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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Editorial

A dream turns to shame

by Yasser Akkaoui
written by Yasser Akkaoui

This month’s oil and gas special report was painful to write. What started as an exciting research project on what promises to be the industry that could break the vicious cycle of corruption and cronyism ended up being a reality check that thrusts the truth in our face again. The oil and gas industry won’t be governed any differently from any other public institution in Lebanon.

The level of murkiness that this magazine’s top investigative journalists witnessed while trying to gain access to accurate information confirmed our suspicions that the system in place was designed to accommodate our politicians’ revolting dishonesty. Corruption should not make its way into the oil and gas sector, but sadly, we don’t see how the system in place will promote transparency and accountability for the people’s benefit.

Similar to the Gulf leaders who became intoxicated on oil and gas fumes — leaving their peoples underdeveloped, unemployed and uncompetitive — our own princes, dictators and thieves will not act better. Any riches that might emanate from our untapped natural resources will go directly into their pockets instead of being invested in Lebanon’s entrepreneurship and human capital.

To combat this, the public must know the terms of oil and gas contracts before they are signed. When consortia of oil and gas companies finally begin operations here, ideally, why not make them list on the Beirut Stock Exchange and float at least 60 percent of their shares? The public is a partner in this new enterprise and should be treated as such. Forcing companies to list would also give the bourse a much needed boost. Perhaps most importantly, it would force the consortia to be up front about their commitment to best practices financially, environmentally, socially and in terms of governance.

We should also begin planning how to use physical gas deliveries — potentially part of the state’s royalty payments — to benefit local industry. After the Civil War, and particularly between 2000 and 2010, Lebanese industry began diversifying and increasing output. Four years ago, industry was starting to compete in the high quality products clusters. We were beginning to look more like Europe than Africa. Since 2011, we’re trending down again, both in terms of production numbers and product class, mainly due to the price and availability of electricity. If we don’t plan how to use oil and gas to benefit local industry, we’ll be throwing away a golden opportunity. 

For now, the view is dim. Our fears that mismanagement will rule the nascent oil and gas industry are repeatedly being confirmed. At least we have local wines, arak and a growing range of beers to help us drown our sorrows and hope for a better day.

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Economics & PolicyOil & gas 2014: On hold

All at sea

by Matt Nash
written by Matt Nash

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.

 

Protecting the world’s waters from pollution associated with offshore oil and gas exploration and production is not a global priority. While then-Russian President Dimitri Medvedev in 2010 suggested before a G20 meeting that world leaders hammer out an international “convention or several agreements” aimed at setting global environmental standards for offshore drilling, four years later only the G20 Global Marine Environment Protection Initiative website exists. A 2014 study by the Paris based Institute for Sustainable Development and International Relations found that national laws regarding environmental protection in offshore drilling vary, and regional agreements covering various bodies of water exist but a global framework does not. For the Mediterranean region, an additional protocol to the 1976 Barcelona Convention for Protection against Pollution in the Mediterranean Sea specifically related to protecting the sea from oil and gas activities went into force in 2011, but Lebanon is not a signatory. Despite that, Lebanon commissioned a strategic environmental assessment (SEA) for offshore oil and gas activities that same year.

The authors of Lebanon’s SEA — British consultancy RPS Energy — note in the document that a broad SEA is only the beginning of proper environmental management for a new offshore oil and gas industry. The SEA says that under European law, companies are required on a project-by-project basis to conduct more detailed environmental and social impact assessments, a practice it encourages Lebanon to adopt. Both Lebanon’s Petroleum Activities Regulations and the 2010 Offshore Petroleum Resources Law call for the companies drilling in Lebanon’s waters to conduct such assessments.

Project-by-project assessments will be helpful in Lebanon — if properly conducted — to both create a baseline environmental picture and help monitor the situation to ensure that environmental damage done by any oil or gas activities in the future is kept to a minimum. The SEA notes that, currently, Lebanon lacks sufficient data to have a full sense of what the baseline picture is today. Olof Linden, a professor of marine environment management with the World Maritime University in Sweden, tells Executive that monitoring and evaluation of the project specific assessments will be important going forward. “Traditionally,” he says of environmental assessments in offshore projects, “it’s a mixed experience. In many [countries], they are just a paper product, something that exists as a condition in a contract, something that the client can tick off as has been done. ‘Ok, here’s the document, let’s move on.’”

Pipe dreams

One prospective project the SEA was particularly harsh on is a planned onshore natural gas pipeline connecting Tripoli to Tyre. The project has been talked about for years now but is still awaiting parliamentary approval. In the SEA, it is stated that, while the Ministry of Energy and Water was, at the time, still pushing for the onshore pipeline, the Ministry of Public Works and Transportation wants to revive the railway line envisioned as the route for the pipeline. Parliamentarian Mohammad Qabbani — who heads the legislature’s Energy, Water and Public Works Committee — says the project raises major safety concerns, and while he stops short of saying that parliament will not approve it, he was not hopeful that it will come to pass. Noting that to build the onshore pipeline, existing property on the rail line would have to be demolished and Palestinian refugees would have to be resettled — along with the fact that coastal erosion could seriously impair the pipeline’s ability to stay onshore — the SEA authors stop short of calling the idea a disaster, but end a list of problems with the pipeline — for which no environmental assessment had been conducted — by writing that “the proposal demonstrates why detailed and transparent Environmental and Social Impact Assessments are considered mandatory for sensible planning, development and project management.”

Work ahead

The SEA also argues that Lebanon lacks a national oil spill response plan. The second volume of the eight volume document is RPS’s recommendation for such a plan. What will become of it, however, is unclear. Executive was unable to speak with the LPA about the SEA in detail, however, in mid-September, the LPA announced on its website in a procurement notice that it was looking for a third party to provide “professional services for the preparation of a National Oil Spill Contingency Plan.” Additionally, the LPA will have assistance in developing a response plan from a new project partially funded by the UN called Sustainable Oil and Gas Development in Lebanon (SODEL). The three year, $2.2 million project launched in May 2014 is designed to work with the LPA on developing and implementing industry specific health, safety and environmental regulations. SODEL will also write policy recommendations for the best use of resource revenues.

Among other concerns, the SEA also notes that Lebanese institutions lack capacity for oil and gas activities, something the government should work on addressing in the not too distant future.

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CommentOil & gas 2014: On hold

Fighting the resource curse

by Jad Chaaban
written by Jad Chaaban

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.

 

“Ten years from now, 20 years from now, you will see: oil will bring us ruin … Oil is the Devil’s excrement.” This statement from Juan Pablo Pérez Alfonso, an OPEC founder, illustrates a common phenomenon linked to the discovery of hydrocarbon resources, coined the ‘resource curse’. In a nutshell, this concept links the increased exploitation and reliance on natural resources with the systematic decline in other economic sectors, specifically agriculture and manufacturing. The economy will be geared toward one sector which absorbs all the resources, labor and attention of policymakers, which would eventually reduce investments in other sectors of the economy. These symptoms are even more dangerous in countries with poorly run and corrupt institutions, non-democratic regimes and weak financial systems. Several countries with abundant resources, such as Nigeria, Angola and Chad, experience rampant poverty and widespread economic failures to this day, despite their riches. It is precisely this gloomy condition that Lebanon should try to avoid.

A set of reform policies needed

The discovery and extraction of oil and gas off the shores of Lebanon would ultimately translate into a boom in revenues for the government, which under the current conditions of poor fiscal planning could easily translate into an uncontrolled expansionary budget policy. If these revenues are spent with no oversight and proper planning, we might end up having large streams of cash that make limited contributions to economic development.

Although the oil and gas law enacted a couple of years ago by parliament stipulates the creation of a sovereign wealth fund to manage these resources, it left the details of this fund and its spending parameters to a future law, and placed these expenditure decisions in the hands of the parliament. With the existing track record of our politicians in mismanaging current revenues, there are serious doubts about its capacity to manage additional revenues.

But the ‘resource curse’ could be avoided if appropriate policy adjustments are implemented in conjunction with the development of offshore hydrocarbon resources. The successful experiences of a few resource rich countries like Norway have been largely attributed to their success in managing resource wealth and its associated risks. The optimal response that takes advantage of the boom while mitigating its potential negative implications includes a set of fiscal, monetary, exchange rate and structural reform policies.

Two principal decisions need to be made when designing a fiscal policy response to the resource curse: first, how much should a government spend from its resource revenues across time? And second, on what should the government spend its resource revenues? Adopting a revenue sterilization policy — whereby foreign exchange reserves are accumulated — can constrain the spending effect and as a result curb a currency appreciation. In that respect, the government must resist the pressure to enjoy all the additional revenues in the short run and recklessly expand its budget expenditure. On the contrary, it must commit to saving part of the revenue proceeds in order to attain a permanent wealth increase.

As for how the windfall revenues should be allocated, the government must be careful not to spend the wealth in a way that would increase the domestic aggregate demand for non-tradable goods and services which would consequently appreciate the real exchange rate. In that respect, the government must direct its spending toward the non-resource tradables sectors through subsidies or by investing in physical and human capital to enhance the productivity in these sectors.

Moreover, the discovered hydrocarbon resources can be helpful if, and only if, there is an energy substitution strategy away from costly imported oil, which includes (a) the renewal of existing energy production facilities; (b) connecting pipelines with offshore and onshore facilities in an integrated energy demand and consumption framework; and (c) respecting the environment and urban fabric around electricity production sites.

Such steps will be complicated and require a detailed level of design and execution. But without such an integrated, overarching plan of action, Lebanon will not be able to escape the very real dangers of ‘the Devil’s excrement.’ No one wants that to happen — not in 10 years, 20 years or ever.

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Economics & PolicyOil & gas 2014: On hold

Keeping it clean

by Jeremy Arbid
written by Jeremy Arbid

The Lebanese Petroleum Administration (LPA) recently published a strategic environmental assessment (SEA) related to potential offshore oil and gas activities. RPS Energy Ltd., a multinational energy resources and environmental consultancy company, initiated the study in October 2011 and completed it five months later. RPS will continue to provide consultation to the Ministry of Energy and Water (MoEW) and the LPA as the sector moves forward, with the recommendation to further assess the environmental impact of drilling for potential reservoirs, processing reserves and transporting oil or gas.

To guide readers of the SEA, Executive has scoured the publication, intended as a reference, to locate specific information and data held within the approximately 900 page document.

Click on the sections below to start exploring.

 

Introduction to environmental assessments
Volume 1: SEA report
Volume 2: National contingency plan
Volume 3: Stakeholder management
Volume 4: GAP analysis
Volume 5: GIS
Volume 6: Registers
Volume 7: Onshore pipeline route
Volume 8: Field survey instruction manual

SEAs are different from environmental social impact assessments (ESIA) in that SEA studies prescribe long term policy planning for an entire region or sector, whereas ESIA studies guide planning on possible alternatives for specific projects and also propose an environmental management plan (EMP) to include monitoring measures and indicators.

According to the United Nations Environment Program (UNEP), an SEA is an “approach to take account of the environmental effects of policy, plans and programmes.” Often employed to obtain and evaluate environmental information, SEAs are useful in generating policy to guide decisionmaking, containing predictions of how the environment is expected to change if certain alternative actions are implemented with advice on how best to manage environmental changes. In Lebanon’s SEA, RPS Energy writes that the process is intended to strike “a balance between promoting economic development of offshore energy resources and effective environmental and community protection.”

UNEP defines ESIAs as “a procedure that identifies, describes, evaluates and develops means of mitigating potential impacts of a proposed activity” at the project level. RPS Energy prescribes that individual impact assessments be conducted by the exploration and production companies as part of contractual agreements (i.e. exploration and production agreements) between the Lebanese government and oil and gas operators.

Both SEA and ESIA studies are useful for a variety of audiences. These include national and local government staff whose responsibility lies in ensuring effective implementation of the studies’ recommendations and in evaluating and approving development project design. Likewise, the staff of multilateral and bilateral agencies charged with sustainable development projects use the studies to identify, design and implement projects. Private sector actors, particularly those companies with environmental responsibilities (e.g. drilling companies) make use of the studies to ensure proper safety measures are included in project design and implementation. Finally, SEA and ESIA studies are of the utmost importance to civil society, including environmental nongovernmental organizations, which have a vested interest in environmental protection and sustainable societal development.

Volume 1 of Lebanon’s SEA introduces RPS Energy’s study of the country’s exclusive economic zone (EEZ) — its purpose and methodology — outlined through several sections: an overview; a presentation of potential scenarios; risk and impact assessment and evaluation; oil spill scenarios; and assessment, recommendations and conclusion.

The scenarios section outlines seven potential outcomes during the exploratory drilling phase and the options for transporting gas from receiving terminals or LNG plants to power plants.

In Scenario 1, for example, where no commercial reserves are found during exploratory drilling, activities would cease, leaving limited impact on the environment and the economy (e.g. limited job creation).

By contrast, in Scenario 5, where exploratory drilling locates multiple commercially viable oil or gas reservoirs, significant (some positive, some negative) environmental (e.g. air emissions and infrastructure construction), economic (e.g. high generation of revenues), socio-cultural (e.g. price increases) and institutional (capacity deficiencies in authorities) impacts would result.

Mapping possible oil spill incidents — which could occur throughout the drilling and production phases — is also explored in this volume. Because the possible crude oil reserve characteristics are still unknown within Lebanese waters, trajectory models for possible spills of four types of oil — diesel, condensate (from gas wells), light crude and heavy crude — are included, with variables including the quantity and duration of spill release.

Scenario 1:           No commercial findings
Scenario 2:         Lean/rich gas and petroleum liquids — onshore bias
Scenario 3:         Lean/rich gas and petroleum liquids — offshore bias
Scenario 4:         Crude oil and rich gas
Scenario 5:         Multiple and successive field developments
Scenario 6:         Nearshore oil/associated gas
Scenario 7:         Onshore gas transportation and use

 

1,000m³ instantaneous heavy crude spill from center EEZ position (Trajectory)
O&G_begin_map2_Vol 1 SEA Report - SEA for Petroleum Activities-81

Source: Strategic Environmental Assessment

 

5,000m³ 40 day blowout of heavy crude oil from the southern EEZ position (Trajectory)
O&G_begin_map1_Vol 1 SEA Report - SEA for Petroleum Activities-89

Source: Strategic Environmental Assessment

Volume 2 of the SEA outlines the framework for formulating a national contingency plan (NCP) to mitigate marine pollution and coordinate an oil spill response. Among the framework prescriptions is the MoEW’s role as the competent authority to formulate the NCP as the coordinating government agency responsible for oil spill preparedness and response, to request external assistance if needed, to gather oil pollution reports, and to coordinate participation of the petroleum sector in the implementation of the NCP.

To advise the MoEW in formulating and implementing the NCP, a National Contingency Planning Committee (NCPC) would count as its members:

– Minister of Energy and Water (chair)

– Ministry of Environment

– Ministry of Public Works and Transport

– Ministry of Agriculture (Fisheries)

– Representative of each of the Petroleum and Petroleum Products Producing Companies

– Chief of Search and Rescue

– Ministry of Interior and Municipalities: Director General of Civil Defense

– Ministry of Defense 

– Ministry of Public Health

– Harbor Master

– National Center for Scientific Research (Marine Biology Specialist)

 

The NCPC will coordinate with the following public agencies whose responsibilities, in mitigating and responding to oil spill incidents, include:

 

Ministry of Public Works and Transportation

Among the ministry’s responsibilities are navigation safety in Lebanese waters, implementing policy to protect marine environment within both public and private ports, and preventing pollution from ships.

 

Ministry of Defense

Each branch of the military has a role to play. The navy has the responsibility to arrest or escort to the nearest port vessels breaching international or Lebanese law, to conduct routine vessel patrols, and to monitor, sample and report any pollution incidents. The air force will undertake routine air patrol missions to protect Lebanese waters and establish aerial surveillance to identify polluters and oil slick incidents. And the army, when requested, will assist the MoEW in the organization of manpower and equipment during shoreline cleanup following oil spills.

 

Local government

The four coastal governors will each appoint a representative to the NCPC in the case of a major spill, to coordinate local shoreline cleanup action, and will be responsible for providing temporary storage facilities and final disposal sites for oily wastes during spill cleanup efforts.

 

Ministry of Finance

Customs authorities will be responsible for approving the temporary import of oil spill combating equipment without payment of duties.

 

Ministry of Interior and Municipalities

Responsible for immigration, the ministry will approve temporary immigration without delay for oil spill strike teams to assist in spill incident cleanup.

 

Ministry of Public Health

Responsible for preparing contingency plans and arranging for expertise to cover potential health hazards resulting from oil spill accidents.

The third volume of the SEA outlines a Stakeholder Engagement Plan (SEP) used to demonstrate a comprehensive stakeholder engagement process from program conception through project development, and engaging stakeholders (a registry of whom can be found in Volume 6: Registers) across communities and interests affected by the development of an oil and gas industry.

Including stakeholders in the preparation of the SEA allows the recording of concerns by industry experts, government officials and civil society. Some of the main issues raised by key stakeholders were:

 

Ministry of Agriculture

“Concerns of negative impacts on the fishery cooperatives and community” though “new fisheries legislation is pending.”

 

Ministry of Environment

“The MoE is under-resourced” but the ministry’s Environmental Impact Assessment decree has been ratified.

 

Ministry of Interior and Municipalities

“Search and rescue is under resourced and could not cope with oil spills.” Lebanon has begun to address this concern by restructuring the country’s civil defense, granting volunteers full employment status and improving the force’s ability to respond to disasters.

 

United Nations Population Fund

“Fears that money or profit will be taken by corrupt officials [thus] preventing regeneration.”

 

CNRS

“Adverse impact on marine life from oil and gas activities.”

 

Multiple sources

“Fear that there is no accountability or communication either between or within the ministries” and “lack of awareness of what an SEA/ESIA and offshore exploration entails.”

The RPS consultation team highlights the range of concerns and comments in the Concerns Registry.

One of the main points made by RPS in this section regarding stakeholder concerns is that “it does not matter whether the concerns are founded or unfounded; there is an obligation from the MoEW or the industry to respond.”

This volume presents an overview of the available environmental and socio-economic data and information on Lebanon at the time the study was conducted. Its purpose is to emphasize the weaknesses in this data so that Lebanese authorities can address the deficiencies in preparation for commencement of oil and gas development activities.

Regarding the data available for use in this report, the authors wrote that there is a “serious data deficiency, and this is alarming in the context of a developing oil and gas industry.” It provides an overview of the petroleum industry and the primary concerns including its impact on a number of factors from oil and gas itself to closely related fisheries and water to tourism, cultural heritage and anthopogenic effects.

Oil and gas: A full review of the upstream, midstream and downstream, including techniques and equipment used.

Onshore ecology: Summarizes the available data for coastal and lowland habitats; vegetation; birds; mammals; reptiles and amphibians; terrestrial invertebrates; fish; and other sensitive areas.

Fisheries: A thorough review of the legal and regulatory framework for fisheries in Lebanese waters.

Air: A summary of air quality and air pollution concerning public health and assessment of data available for air quality management.

Social: An assessment of the social impacts, a thorough review of the available data on demographic trends, wealth distribution, employment and workforce, poverty, ethnic context, cultural makeup, political structures, gender, life expectancy, literacy, land ownership and usage, crime, infrastructure and energy use.

Tourism: A thorough assessment of the temporary and sustained impacts felt by coastal and marine tourism.

Anthropogenic [influence of human activity] effects: Focus on the data available considering non-routine impacts such as oil or chemical spills, fire and unexploded ordnance as well as anthropogenic impacts not considered in the other sections.

Environmental law overview: A thorough review of the environmental legislation in the context of the oil and gas exploration lifecycle and also air, water, soil, biodiversity, land use, agriculture, energy, industry, construction, transportation, noise, solid waste management and tourism.

Offshore ecology: A summary of the available data for benthic and planktonic species, demersal and pelagic fish, marine mammals and reptiles

Water: An extensive overview of the available data on water management and usage, regulatory framework and planned strategy

Waste: An analysis of available data on municipal solid waste management, waste generation, waste streams and waste infrastructure

Health: An analysis of the impacts on public health including regulatory framework and review of existing available data

Cultural heritage: An assessment of the baseline and potential impacts on archaeological remains, historical buildings, and historic landscapes in both offshore and coastal onshore zones

This volume comprises a description of the available GIS (geospatial) datasets acquired by the RPS consulting team, including the methodology in organizing the metadata for use in informing decisionmaking by the relevant authorities (e.g. the MoEW). The primary recommendation of the RPS team to the MoEW is to set up a geoportal to increase dialogue between the MoEW/LPA and stakeholders to share the GIS information, avoid inconsistencies and facilitate data exchange.   Aggregating datasets from various sources including the MoEW, the army, NGOs, various state organizations and private companies will better assist decisionmaking.

This volume includes the law, consultation notes, identification of stakeholders engaged and a list of data acquired from specified stakeholders. It is intended to be continually updated.

The legal register contains the code and number of legal articles consulted, with a description of the legal requirements for various issues as well as the limitations of a specified piece of legislation.

The stakeholder register lists the names and contact information of all stakeholders engaged throughout the data acquisition and study life cycle.

The consultation register is a record of the details and outcomes of meetings, conversations and verbal agreements between the RPS consultation team and stakeholders.

The data acquisition register lists all data or documents received from stakeholders.

The concerns register records all concerns raised to and by the RPS consultation team based on consultation with stakeholders and RPS interpretation of in-country observations and secondary research.

This volume shows, through pictures, the proposed route of an onshore pipeline stretching from Tripoli in the north of Lebanon — bypassing the Greater Beirut area offshore — to Tyre in the south of the country.

 

  Proposed onshore pipeline route
O&G_begin_MAP3

Source: Strategic Environmental Assessment

The final volume of the SEA provides a description of surveying and sample techniques as an instruction guide for conducting further offshore, biological and social surveys as well as a starting manual to carry out future ESIA baseline surveying.

 

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Economics & PolicyOil & gas 2014: On hold

High expectations

by Jeremy Arbid
written by Jeremy Arbid

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.

 

Much has been said regarding the prospects for oil and natural gas in Lebanese waters. Extensive surveying — the entirety of the country’s offshore waters has been spanned by 2-dimensional seismic surveys while 70 percent has been covered by the 3-dimensional kind — has resulted in the identification of the zones most likely to contain recoverable hydrocarbons, drawing interest from 46 companies that prequalified to bid in Lebanon’s first offshore licensing round.

A Lebanese Petroleum Administration (LPA) map from 2012 shows where the greatest potential to find resources may exist. The results of seismic surveying have resulted in assessments which companies can use to drill exploratory wells and thus test projections of reserves in Lebanon’s exclusive economic zone.

The results of surveying suggest the different zones contain gas reservoirs at different depth: biogenic gas is formed at shallow depths and low temperatures by bacterial decomposition of organic matter, suggesting lower costs in drilling and extraction. Thermogenic gas, in contrast, is formed at greater depths through thermal cracking of decomposed organic matter or oil into gas — where molecular bonds are broken due to high heat and temperature — suggesting higher costs in drilling and extraction.

The seven zones are delineated according to geological similarities and characteristics of different petroleum systems (the geophysical qualities essential for oil or gas to accumulate). In referring to this map, exploration probability of success for the zones has not been projected, nor do the zones directly relate to the 10 proposed offshore blocks.

To better appraise how much gas or oil an area might produce, experts use what are called P50 calculations. These show a middle of the road estimate for the volume of gas or oil, and are the norm for projecting exploration success so as to manage expectations. For instance, a P50 of 10 trillion cubic feet (tcf) of gas means that, based on all available evidence, experts predict that the probability of finding at least 10 tcf to be 50 percent — that is, there’s an even chance there’ll be either more or less than 10 tcf. The more conservative P90 and optimistic P10 calculations can also be used to bracket expected outcomes.

In a September conference hosted by the Research and Strategic Studies Center of the Lebanese Armed Forces, the LPA outlined the P50 for offshore blocks one, four and nine. In block one, the P50 for natural gas is 14.9 tcf and +440 million barrels (mmbbl) of oil; in block four the P50 projection is 13 tcf and +425 mmbbl; while in block nine the P50 is 15.2 tcf.

These are merely projections based on seismic surveying and, until drilling in Lebanese waters occurs, 100 percent accurate figures on what lies below the waves cannot be confirmed. But to give some perspective, Iran — the world’s leader in proven gas discoveries — stands at 1,192.9 tcf at the end of 2013, according to the BP Statistical Review of World Energy June 2014. Lebanon might only find a fraction of this amount, not a global game changer, but certainly significant within the regional context.

Further data of the offshore area through electromagnetic surveying (useful for penetrating Lebanon’s thick layer of salt) and core sampling (useful to identify temperatures of the reservoirs) might result in more accurate assessments of where companies should drill exploratory wells, reducing time and saving money.

For now, these indicators are very encouraging. But no amounts for oil or gas can be confirmed until exploratory wells are drilled. Lebanon will have to wait before needed decrees are passed, allowing companies to come explore the country’s exclusive economic zone.

[media-credit name=”Lebanese Petroleum Administration” align=”aligncenter” width=”580″]WHERE GAS_map1[/media-credit]

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Economics & PolicyOil & gas 2014: On hold

Looking onshore

by Matt Nash
written by Matt Nash

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.

 

Although Lebanon’s seven onshore exploration wells — drilled between 1947 and 1967 — all turned up dry, that does not mean there are no hydrocarbons buried beneath Lebanese territory. In fact, the search for onshore oil or gas resources is ongoing, despite complications related to security problems along Lebanon’s northern and northeastern borders with Syria. US based NEOS GeoSolutions plans to conduct aerial onshore surveying soon. In an email response to questions for this special report, the Lebanese Petroleum Administration (LPA) says, “The project is under mobilization and [we] expect the wheels up before the end of the month.” A NEOS press release from January 2014 says, “Our neoBASIN survey has been designed to map the regional prospectivity of northern Lebanon by integrating legacy well and 2-D seismic data with newly acquired airborne geophysical datasets. Among other things, our geoscientists will work with the program’s underwriters to identify the relationships among key geologic features that extend into the survey area from offshore structures and from Syria’s onshore petroleum systems, as well as to efficiently highgrade acreage across the survey area.”

The airborne survey will cover 6,000 square kilometers — more than half of Lebanon’s total area. A map included with NEOS’ press release shows the survey area covering the whole of Lebanon stretching from Beirut and north. The LPA’s statement says analyzed data from the survey should be ready in the spring of 2015. More traditional 2-dimensional seismic surveying being shot by the UK’s Spectrum — which carried out 2D and 3D offshore surveys in Lebanese waters — began in 2013, but is currently on hold because of security concerns. Spectrum has so far shot 100 kilometers of a planned 500 kilometers of linear surveying. The LPA says “scouting and seismic line routing design are completed” for the remaining survey areas but “the project involves long hours presence on-site in remote areas exposing the crews to all sort of possible threats that are not few these days.” Results, of course, will not be ready before surveys are finished. NEOS representatives in Lebanon were not available for comment and Spectrum did not respond to an interview request for this article.

On the legal side, the 2010 law governing offshore exploration and production is strictly limited to offshore. The LPA wrote a new onshore law and submitted it to the Ministry of Energy and Water in January. Since then, the LPA says, the draft was sent to “all ministries,” some of which suggested changes that have been incorporated into a newer version of the legislation. The final draft “will be transmitted to the parliament within [a] few days. Ratification date can be decided by the parliament only.”

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BusinessOil & gas 2014: On hold

Powered by gas

by Jeremy Arbid
written by Jeremy Arbid

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.

 

When Lebanon moves forward toward extracting its potential oil and gas resources in the country’s coastal waters, it will do so with the intention of powering industrial manufacturing and investing in infrastructure for small and medium sized enterprises (SME) integrating them with operating oil companies, creating an industry of support and ancillary service companies.

The Lebanese Petroleum Administration (LPA) has repeatedly indicated this intention in its vision for Lebanon’s oil and gas sector, saying the crown jewel is not the lucrative extraction of resources, but rather encouraging manufacturing, industrial localization and SME integration.

Difficulty to localize

Though revenue from the sale of potential petroleum resources could be significant, the lasting value might come in powering industrial manufacturing and encouraging the integration of SMEs into an oil and gas value chain. “It is a very large area of opportunity and — when we talk about SMEs — quite a large chunk of revenues depend on the services provided,” says Georges Chehade, a partner with Strategy& and the firm’s leader of the energy, chemicals and utilities practice for the Middle East. “There will be a lot of opportunities to localize,” he adds.

As the sector matures, developing a value chain will hold huge potential for employment generation and investment opportunities across industries, infusing wealth into the Lebanese economy that could last well into this century and perhaps beyond, explains Chehade. However, the initial phases — exploration and development of reservoirs — will only see limited integration of local companies in servicing the operating oil companies. Exploration during the first licensing round, which typically lasts three to five years, “is a difficult phase to localize and mainly will rely on the resources and bases that these [companies] will have somewhere else in the region,” says Chehade. Operating oil companies that might be awarded contracts for exploration most likely will rely on existing resources in the region. For example, “they might have rigs in the Mediterranean that they will bring in order to drill these [wells],” explains Chehade.

Though the exploration phase might hold only limited opportunities for local companies to integrate services and supply materials and products to the operating companies, it is at the development and production stages where SMEs could begin infusing their products and services within the sector. It is at these stages that two types of activities will become in demand — engineering, procurement and construction (EPC) services, and oilfield services (OFS).

[pullquote]Less-technical services, materials and products could be supplied by existing or newly established Lebanese companies[/pullquote]

“These are two big buckets of services that will be required,” Chehade points out, articulating the importance of EPC and OFS companies. These companies will fulfill the main supply chain requirements of the operating oil companies, offering technical services such as the servicing of drilling rigs, pipe laying and the construction of refining infrastructure. Most likely, large OFS companies will enter the Lebanese market to meet demand; examples include Schlumberger, Baker Hughes and Halliburton, all of whom have shown interest by sponsoring Lebanese oil and gas conferences. These companies might use materials supplied by the Lebanese market. For instance, cement from Lebanese factories might cost less due to shipping expenses and the same could be the case with other materials or for the laying of pipelines which could be done using local firms. This point is particularly pivotal given the local content strategy articulated by the LPA.

Less-technical services, materials and products could be supplied by existing or newly established Lebanese companies. Chehade says this includes everything required to cater to the needs of offshore production including marine vessels or helicopters for transportation to drilling rigs, food catering or the construction of housing for workers to name but a few.

A part of the local content stipulations in model exploration contracts are employment requirements compelling companies to hire 80 percent of their workforce from the local labor market. Localizing employment, Chehade says, “will definitely encourage the development of an industry and increased localization of these steps of the value chain.” But in addition to labor force requirements, the local content policy will also give preference to Lebanese contractors to provide needed goods and services to companies throughout the petroleum industry, into ancillary industries. Specifically, there will be a preference for Lebanese services even if they’re up to 10 percent more expensive, and for goods up to 5 percent dearer. The latter preference will only apply to goods actually produced in Lebanon, according to the LPA.

Offshore platform

 

Impact on the price of fuel

Confirming commercial quantities and the quality of findings through exploratory drilling will benefit Lebanon in at least two other significant ways. First, if and when viable quantities of natural gas are found, industries and factories can use the fuel to power manufacturing.

In an August interview with Middle East Strategic Perspectives, a local consulting firm, Minister of Energy and Water Arthur Nazarian discussed how the reduction of heavy fuel oil imports — and relying on natural gas if Lebanon discovers the resource in coastal waters — could benefit industries through a lower “energy bill which has been so far one of the major impediments to competitiveness on the international markets for Lebanese products.” (See this month’s special report on Lebanese industry)

Presently, Lebanon has little heavy industry because there is limited availability of fuels to power manufacturing and electricity supply in the country is intermittent, requiring small factories to purchase generators. The high cost of energy and low reliability of access to electricity in Lebanon reduces the country’s manufacturing competitiveness compared to many of its neighbors in the Middle East where energy flow is reliable and, in some cases, the cost of fuel is subsidized. At a conference in September, The Daily Star reported, Industry Minister Hussein Hajj Hassan stated that “Lebanese industrialists have in the past years been alone in the face of competition from neighboring countries where the industrial sector is supported in terms of subsidized electricity, export and proper and affordable infrastructure.”

If Lebanon begins producing natural gas, the LPA tells Executive, “Lebanese industry, which suffers from high energy bills that are impeding its productivity and growth, will be provided with secure, clean natural gas.”

The forecasting of domestic demand, encompassing the needs for residential use, electricity generation and industrial manufacturing are calculations the LPA has begun to compile. Electricity generation will require 0.2 trillion cubic feet of gas annually, the LPA has said during conference presentations, though figures for residential and industrial demand are not presently available.

Subsidizing fuel demand for industrial use in manufacturing is a tricky issue. Egypt, for example, aggressively subsidized fuel and under-forecasted demand growth for industrial use, a lesson the LPA has noted and will look to avoid (see the special report overview).

Developing a petrochemical industry

[pullquote]“Lebanese industry, which suffers from high energy bills that are impeding its productivity and growth, will be provided with secure, clean natural gas”[/pullquote]

Confirming quantity and quality of natural gas will also give a clearer picture for developing a downstream petrochemical industry. Lebanon will know more in three to five years, Chehade points out, adding, “It’s premature to think now about what could happen in downstream because we don’t know what sort of gas is down there and the type of gas will determine the application, especially in the petrochemical streams.”

The versatility of natural gas is exceptional. The fuel is a common feedstock to produce multipurpose chemical products like synthetic ammonia and urea, which are most widely used as fertilizer for agriculture. Ammonia and urea are also ingredients used to manufacture industrial explosives; catalytic converters to reduce the exhaust from combustion engines; it’s an ingredient in many household products like hair conditioners, tooth whiteners and dish soap; it’s sometimes used as a cloud seeding agent to modify precipitation and has been used as an additive to enhance cigarette flavor. It also has many medical uses in dermatological products to rehydrate the skin and as a diuretic. It can also be used as a raw material to produce decorative laminates, textiles, paper, foundry sand molds, wrinkle resistant fabrics and adhesives. Simply put, natural gas is a very important feedstock for the chemical industry.

Adding value

Because Lebanon is still in such an early stage of the exploration process, the pieces of an oil and gas value chain have not fallen into place yet. Mapping out how a web of companies will be interconnected and the way revenues, goods and services will flow both to the oil and gas industry and into secondary industries is an extensive task that the LPA plans to, perhaps with consultation, undertake. SMEs will perform integral roles and, as companies reach higher levels of sophistication in the services and goods supplied, it will be important to plug SMEs into regional and global value chains.

But integrating SMEs into regional and global value chains is no simple feat. A 2010 report published by the United Nations Conference on Trade and Development (UNCTAD) found that “while some governments have industrial policies and may promote certain economic sectors, they have been less supportive of SMEs … nevertheless, there is growing awareness of the contribution of SMEs to income, employment and exports.” The report broadly recommended governments support SME innovation and integration into evermore sophisticated value chains to enable SMEs to meet international quality standards through highly specialized training programs for workers and financial measures and instruments to support SME innovation and technology. 

The benefits to Lebanon in doing so are self-explanatory — more manufacturing, more jobs, more products for export — while the benefits to big, international companies are huge. A 2007 International Finance Corporation report in collaboration with Harvard University’s Kennedy School of Government noted that “in developing countries, business linkages with local small–medium enterprises — including procurement, distribution and sales — offer the transnational corporations an avenue to reduce input costs while increasing specialization and flexibility.” Similarly, in its 2006 World Investment Report, UNCTAD identified 77,000 transnational corporations that in 2005 had counted 770,000 local partners which “generated an estimated $4.5 trillion in value-added, employed some 62 million workers, and exported goods and services valued at more than $4 trillion.”

These reports indicate the importance of integrating local suppliers of goods and services into regional and global value chains, the effects of which produce ever more sophisticated products and services with big impacts on local and regional economies and international trade.

What potentially lies beneath Lebanese waters could translate into big gains for Lebanese industries and future entrepreneurs. If the country does find oil and gas resources — offshore prospectivity is high — then industry and SMEs powered by these fuels will flourish.

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Economics & PolicyOil & gas 2014: On hold

A treasure trove

by Matt Nash
written by Matt Nash

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.

 

Like skinning the proverbial cat, there are many ways a state can earn money from oil and gas resources. A government’s goal in negotiating an oil and gas deal with international companies is to maximize its share of revenues. While states were once content to give oil and gas companies control over and ownership of hydrocarbons in exchange for a cut of the profits, the times began a-changin’ in 1966. That year, Indonesia reversed the state–petroleum company relationship, prompting the nationalization of resources in countries around the world. Indonesia signed the first major production sharing agreement (or contract, the terminology differs but the idea is the same) the most important innovation of which was that the state owns the resources.

Prior to 1966, governments relied only on royalties and taxes to earn money off of hydrocarbon resources through what are commonly known as concession agreements. Production sharing agreements changed that, and today there are a number of different types of agreements states and oil companies can enter into with a variety of fiscal terms that a state can use to profit from any oil or gas lying beneath its territory. That said, several researchers studying the financial benefits to a state from one system versus another have concluded that, as long as a fiscal system is well designed, which tools a state uses to make money can be largely irrelevant.

In a 2007 book titled “Escaping the Resource Curse”, consultant and oil and gas fiscal regime analyst David Johnston writes, “Contrary to popular belief … the type of system used is of minor importance relative to other design concerns. Governments can achieve their fiscal objectives with whichever fiscal system they choose as long as the system is designed properly.” Unfortunately, Johnston does not offer any example of a ‘perfectly designed’ system, in large part because fiscal regimes vary from country to country and have to take into account both the government’s desire for maximum revenue take as well as the prospectivity of an area open for licensing, political risk and other factors that impact foreign companies’ willingness to invest in a given state.

Evaluating a fiscal system is a difficult task, notes Silvana Tordo in a 2007 World Bank working paper on fiscal systems for hydrocarbons: “Only at the end of a field’s economic life, when all revenue, cost, royalty and tax data are known, can the profitability and the division of profits between the host government and the investors be reliably determined.” Despite this, there are clearly better and worse fiscal regimes, and where Lebanon’s proposed system falls on this spectrum is the matter of some debate.

exec_-_royalties_chart[1_new

The toolbox, Lebanon edition

Royalties and taxes are still the mainstay of concession agreements but also play a role in some countries’ production sharing agreements. Lebanon, for example, currently has a model exploration and production sharing agreement that calls for royalties on oil and gas, should any of either be produced. The model contract has to be approved by the council of ministers, and is therefore still subject to change. That said, Lebanon is currently planning to charge a flat 4 percent royalty on gas and a royalty ranging from 5 to 12 percent on oil, based on the volume of production, the Lebanese Petroleum Administration (LPA) confirmed at a workshop for journalists held from September 4 to 5. Paris based energy analyst Nicolas Sarkis argued earlier this year in a letter to then-President Michel Sleiman and articles published in the local press that these rates are far too low compared to global averages. What Sarkis failed to address in his critique, however, was that royalties are only one revenue stream in Lebanon’s model contract.

Aside from handing the state ownership of petroleum resources, production sharing agreements also gave birth to the cost oil–profit oil split (in industry lingo, ‘oil’ is often used as a catchall for all types of hydrocarbons). The idea here is that the company or companies exploring for and, eventually, producing oil or gas get to ‘keep’ some of the resource to sell exclusively with an aim toward recovering the costs of exploration and development. Any additional oil or gas remaining once the company recovers costs (i.e. profit oil) is split between the company and the government. The line between cost oil and profit oil in production sharing agreements is often drawn by the companies in a competitive bid. Lebanon, the LPA announced in April 2013, will allow companies to bid on the cost recovery ceiling (i.e. the line between cost oil and profit oil) as well as how profit oil is split between the state and the companies with rights to drill in each block awarded.

Cost oil calculations can be based on volume or value (i.e. x percent of the barrels of oil go to the company for cost recovery or x percent of the price the company receives from selling what it produced goes for cost recovery). Lebanon’s model contract, according to the Petroleum Activities Regulations approved by the cabinet in 2013, calls for calculating cost oil by volume. The regulations also stipulate that cost recovery will be calculated quarterly, allowing for any costs not recovered in one quarter to be carried to the next until all costs are recovered. The regulations also note that should a well stop producing before costs are fully recovered, the companies are out of luck.

To make things a bit clearer, imagine companies are awarded an offshore block with a cost recovery ceiling of 50 percent. Once a contract is signed, the companies (Lebanese law stipulates that only a consortium of at least three companies can win rights to a block) will either commission surveys to determine where to drill or rely on existing survey data to plan an exploration drilling strategy. Exploration drilling, especially in the deep waters off Lebanon’s coast, costs tens of millions of dollars per well. If the companies discover oil or gas, they will then drill additional appraisal wells to better determine just how much of what they’ve found. After appraisal, if it makes economic sense to develop the discovery, the companies will start producing — and selling — the resource (it is entirely possible to make a discovery only to find it is so small that producing it won’t make the companies any profit). By the time production starts, costs can already be very high. For purely illustrative purposes, let’s say the total cost is $100 million and that a field’s sales generate $20 million per quarter after royalties. With a cost recovery ceiling at 50 percent calculated quarterly, this means that until the companies recover that $100 million (although costs continue to be incurred throughout the lifetime of a project), each quarter they can use 50 percent — the equivalent of $10 million — of their production to recover costs. Under such a scenario, it would take two and a half years for the companies to recover their investment. This also means that each quarter, the government gets its own take from production through its share of profit oil. 

[pullquote]Both royalties and the structure of Lebanon’s cost oil–profit oil split ensure the state will begin earning money from production almost as soon as it begins[/pullquote]

Government take

The second biddable item (of two) in Lebanon’s model exploration and production sharing agreement is determining the split of profit oil. Indonesia, in its 1966 agreement, opted for a 60–40 split in favor of the state. According to Johnston, the fiscal regime consultant, around 80 percent of production sharing agreements instead use a sliding scale to determine the profit oil split, which is what the LPA said it plans to do during the September media workshop. According to an LPA presentation, the profit oil split will be based on what is known in the industry as the R factor, where ‘R’ stands for the ratio of cumulative project revenues to cumulative project costs. When the R factor equals 1, total revenues have caught up to total costs, meaning all costs have been recovered. Prior to this point (when the R factor is less than 1), the government’s share of profit oil is low. Once cost recovery is reached and until a certain level of company profitability is achieved, the government’s share gets larger and increases in increments as company profitability rises. To illustrate: prior to cost recovery, the government will get 5 percent of profit oil, with 95 percent going to the company. Once cost recovery is reached, until after the company has earned profits equivalent to half of costs, the government gets 10 percent of profit oil, and so on. It is too early to tell what Lebanon’s R factor calculations look like because the companies will bid on these terms.

More money makers

Both royalties and the structure of Lebanon’s cost oil–profit oil split ensure the state will begin earning money from production almost as soon as it begins. Additionally, however, the Petroleum Activities Regulations codified an area fee companies must pay for the blocks they have the right to explore and — potentially — develop. The regulations say that once the exploration phase is finished (i.e. when a discovery has been made, appraised and determined economically viable for development) companies will have to pay a yearly fee of $350 per square meter for the block they have the rights to in the first year and $400 per square meter in each additional year. The average block size — based on the LPA’s proposed block delineation, which is subject to cabinet approval — is 1,790.7 square kilometers. By the end of the exploration phase, however, companies must give the government back 50 percent of the area of the block they have rights to, meaning that the area fee will be charged to only half the block’s size as originally awarded. Regardless, it will mean on average of $300,000–$400,000 per auctioned block flowing yearly into government coffers.

Lebanon will also charge the oil and gas companies working in its waters income taxes. Currently the corporate income tax in Lebanon is 15 percent, however many countries draft legislation to charge oil and gas companies a higher tax than other companies pay. Lebanon is pursuing such a strategy, but a new ‘oil and gas’ tax regime has yet to be approved by the Lebanese authorities.

What it all means

Given that Lebanon is opting for a production sharing agreement, it is important to remember that this means the state owns any resources that may be found. Both the state’s share of royalties and profit oil can be taken in cash or in kind, meaning Lebanon could ask for delivery of actual quantities of oil or gas for domestic use or to sell on its own if the country feels it can do a better job marketing the resources than the companies extracting them. It is still too early to tell how Lebanon’s proposed oil and gas fiscal policy stacks up compared to other global producers; however, what is clear is the country is not deviating from international norms. Given that two important streams of revenue are subject to competitive bidding, a full evaluation of Lebanon’s system will be much more feasible once we see how much the country earns. 

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