWI), a regulatory body whose main duties include researching the Lebanese territories and national grape varieties in order to set quality standards, modelled after the French appellation d’origine contrôlée, a certification which indicates the origin, quality and general style of wine.

[pullquote]The NWI is off to a slow start and so far, says Lahoud, “Nothing tangible has been achieved”[/pullquote]

Without such an appellation, explains Saade, all Lebanese wine is currently placed at the same level regardless of its quality or origin which is unfair to those who are investing more time and money to produce a distinguished drink.

In order to designate these appellations, the NWI’s first step would be to identify the different terroirs, or vinicultural landscapes, in Lebanon and create a geographic certification database. “Where does wine of Lebanon come from? Does it come from the Bekaa, Batroun or Jezzine? It is important to identify all of this, as it gives Lebanese wine more credibility,” says Riachi. 

Saade explains that some winemakers produce wine in one region but bring grapes from another. “This is not wrong at all but the consumer has the right to know where the grapes they are drinking come from. The most important thing for us is that the consumer is informed,” he says. 

Because of the extremely high price of land, many of the bigger Lebanese wineries own the majority of their vineyards but acquire more land through long term rental contracts with farmers who work under the wineries’ conditions and also sometimes buy grapes, especially for their arak production, explains Domaine des Tourelles’ Issa. “The disadvantages of owning the vineyard are that there are more responsibilities, and more work which would require a bigger team, hence more expenses. The advantage is that you have more control over the vine’s yield as a lighter yield produces better quality wine but independent farmers would tend to add to a vine’s capacity to make more money selling more grapes,” says Nathalie Touma, co-owner at Château St. Thomas.

Although some like the Saade brothers feel that setting geographic certifications and appellations should be solely the government’s job — with limited consultation from the private sector, as “control should come from above and not within” — the NWI, which was formed last year, has four representatives from the various Lebanese wineries and four from the related ministries.

As is, the institute is off to a slow start and so far, says Lahoud: “Nothing tangible has been achieved.”

“We were slow starting off because there was no government at the time [the NWI was created] and so there were needed signatures missing and no approved budget, but hopefully we’re slowly moving forward now,” says Joe Assad Touma, who is also a member of the institute.

Domaine Wardy

Domaine Wardy

The future of Lebanese wine

Lebanese wineries have overcome many challenges, including marketing the country’s name abroad and continuing to produce wine in an unstable political climate where roads to the vineyards can sometimes close arbitrarily due to the political tension in the Bekaa region, home to many of the vineyards.

They have also put in major investments — the most commonly cited by the winemakers interviewed being land, electricity, marketing and imported items, essentially everything that goes into the bottle aside from the grapes — in a sector where returns are known to be slow due to the years it takes for the vines to mature and produce quality wine. 

Taking all this into consideration, it is no wonder Lebanese wine is expensive when compared to some other wines. “Already, the cheapest Lebanese wine bottle is more expensive than the Chilean or Argentine version,” says Wardy, explaining that land in these countries is cheaper and the equipment is available.

This is why what distinguishes Lebanese wine should be its quality and not the quantity produced, as quantity will not increase as long as land is limited and international markets are still relatively narrow. “All of Lebanon is a boutique winery and that should be our focus,” says Wardy.

Whatever the future focus of Lebanese wine, the fact is interest in this sector is rising considerably both locally and internationally and at the public and private level. After all, as Chaoui concludes, “Lebanese wine may be small in quantity, but it is one of the few products we have in this country which could be compared to the international level and you know, what could be more enjoyable than a good glass of wine?”

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Beer, wine & arakBusiness

Rising spirits

by Paul Cochrane
written by Paul Cochrane

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

There is general doom and gloom in the economy in Lebanon, consumer confidence is down and polls indicate general pessimism about the future. But one sector is doing surprisingly well given the current situation, or perhaps because of it: alcohol. Across the alcohol spectrum it is more, more and more. More importation choice, more wines, more breweries and more places to drink. As with many other consumer trends, this reflects global trends: drinking better and with greater variety.

A decade ago, there were three primary choices on the drinks table: blended whisky, Almaza beer, and red or white wine. Today, a good spread may feature in addition to the above: vodka, single malt whisky, rosé wine and locally produced craft beer. In many respects, the changes today reflect what the market went through in the 1960s, when arak — that beloved drink accompanying mezze on a lazy weekend — declined in popularity in favor of Scotch as taste buds started to change.

But the alcohol scene today is unlike anything the country has seen before. It has matured, and fast. While only three rosé wines were on offer at Vintage Wine Cellar several years ago, today there are 25. The same goes for single malt whiskies and the selection of international wines. Beer has equally diversified, with Brasserie Almaza offering five different beers, and two new local beers entering the market this year. Decadence has also become more muted as tastes have become more discerning. 

“The opulence of the last 10 years has ended, when people were popping Salmanazar (nine liter) and Jeroboam (three liter) bottles of champagne at nightclubs; people are showing off less,” says Nagi Morkos, managing partner at Hodema, a consultancy service. 

Instead, consumer behavior has diversified and moved upmarket. It has become about drinking a specific vodka in a cocktail, going for a single malt instead of a blended whisky and asking what local wines are on the menu. Consumer trends have also become associated with perceived calorie intake: less in vodka, more in whisky, which partly explains the spirit’s popularity in the nightlife scene.

Yet the ostentatious nightlife the capital has become renowned for has not disappeared. A distributor will still spend hundreds of thousands of dollars to have one of their vodka brands advertised at a leading rooftop club to gain attention locally, also knowing the broader impact of Beirut’s jet setting circles. 

The country’s certain global cache is reflected in its alcohol’s popularity abroad. With the domestic market as limited as the land for growing grapes, the country’s 40 vineyards are choosing to produce quality over quantity — which means export. Lebanese wine is now gracing the menus of Michelin starred restaurants in France, is being imbibed in New York and London and has been the vin de table for the Queen of England. 

When it comes to beer, Kassatly Chtaura named its new lager Beirut with the export market in mind, and 961 — named after the country’s calling code — exports to the US, Europe and Hong Kong. New craft beer brewery Colonel, just two months after opening, has already had inquiries from European importers. 

With another major commercial beer brewery planned, the craft brewing scene starting to flourish, awards being won at international wine festivals and more quality arak being distilled, Lebanon is truly going through an alcohol renaissance, despite what is happening in the immediate neighborhood.

Here’s to a glass of local wine, beer or arak. Kesak!

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CommentOil & gas 2014: On hold

Safety in numbers

by Laury Haytayan
written by Laury Haytayan

This article is part of Executive’s special report on the oil and gas sector. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

 

In November 2013, then-Minister of Energy and Water Gebran Bassil was busily promoting optimism and working hard to launch the first offshore licensing round for oil and gas. And amid this feverish activity, fears of mismanagement, political and religious favoritism and theft of revenues from the resources were beginning to grow among the public.

But then things stopped. The government was unable or unwilling to pass the two essential decrees related to the maritime blocks and the model exploration and production contract. Momentum evaporated, leaving the licensing round in limbo, open for an undetermined amount of time.

It is speculated that the longer this period lasts, the more likely companies will lose interest or set their negotiations bar high, making the government pay the price for its inability to take decisions. But, on the other hand, it also gives the Lebanese the time to pause for a while and think of what it would mean for Lebanon to become a petroleum producing country, including what challenges and opportunities the commercial discoveries would entail. With Bassil heading the ministry, it looked like him running the 100 meters and us running behind him trying to catch up.

[pullquote]Lebanon is the perfect candidate to fail in managing the oil and gas sector[/pullquote]

Lebanon is not known for its strong institutions or its respect of the environment, nor for transparency and efficiency in public administration, its good management of finances, its diversified economy, or its planning and investment in sustainable development. To add to this grim situation, there is a high level of distrust between political parties themselves and between political elites and citizens. In a sense, Lebanon is the perfect candidate to fail in managing the oil and gas sector, thus turning these resources into a curse for the country and its population. And we all know that Lebanon cannot stand another curse.

However, there are remedies for the government to succeed in managing the sector in an efficient way. Having the political will to keep the sector away from local political bargaining and having a clear strategy and vision on how the revenues will be used are essential. There are also international changes in natural resource rhetoric on which the government and the citizens can rely to benefit from potential oil and gas revenues. The past few years have witnessed global campaigns for open data, open budgets and disclosure of and access to information, especially concerning natural resources. It is becoming more and more difficult for governments and companies to deny the right of the public to know how its money and resources are being managed. The Ministry of Energy and Water, and specifically the Lebanese Petroleum Administration (LPA), the regulatory body of the natural resource sector, had stressed on various occasions that it is abiding by the highest standards to ensure that the licensing process is transparent. It had chosen the prequalified companies according to a set of specified criteria; it intended to have a transparent process during the bidding round and had set clear selection criteria for the winners.

However, with regards to contract disclosure, the LPA was hesitant. It guaranteed that the model contracts would be published on its website, but announced a couple of times that the decision to publish the signed contracts had yet to be taken. On the other side, the LPA has been interested in one of the leading international initiatives on natural resource transparency — the Extractive Industries Transparency Initiative (EITI) — and it is looking into the feasibility of signing up to it. In a country such as Lebanon, with little trust among citizens and between the government and the public, initiatives such as the EITI could be a good start to initiate dialogue and debate for reforms and build trust over the management of the revenues.

[pullquote]It is possible to turn what now might be a curse into a blessing[/pullquote]

Lebanon is bound to become a producing country if commercially viable amounts of natural resources are discovered. Knowing its history in governance, there is great pressure on its citizens — and especially on civil society — to act as the safeguard of the sector and demand that the government put in place key accountability mechanisms, such as setting clear roles and responsibilities of agencies running the sector and information sharing mechanisms. The natural resources sector should become the medium for the government to show its good will in terms of integrity and corrupt-free management style to gain the trust of its citizens. Furthermore, the Lebanese population should work collectively to play the role of watchdog for the government’s policy decisions. And here, civil society’s role will be key. It is possible to turn what now might be a curse into a blessing that will finally put Lebanon on the right track to become a viable, strong and independent state.

So what is the EITI?

The EITI is an international initiative to improve transparency and accountability in the oil, gas and mining sectors. It was established in 2003, as a response to harsh criticism and a vast campaign from international organizations on opaque oil and gas management in resource rich countries with high poverty rates. The current EITI board is formed of 20 members representing implementing countries, supporting countries, civil society organizations, industry and investment companies and a secretariat, which is responsible for reaching out to countries with natural resources and supporting them to implement the EITI.

Countries decide voluntarily to sign up and must meet a number of requirements to obtain and preserve the status of compliance with the initiative. Currently 46 countries are using EITI to improve natural resource governance. Recently, the UK, France, Germany, Italy and Australia committed to implement it.

For countries implementing the EITI, natural resource companies are required to publish what they pay to governments and governments are required to publish what they receive. The mutually provided numbers are then reconciled by an independent auditor; any discrepancies are investigated and a report is produced. Participating countries in the EITI are required to disclose information on licenses and license allocations, in-kind revenues, transportation revenues, data production, social expenditures and sub national payments. It is also important to note that the EITI encourages contract and beneficial ownership disclosure, which identifies the real owners of the natural resource companies.

Each EITI implementing country forms a multi-stakeholder group (MSG) that includes representatives from the government, companies and oversight bodies — the latter mainly coming from civil society. Some MSGs also include parliamentarians. This group oversees the EITI process and the production of reports. It also ensures that the reports are disseminated to the public and discussions over reforms are launched. The findings of the produced report are communicated to the public to raise awareness and initiate debate about better management of the sector.

[pullquote]All this will eventually create pressure to make the government more accountable[/pullquote]

Benefits of the EITI

The EITI goes beyond producing a report that contains contextual information and production figures. It is a tool that requires collective action from different stakeholders in identifying the substantial information that needs to go into the report, which will be the bases for debate, discussion and advocacy around the management of the resources. Moreover, this voluntary initiative has benefits for governments, companies and civil society organizations.

A government will benefit by demonstrating a commitment to transparency that would improve its national and international reputation with both citizens and the international community. It also benefits a government by improving revenue collection and management processes — Nigeria was able to find $553 million in owed taxes in 2009 after using the EITI — as well as sovereign ratings.

Companies and investors benefit by mitigating political and reputational risks, and by strengthening the investment climate by addressing opaque governance and securing long term stability in extractive industries, where investments are capital intensive and dependent on long term stability to generate returns. Reducing such instability is beneficial for business, as is demonstrating corporate social responsibility (CSR) and contribution of payments to national development. Transparency of payments made to a government can also help to demonstrate the contribution that their investment makes to a country.

Civil society benefits by using the tremendous amount of information that will be available to the public through the publication of the reports. This information will empower civil society organizations to set advocacy plans, as well as help media outlets with reporting and investigating the numbers and data provided. All this will eventually create pressure to make the government more accountable. The rules of EITI require that civil society organizations be formally and fully involved in each stage of the initiative. This gives them a voice in a permanent consultation and participation framework that allows for an ongoing discussion with the government and companies.

What does Lebanon need to do?

If Lebanon were to decide to sign on to the EITI even before production starts, it will need to undertake the following steps:

• The government should announce publicly its desire to adhere to the EITI.

• It should nominate a key person that will act as the national coordinator and will be responsible for implementing EITI requirements and interacting with the EITI secretariat in Oslo.

• It needs to commit to work with civil society and companies, and establish an MSG to oversee the implementation of the EITI.

• The MSG is required to develop a workplan, fully funded and aligned with the reporting and validation deadlines established by the EITI board.

• The government should submit an EITI candidate application to the EITI board that will decide either to accept or refuse the application.

The important element is for civil society organizations to be ready and able to choose their representatives in the MSG. Currently the Lebanese civil society movement is shy and hesitant when it comes to tackling the natural resource issues, and not close to establishing a coalition of organizations capable of injecting its representatives within the MSG. Therefore, civil society’s readiness is crucial for any future steps towards signing up to the EITI. Without this readiness, Lebanon can dismiss any hope for properly managing any resources — and optimally benefitting from them.

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Economics & PolicyLebanon's water crisis

Quality concerns

by Matt Nash
written by Matt Nash

There’s something missing from the debate about Lebanon’s water woes, several experts on the topic argue.

“Engineers, the government, they care about quantity,” says Samira Korfali, an associate professor of chemistry at the Lebanese American University whose water research focuses on metal content in water. “I care about quality.”

Indeed, the government’s response to this year’s more severe than average water shortage has been to drill more wells and encourage people to conserve their usage. The National Water Sector Strategy, approved by the government in 2012, stresses the need to monitor and maintain the quality of groundwater, and the National Center for Scientific Research (NCRS) is working on a monitoring program, but whether it is laying the groundwork for a long term monitoring and action plan or will become yet another study conducted and then ignored remains an open question.

[pullquote]“The pace of improvement is not enough for ensuring [a] safe, sustainable water supply” [/pullquote]

May Jurdi, a professor of environmental health at the American University of Beirut who has been studying water quality since the 1990s, is part of the current monitoring program. While she is hopeful the new program will be sustainable, she notes that previous programs have come and gone with no long term impact. “You have cycles of repetition of the same story since 1990,” she says of various water quality programs run either by the government or donors. “And when you look at the actual problems you find, if I go back and say, ‘What were the problems in 1990s and what are the problems now?’ Most of the problems have not been [addressed].” Jurdi adds that there has been some improvement, but cautions “the pace of improvement is not enough for ensuring [a] safe, sustainable water supply.” 

“It has been cycles of moving, improving and then not sustaining,” she says.

Saline invasion 

Because of over pumping of groundwater along the coast, salt water has made its way into some of Lebanon’s aquifers. Ziad Khayat, who in 2012/13 helped conduct the first nationwide groundwater assessment Lebanon has carried out since 1970, tells Executive that, for the most part, quality wasn’t on the agenda. The study did, however, identify increased salinity in groundwater up to “several kilometers inland,” Khayat says. He adds that the year long groundwater study found six of Lebanon’s 44 groundwater basins showed an increase in seawater intrusion compared to 1970. Mark Saadeh, a hydrogeologist who wrote his PhD dissertation on seawater intrusion into the coastal aquifer beneath Beirut and its suburbs, says that continued extraction of groundwater near and along the coast is only exacerbating the problem. 

Saadeh explains that coastal groundwater aquifers are not completely walled off from the sea, meaning there is a point at which the freshwater stored in an aquifer and seawater meet. As the level of groundwater lowers, seawater can push its way in. Both Saadeh and Khayat argue that once seawater enters an aquifer, it is difficult, time consuming and expensive to push back out again. In a 2006 paper, Spanish researchers detailed how they were able to reverse seawater intrusion, but one of the most important components of their methodology was strict monitoring and management of pumping — something no one is currently paying any attention to in Lebanon. As anyone who has read the “Rhyme of the Ancient Mariner” knows, seawater is undrinkable. Saadeh adds that it corrodes pipes and does not lather when one tries to wash with it. As for using salty water to do laundry, he notes, “Your clothes will never be clean.”

Shitting where we drink

Subsoil seawater surge is not the only threat to Lebanon’s groundwater. Far less well documented is wastewater contamination of the country’s subterranean aquifers. Khayat says that the groundwater monitoring program he worked on did not focus on this type of pollution and notes there is little documented evidence of the problem. However, Lebanon’s aquifers are mostly composed of limestone, which are highly porous and easily refilled, something he describes as a blessing and a curse. Because of their physical characteristics, Lebanon’s aquifers collect rainwater — and more importantly melting snow — as it absorbs into the soil and trickles down. They do not, however, discriminate in terms of collection, meaning wastewater dumped onto the ground, poured into dry wells and septic pits, or released into rivers can also wind up in the groundwater. 

Jurdi, the AUB professor, says the results of the NCRS study are not yet complete. That said, she and others argue that Lebanon’s wastewater situation is a mess. Assem Fedawi, the sector manager for water and wastewater planning and programming with the Council for Development and Reconstruction (CDR), tells Executive that currently Lebanon has eight working wastewater treatment plants connected to sewage networks, up from four in 2010. Of the eight, three are along the coast and five are inland. He says of the inland plants, however, that “not all of them are handling a full flow,” meaning they are not being used to full capacity nor collecting all of the wastewater being created around them, partly because they are not connected to the sewage network.

[pullquote]Intermittent water supply — a yearly occurrence in Lebanon — is also a potential source of water contamination[/pullquote]

The connection issue is a serious problem in Lebanon. In 2010, there were seven completed wastewater treatment plants sitting idle because they were not connected to the sewage network. Fedawi says four have since been connected. Asked how a plant could be built but not connected to the network that feeds it the wastewater it is supposed to treat, Fedawi says that following the Civil War, Lebanon received a large influx of foreign donations to rebuild the country’s largely decimated infrastructure. CDR built the plants, he says, and municipalities near where they are located were supposed to construct the required sewage networks to make the plants usable. In many instances, that never happened. Since 2010, however, the CDR’s strategy changed and it now will also build sewage networks for any treatment plants it builds. As for how much wastewater gets treated in Lebanon today (in 2010 it was an estimated 8 percent), he says his personal estimate is “closer to 20 percent,” but he admits, “we don’t have any data.” He says $1 billion has already been spent on the country’s wastewater system and estimates a further $1.5 billion is needed to finish the job. 

Randa Nemr, an advisor to the Minister of Energy and Water, tells Executive that, despite the fact that groundwater supplies may be contaminated by wastewater, the water supplied by the country’s four water establishments (i.e., water from the government’s network) is safe to drink as all of it gets treated before distribution. Jurdi, the researcher, concurs, explaining to Executive that government supplied water is perhaps the most reliably safe water in the country.

Fill ‘er up

The lack of data on groundwater quality raises health concerns for people buying tanks full of water from unregulated delivery trucks. Nohad Al-Homsi, a project officer with the World Health Organization in Lebanon, tells Executive that even when using water for personal hygiene, laundry or washing dishes, the water should be safe to drink. She dismisses the notion of ‘service water’. Like others interviewed for this article, she has no solid information on how safe water delivered by trucks is, but as Executive reported last month, neither the Ministry of Health nor the Ministry of Energy and Water are monitoring this privately delivered water. Jurdi explains that the health costs of unsafe water use in Lebanon are also unknown. Exposure to contaminated water, she says, can cause diarrhea, headaches and fever, but adds that people don’t realize the risks associated with dirty water and therefore often do not link water to health problems when speaking with their doctors. 

Both Al-Homsi and Jurdi note that the seasonal intermittence in water supply — a yearly occurrence in Lebanon — is also a potential source of water contamination. Al-Homsi explains that when a household’s water storage tank runs empty and is then refilled, the refilling causes sediments at the bottom of the tank to mix with the water and come out through the faucets. She says people should let the taps run for a few minutes before using water after a tank has been refilled. Jurdi says that empty water pipes can also absorb any wastewater that may be wetting the ground around them, bringing that contaminated water into a home when the pipes fill up again. 

Crop concerns

Perhaps the most alarming public health concern in the water sector relates to agriculture. Some farmers in the Bekaa, according to Fedawi, are using wastewater to irrigate their crops — particularly this year when “there is no water.” Again, the extent of the problem is far from clear. Korfali, the LAU professor, tells Executive that metal contamination of plants is not a problem. Yet Jurdi says that contamination from organic materials such as fecal matter very well could be. She did not have much data, but says she recently participated in an as yet unpublished, small scale pilot study of plant contamination and found “alarming” levels of fecal contamination with “isolates” such as bacteria and viruses in the plants, which are “resistant to the antibiotics that were given.” She cautioned, however, that the study was not large enough to make conclusions about the safety of vegetables in Lebanon. “But this is expected. All studies say that if you use wastewater [for irrigation], this is what will happen.” 

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