Finance

Iraqi intrigue in Lebanon

by Mohanad Hage Ali
written by Mohanad Hage Ali

Lebanon’s propensity to host political, media and financial players from around the region and beyond is well know. Its weak government, strict banking secrecy laws, open media landscape and plethora of rival political movements provide a welcome embrace for all and sundry. Among those to have set up shop here recently is an Iraqi outfit with an intriguing network of connections trailing back into the quagmire of Iraq’s troubled contemporary history.

The operations in question are a nascent TV station, Asia TV, and Al Bilad Islamic Bank, which opened a branch in Hamra in recent years. The lynchpin that joins the two enterprises is one Mr. Aras Karim Habib who is the chairman of the TV station and sits on the board of the bank (and was responsible for the opening of its Beirut branch). 


A shady past

Habib was chief intelligence officer for the Iraqi National Congress (INC) — the umbrella organization of opposition groups set up with American assistance after the 1991 Gulf War — as is documented in investigative journalist Aram Roston’s book, “Ahmad Chalabi; The Man Who Pushed America to War.” Roston also outlines how Habib was one of three principals for Boxswood Inc, a company established in the US by Chalabi through which the INC received funding from the American Defense Intelligence Agency.

It didn’t take long for Chalabi and Habib to fall from grace among certain elements of the US establishment after the 2003 invasion of Iraq, with a US intelligence official accusing Habib of passing intelligence to Iran, as was reported by the British daily the Guardian. In 2004 an arrest warrant was issued for Habib relating to his intelligence activities with the INC. Habib was not available for comment despite numerous requests by Executive.

Habib is now living in Beirut, and his connection to the Chalabi family continues; Al Bilad Islamic Bank was incorporated in Iraq in 2006 with Chalabi’s nephew, Issam al-Uzri as chairman. Issam’s son, Hussein al-Uzri, was the former chairman of the government-owned Trade Bank of Iraq (TBI), which was accused of corruption by the Iraqi government in June 2011, leading to the former chairman to flee the country, while his father left his position as chairman of Al Bilad two years ago.

The link between the two banks came to the fore following the award for “deal of the year” given by a trade magazine to Al Bilad in 2008 for being allocated a $100 million letter of credit by TBI. 
Habib set up the Beirut branch for Al Bilad, the bank’s 15th branch and the only one outside of Iraq, in Hamra in December 2010. “Habib was involved directly in establishing the bank in Lebanon and he is the coordinator between Iraq and Lebanon,” says Talal Kaissi, head of the Al Bilad’s Beirut branch.

The bank is set on expanding its operations in Lebanon, according to Kaissi, it has acquired a building in downtown Beirut facing Starco for $32.5 million. The building, which is still under construction, will be the new bank headquarters and the Hamra office will remain as a retail branch.

From banking to television

More recently Habib has ventured into Lebanon’s media mosaic with the establishment of Asia TV, which according to Kaissi “is a private business” of Habib’s (which Executive confirmed banks with Al Bilad). Entifadh Qanbar, Asia TV’s general manager, goes further saying Aras Karim Habib is the chairman of the station and explains, “I run the day to day operations and [Habib] sets the general direction.” Asia TV started broadcasting on March 5 and Qanbar says, “We are a pan-Arab TV station. We cover the Arab, Muslim world with an Iraqi taste. I want English, Persian, Turkish and perhaps Kurdish news broadcasts.”

The station is one of several new media enterprises in Lebanon that endeavour, in the words of Qanbar, “to counter the Gulf invasion in the region.” The coverage of the Arab uprisings, and in particular the Syrian crisis, has severely polarized the journalistic community in the region and the coverage from outlets that enjoy support from the seemingly bottomless pockets of the Gulf, such as Al Arabiya, Al Jazeera, Al Mustaqbal, Asharq Al Awsat, Al Hayat, An Nahar and many more has created a backlash. 

Among those providing an alternative discourse are several new TV stations such as Al Etejah, Al Maseera, Al Mayadeen, Iran’s Press TV and Asia TV. However, with the schisms running throughout the Middle East increasingly characterized by the rivalry between the Sunni monarchies in the Gulf and the Shia theocracy in Iran, charges have been made that these new outlets are nothing more than an Iranian-backed push into the Lebanese media landscape, thus further exacerbating tensions. 

The hand of Tehran?

Aletejah and Asia TV are members of the Tehran-based Islamic Radio and Television Union, Aletejah is connected to an Iraqi military outfit call the Hezbollah Brigades (not linked to the Lebanese militia-cum-political party), Almaseera is connected to the Shia Houthi rebels in Yemen and a recent report on France 24 created waves by bringing into question the independence of Al Mayadeen from the interests of the Iranian and the Syrian regimes. Asia TV’s Qanbar says that his station receives no support from Iran and asserts further, “We have never been told what to say on our station.”

The station’s output is guided by a particular Iraqi vision of the Middle East that is perhaps best encapsulated by one of their flagship shows, Qalb al Aalam, or Heart of the World. The program focuses on the historical, cultural, political and economic relationships between Turkey, Syria, Iraq and Iran. Qanbar expands on the relationship with Iran saying, “We are in the camp of the Iraqi’s. The Iraqi establishment, including Sunnis, Shias and Kurds, now all have good relations with Iran. What’s more, we have a strategic relationship with the United States. That is very disturbing to the countries of the Gulf.”


The ties that bind

The relationship between Habib and Qanbar is a long one and is entwined with their involvement with the INC and Ahmad Chalabi. Qanbar says that, “[Chalabi] is a good friend and I ask him for advice on some issues and he will give me very good advice that I will consider but I will not follow in the steps of Chalabi.” However, Qanbar has served as his long-term spokesman and his personal account on LinkedIn, the professional networking Internet site, lists his current status as “Advisor to Dr. Ahmad Chalabi.”

With the long-standing links between the three men it begs to be asked if Chalabi has any involvement in either the bank or the TV station. The Wall Street Journal recently quoted Chalabi as saying that he is considering joining the editorial board of Asia TV but Qanbar denies he has any role at the station, saying, “We get our funding from Iraq, from a group of businessmen and a group of individuals that want to counter the Gulf invasion of Iraq but Ahmad Chalabi is not one of them.” Furthermore Kaissi at Al Bilad also denies Ahmad Chalabi has any direct involvement in the bank’s affairs.

In any case as the media war in the region intensifies the Iraqi challenge to the “Gulf Invasion” has set up shop in Lebanon and looks set to stay.

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Economics & Policy

Beirut’s secret garden

by Nabila Rahhal
written by Nabila Rahhal

Many older residents of Lebanon’s capital have fond memories of the Horsh Beirut, of childhood games and family picnics in one of the city’s most beautiful parks. The current generation has no such memories. While the Horsh Beirut, also known as Horsh el Snawbar or Horsh El Eid, accounts for some 77 percent of the city’s green space, the municipality has kept it closed to the public for more than two decades; but if a growing number of civil society organizations are successful in their efforts, the gates may soon be open again. 

Among the many victims of the civil war was the Horsh, whose ancient pine trees were burned to cinders during an Israeli assault on the city in 1982. In 1992, the municipality of L’Ile De France, working with the Beirut municipality, funded the restoration of 90 percent of the park at a cost of $191,000, according to Bilal Hamad, president of Beirut Municipality, with the remaining 10 percent picked up by the municipality. Once completed, the municipalities of L’Ile De France and Beirut decided the park would remain shut for 10 years to allow the newly planted pine trees time to grow and mature, says Hamad.

Today — 20 years later — only 10 percent of the Horsh Beirut is open to the public; the remaining 90 percent is closed to all Lebanese citizens less than 35 years old, and even those older than 35 must hold an authorized permit from the municipality to access the park. This classification, says Hamad, is one he inherited from the previous municipality and does not “necessarily agree with.”

Nizar Sayghieh, a lawyer who has worked to reopen the park, says that according to common law, closing a space created for public use is illegal, and people have a right to access the park.

Hamad acknowledges that the park is a public space and that “it shouldn’t be closed.” He claims he wants to give it back to the people of Beirut but says he wants to be confident it will not get ruined by opening it haphazardly. Sayghieh counters that if the safety of the park is the concern, the municipality should use the ample funds it has to hire and train security guards.

Civil society in action

To obtain answers for the delay in reopening of the park, an NGO named Nahnoo organized a debate in February 2011, between Hamad, Nahnoo founding member Mohammad Ayoub, Sayghieh and Eric Bouvard, a representative of the municipality of the L’Ile De France in Beirut.

During the debate, says Ayoub, Hamad asked for a policy paper that would outline how best to manage the opening and maintenance of the park. Provided this was presented, continues Ayoub, Hamad promised that he would open the park by the end of 2012. While Hamad confirmed asking for the policy paper, he said that he didn’t mention a specific date but that he would love to open the park by the end of the year, provided that the necessary arrangements exist.

Nahnoo took up the president of the municipality’s challenge and, two months after the debate, provided him with a detailed policy paper outlining specific solutions to the possible obstacles preventing the park’s opening, such as security issues and fire hazards, says Ayoub.

Hamad praised the quality of the paper, adding that he had sent it to a committee within the municipality that will study it and give recommendations this month. Hamad also sent it to  L’Ile De France representatives for their input and, pending both, he will be calling for “a brainstorming workshop in his office within the next few weeks.”

“The purpose of this workshop is to come up with one final plan to be presented to a private company that will manage, protect and maintain the park,” says Hamad.

When asked if the municipality cannot afford to maintain the park themselves, Hamad said they can but if they could get a company to do it for them, then “why not?”

Questionable outsourcing

This has led others to cry foul, given the ample examples — such as the Beirut Central District — where private management of public land has proved controversial, to say the least.  “Giving the park to a private company could risk turning it into a resort of sorts where its very purpose of being a public and free space will be defeated, just like what is happening with our beaches,” says Sayghieh.

Hamad says this will not be the case as the municipality will retain ultimate authority over the park. He does admit, however, that there might be a nominal entry fee to make the people using it “feel a sense of responsibility.”

Hamad also mentions providing park users with access cards to the park so security catching people misusing the space can seize the cards, and deny violators further entry. He believes that this will be a good way to control those who might intentionally want to destroy the park.

Dima Boulad of Beirut Green Project, a local NGO also working on public green spaces,  says that while rules are certainly needed to protect the park, “We don’t need the rules to be so uptight that people aren’t able to enjoy the park experience anymore.” Boulad gives the example of the newly-opened Zaitunay Bay, which does not allow pets or eating in non-designated areas.

Nahnoo and other civil society organizations remain unsatisfied with the municipality’s evasive techniques and last month organized guerilla picnic protests at major intersections around Beirut, along with 12 other local NGOs also campaigning to the open the park.

Nahnoo’s Ayoub said that he fears the municipality is “coming up with excuses to delay the opening,” and is working with the other NGOs to pressure Hamad to set a clear target date for the opening. Hamad says he believes in the importance of public green spaces and has even launched a campaign, “Beirut is Amazing”  to renovate several public parks, such as Sanayeh Park and the Sioufi Gardens, starting this summer.

According to Hamad, a landscape artist has donated plans for the rehabilitation of Sanayeh, and the retail company Azadea has agreed to donate the needed funds for the project. The municipality is currently asking private donors, companies and NGOs to donate money or resources for the rehabilitation of the Beirut’s main parks and to add greenery to the  streets of Beirut, mainly on road islands and strips dividing the roads.

Notably absent from this campaign is Horsh Beirut. When asked about this, Hamad said that, Horsh Beirut, being the biggest park, requires a separate campaign. He concluded by saying of the Horsh “it is a jewel for the people of Beirut and we want to make sure it stays that way once we open it.”

Yet one wonders how valuable a jewel is when no one can see and appreciate its beauty. Until the park is opened, the children of Beirut will continue to grow up with memories of playing on hard concrete in narrow alleys, while the wide open greens of the Horsh lay in lonely silence.

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Business

The oil importers’ albatross

by Sami Halabi
written by Sami Halabi

The perception of Lebanon’s oil importing companies as a cartel of money-making executives feeding off the backs of the people is an easy one to buy into, especially in an import-driven economy such as ours. But as any journalist knows, there are at least two sides to every story, if not many more.

“We are always accused of being people that are making fortunes, which is not true,” pleads Dania Nakad, general manager of Wardieh Holdings (Wardieh) — the self-proclaimed largest Lebanese-owned private sector oil company — and the recently appointed vice president of the Association of Petroleum Importing Companies (APIC), the industry’s lobbying body.

“During the war when the country was just a bunch of mafias and there was chaos everywhere you could say that the oil industry was a cartel, because there were two or three importers with control over the few ports,” she says, adding that such is not the case anymore.

Wardieh is probably best known in Lebanon for its gas stations, and the fact that it used to be owned by Exxon-Mobil before the later decided to exit the country. Yet the company does not own most of the stations that brandish their name.

Instead, Wardieh’s main revenues come from the import of petroleum and other oil derivatives ranging from diesel to petrochemicals. It signs supply contracts with gas station owners and finances the underground tankers and station equipment. While this has proved profitable for Wardieh, there have been a few hiccups.

Last year, a Wardieh gas station exploded near Beirut’s Adlieh district killing three and wounding 14 others. Nakad explains that the incident was a result of a panic-stricken owner, looking for his employee, turning on an electricity switch that had been shut off after fumes were detected in a storage area “that should not have been there."

The leaking underground tanker had been identified and subsequently filled with water for safety, but apparently this was not sufficient to prevent the incident. Nakad says that no charges were pressed because it was obvious where the fault was and “a few months later the station was up and running; we are still with them, them with us, but we lost Joseph,” says Nakad, referring to the station’s former owner.

Explosions aside, oil importers also have to take on significant credit with gas stations that pay post-factum while they pay their suppliers and the government in advance. “I have no protection. So what if I have a contract with a station? If he doesn't pay me I can sue him, go to court, spend a million years there and meanwhile he’ll have zeroed in his account and when the court tells him to pay, he’ll say he’s bankrupt, so what have you gained,” says Nakad. “If you want to be really smart you can steal a million dollars tomorrow and just sit in jail for three months! Honestly, this is the case today.”

Closing the pump

At present there are just 12 companies licensed to import oil into Lebanon. More players are not involved due to the large investment needed for storage, transport and infrastructure, coupled with the need for access to land on the seashore suitable for such an operation. 

Wardieh’s total assets, for example, are valued at $100 million, according to Nakad. She describes last year’s turnover as “excellent” and revealed to Executive that the company raked in revenues of “something like $340 million.” That is because oil prices stayed relatively stable throughout 2011. But now that oil prices are dropping again “since April we are witnessing another crash,” similar to that of 2008 when prices plunged from around $147 per barrel to below $50.

But with such revenue-to-asset ratios it’s little wonder that many say oil importers are running a racket. Oil importers have been accused of acting like an oligopoly and fixing prices. These companies bid for petroleum on the international market in groups in order to be able to buy up whole tankers, as opposed to half-tankers or less, thus allowing for better prices. Wardieh currently groups up with Total and IPT to bid for ships in the Lebanese market. Nakad denies that there is price fixing between the three large groups who usually engage in the bidding, but concedes, “In the absence of a government, the absence of a ministry and the absence of a strategy and policy, we do what we can to safeguard our basics.”

“At some stage ministers like to flex their muscles, and that applies to the current and previous ones who say ‘we want to import [gasoline]’. We tell them, ‘please do, we beg you to do it’,” says Nakad. “It would be better for us because then we wouldn't have to have all this expensive equipment, open up letters of credit for millions of dollars, and take the risk in a country where Israel can come tomorrow and bomb our facilities whenever they feel like it. Instead I would just simply go to the [government] refinery every day, as I do today with the gas oil [red diesel], and take my stock and sell it to market.” 

Caught red handed

At present the government only imports ‘red’ diesel — diesel with high parts per million (ppm) of sulfur, at around 500ppm — while the private sector imports ‘green’ diesel, at around 350ppm. Lebanon’s government-owned petroleum refineries have been out of commission since the Civil War, and perhaps that is a boon given the amount of corruption recently uncovered at their existing facilities.

At the beginning of the year, the government offered a one-month subsidy on red diesel, which removed the value added tax for distributors, the savings of which were passed on to end consumer. A report issued earlier this year by the Audit Court, Lebanon’s government spending oversight body, said that during the last days of the subsidy period government-run facilities in Tripoli and Zahrani continued to sell at the subsidized prize, with 101 of 215 licensed distributers of oil products suppling the red diesel on the last day of the subsidy. The distributors then sold the product at non-subsidized prices.

“I told one of the people who bought, ‘tomorrow morning if you are smart you go and take a credit note from all the people you sold to with the higher price because this will not pass and the files will be opened and heads will roll,” says Nakad. “Another calls me and says he made $50,000 [in profits off the deal], I told him go and sell at the lower price because I was sure that their will be a scandal. He thanked me a month later.”

The Audit Court eventually blamed the government, the consumer protection authority and the companies that made millions of dollars of profits but no one has yet been held accountable. “You think the guy at the door or the accountant makes the decision to extend working hours until after midnight,” she asked rhetorically. “When the big ones fall, it's the little ones that take the blame. The issue was cooled off and tucked away, not because there was a guy at the door who made a decision, there were big people behind it and if it gets to the courts they’ll find a scapegoat.” 

No margin for error

Even if things look good for oil companies, margins may not be as lucrative as one is inclined to believe. In 2002, the Lebanese government commissioned the international accounting firm PriceWaterhouseCoopers (PWC) to carry out an assessment of the pricing structure of petroleum in the country. The study suggested a structure whereby the oil importers would make a 5 percent profit margin on the cost of their product. Other elements included in the pricing structure were the government’s excise tax, currently at $2.67 per jerry can (20 liters) of 95-octane gasoline, value added tax (10 percent), insurance, additives and other costs to the consumer.

Since then, however, Nakad says they have had to incur further costs associated with increases in additives, operational expenditure, invested capital and others, such as a war risk premium that was imposed after the 2006 war with Israel, effectively bringing the margin to 3 percent of the cost of product. The three percent figure was also confirmed by another general manager of an oil importing company that spoke on condition of anonymity. “I dare anyone to identify one commercial sector that can do with 3 percent profits. The dikeneh [shopkeeper] next to your house won’t accept a margin of 3 percent,” says Nakad.

Nakad says that APIC commissioned PWC to do another study in 2010 to update the price structure, and the brief was presented to the previous and current Ministers of Energy and Water, who have not responded. That is why gas stations have gone on strike several times since, says Nakad, closing down gasoline supply in the country.

“You think the international names got out of Lebanon because they don't like the country or because of the weather?” she asks. “It’s not rewarding. Put the money in the bank. You get more and it’s secure!” 

A plausible solution for the industry, she says, would be for the government to crack down on the estimated 2,000 unlicensed stations in Lebanon and stop giving out new licenses to stations, which have reached some 5,000 across the nation. “We are not asking for the government to take [the PWC study] and just implement it, but do something in between, make a compromise.”

Nakad admits that if the companies got their way then consumers would bear the brunt of higher prices. “The awkward situation that we are in is that, whatever demand we have, it is going to be reflected on the end users because the government wants to maintain their income from the jerry can,” she says.  “But we are not supposed to be the financier of the cabinet. The government should not rely on gasoline, which is a consumer good, as a source of income because it is places the burden on the backs of the people.”

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Finance

INSEAD’s Professor Theo Vermaele

by Executive Staff
written by Executive Staff

Professor Theo Vermaelen, the Schroders Chaired Professor of International Finance and Asset Management at the INSEAD business school discusses with Executive how the ‘small people’ caused the 2008 financial crises, Facebook’s IPO flop and Lebanon’s conservative stance on derivatives trading on the sidelines of a recent conference titled ‘Challenges of the New World Economy: Are we in a Post Globalization Era?, at the Phoenicia in Beirut.

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Real estate

For your information

by Executive Editors
written by Executive Editors

Political tensions, market volatility hit Solidere

It has been a roller coaster ride for Solidere so far this year, mostly due to a shaky security situation in Lebanon, but also because of a sector-wide drop in sales. The property developer’s A and B shares dropped of 3.1 percent and 4.19 percent, respectively, in the third week of May on the Beirut Stock Exchange after violent clashes across the country. However, share prices climbed back up to $12.5 and $12.34 by the end of trading on May 25. As Executive went to press at the end of May, the developer’s global depository receipts listed on the London Stock Exchange were down 29.6 percent since anti-government protests began in Syria last spring. Many local analysts predict that if Solidere shares remain in free fall, major shareholders Bank Audi and BankMed would initiate a buyback scheme to boost prices, as they have done in the past.

Construction down, again

According to figures released by the Order of Engineers in Beirut and Tripoli, construction in the first four months of this year is down 10.5 percent from the same time last year. The most significant drop was in April, which saw a 26.5 percent dip in the number of new building permits over the same period in 2011. The Order of Engineers attributed much of the decline to the worsening situation in Syria and its effect on Lebanon. These figures follow a general downward trend over the last year for the entire sector. A Citi Research report, MENA Construction Project Tracker, showed in April a regional drop of 30 percent in the number of new projects awarded across the Middle East and North Africa.

Cityscape award goes to Abu Dhabi’s Sorouh

Sorouh Real Estate Company won the 2012 Cityscape Abu Dhabi award for the best mixed-use project in the region for its Sun & Sky Towers development in Abu Dhabi. Sorouh Chief Operating Officer Gurjit Singh said the development had attracted “over 900 families” after the award announcement. The Sky Tower stands at 74 floors, and the Sun Tower is 65 floors, making them the tallest buildings in Abu Dhabi. The company broke ground on the towers in 2007 and the first tenants were able to move in last year.

Beirut Property Fair

The annual three-day Beirut International Property Fair took place at the Conference Center of Hilton Beirut Habtoor Grand Hotel at the end of May. The event featured talks on attracting foreign investors to Lebanon, social media marketing strategies, investment in green technologies, and construction site safety. A general theme of smaller, more affordable apartments highlighted this year’s conference as Lebanese property developers slowly adjust to the realities of a general downturn in the local real estate market. Beirut-based investment firm MENA Capital used the event to launch its new 10,000-square-meter Bella Casa gated community in Beirut (see page 88).

UAE property agency welcomes criticism

Emirates-based property agency Better Homes is attempting to take the lead in a transparency drive for the sector, by creating an online rating system where customers can rank the performance of individual real estate agents directly on its website. The idea is to enable prospective buyers, and those who have already purchased property, a chance to rate and discuss their experiences in a public forum. “Honest and open customer reviews will enable new customers to find the best agents,” Ryan Mahoney, chief executive of Better Homes, told the Abu Dhabi-based newspaper The National shortly after the rating system was launched last month.

Palm Jumeirah courts young buyers

Emirates property developer Nakheel will soon expand its residential offerings on the Palm Jumeirah after it said financing had been secured for 192 studio apartments. The new development, Palm Views, “will appeal to young, vibrant individuals and couples who want a prestigious address at a price they can afford,” Nakheel chairman Ali Rashid Lootah said at a press conference. Studio apartments are 150 square meters, and start at AED1 million ($272,000). Palm Views will be split into two towers, each with 96 residential units. Construction is slated to begin by the end of this year, with first delivery expected in the first quarter of 2014. Palm Views will follow a regional trend that has new developments moving away from the higher end of the market to focus on first-time buyers.

Awards handed out at Cityscape Qatar 2012

Cityscape Qatar 2012 awards were announced on the last weekend of May. Notables included Best Sustainable Development Award, which went to Msheireb Properties for its Msheireb Downtown Doha project, and the Residential Project Award, given to Qatar-based United Development Company for its offering, The Pearl Qatar, which won for Mixed-Use Project. Other winners included Hamad Medical Corporation, Barwa Real Estate, and Qatar National Hotels Company. A number of large deals were also announced at Cityscape Qatar, and Barwa Real Estate Group used the conference to officially launch its Lusail Golf Residential Development. “The number of agreements signed at the event are themselves a testament to the leading role Barwa continues to play in Qatar’s development,” Barwa’s chief executive officer Abdulla Abdulaziz Al Subaie told reporters after the launch.

Bahrain property sold ‘at a loss’

According to a report by international real estate consultancy CBRE, Bahrain’s residential property market has taken a serious beating since anti-government protests began there last year. The report noted that: “Several middle-income housing projects have been launched in Bahrain in the last three months, and sales have reportedly been brisk to date.” But things are so bad that “that some of these projects are effectively being sold at a loss, or at best, cost price, in order to stimulate the market and raise the profile of the ongoing master-planned projects of which they are merely [at] a very early phase,” the report said. CBRE offered little hope for the immediate future as Bahrain’s public image remains tarnished by a brutal government crackdown on dissidents in the Gulf country.

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Economics & Policy

The devil’s details

by Malek Takieddine
written by Malek Takieddine

In its drive to become an oil and/or gas producing country, Lebanon currently faces the challenges of establishing and implementing a sound regulatory framework and an effective Petroleum Administration, the sector’s (supposedly) independent regulatory body.

Some of the most crucial aspects of the required system include creating farsighted mechanisms that will first prevent the occurrence of a number of problems that are commonly encountered in hydrocarbon producing provinces, and second, equip the Lebanese government with sufficient powers to address such problems swiftly and efficiently as they arise throughout the development of the upstream oil and/or gas industry in the country.

National vs. IOC interests

Arguably one of the worst oversights that can be committed by the early drafters of oil and gas legislation is the assumption that International Oil Companies (IOCs) would be always seeking to diligently explore their acreages in search of hydrocarbons, and that once they have found oil and/or gas, they would be eager to exploit it effectively and quickly.

Experience around the world shows that not long after licenses are granted or discoveries are made, some areas are often left to lay fallow and national governments discover that they do not have adequate powers to impose work obligations on the IOCs. As a prominent observer of the United Kingdom offshore licensing regime once noted, “the idea that licensees might make significant discoveries but then not develop them does not appear to have occurred to those who first drafted the offshore licensing arrangements in 1964/1965”.

In the UK, for example, rigorous state action was needed to address this problem and the government had to undergo the complexities of enforcing a “voluntary” scheme in order to rectify the situation of fallow areas and discoveries. The result was a shy governmental process that raised some concerns about the legality of such measures.

The efforts undertaken so far by the Lebanese government in drafting the offshore hydrocarbon legal framework suggests that the country is slowly making steady progress in the right direction. It is imperative to continue along this positive trajectory by appointing a Petroleum Administration that can play an effective role in monitoring, at a close distance, the petroleum operations to be undertaken by the IOCs.

Foresight needed

It can be also predicted that, in light of the current position of the Lebanese economy, the mere discovery of commercial oil and/or gas reserves would  understandably be interpreted as a promising sign of future wealth, regardless of the quantities that would actually be produced.

Yet, once the initial joy of the first few barrels fades away, the Lebanese government must be well prepared to monitor the efficiency of its production and to make sure that its licensees are conducting their operations using the best practicable standards and methods to ensure acceptable recovery levels out of each reservoir.

The technical expertise and skills of the licensees (the operators) usually play a crucial role in determining the levels of recovery (i.e. how much oil and/or gas could be practicably produced).

For instance, a 70 percent oil recovery from an oil reservoir is considered to be a high percentage as it is almost impossible to extract entire reserves of any particular reservoir due to the constant reduction of pressure and the interference of other factors, such as oil density and depth of the reservoir, amongst others.

Countries such as Saudi Arabia are constantly aiming to increase their investments in enhanced recovery technologies, as they recognize how vital this is in order to boost recovery rates at their reservoirs from around 50 percent to 70 percent.

Once again, the Lebanese regulator must ensure that the government’s powers under any exploration and production agreement offer useful mechanisms for pushing the licensees towards more efficient recoveries, that is to say better stewardship.

In due course the government must put in place adequate mechanisms whereby field activities would be surveyed (preferably on a yearly basis) to determine the performance of each licensee (operator).

A process to deal with underperforming fields must also be decided. Such a process could, for example, include an initial consultation exercise between the government and the licensee (operator) to study possible ways to enhance stewardship. A set of targets could thereafter be agreed in conjunction with a clear and firm set of sanctions.

Failure to address certain crucial issues in the initial text of petroleum regulations and agreements could have disastrous consequences on the national interest and result in huge resources being lost or at least deferred. 

Effective revenue management

In addition to operational efficiency, an important matter that Lebanon must consider is the efficient management of its hydrocarbon revenues. Hydrocarbon resources are known to inject considerable financial revenues into state accounts. These revenues would usually have two main characteristics: one, they are likely to constitute a large percentage of the total yearly revenues of the state; and two, they are temporary. As a result, several unfavorable consequences could be noticed in the national economy:

(i) Inflation due to the sudden increase in money supply.

(ii) An occurrence of the Dutch Disease, meaning the depreciation of the productive sectors as they becomes less competitive due to the oil-related increases in exchange rates.

(iii) An unstable budget balance due to the volatility of oil prices.

(iv) A decrease in income when the resources of the province begin to decline.

As part of the economic strategies that governments undertake to surmount the above challenges, national oil funds are often created by governments to accumulate and manage part of, or the entirety of, the state’s oil and gas revenues. In total, close to 20 petroleum-producing countries are known to have established national oil funds.

The specific purposes of such funds varies between countries; for instance, Norway’s aim is to use its fund to stabilize of the economy and to secure a steady income for future generations, even after the resources dry-up. Russia, however, does not give priority to saving for future generations and the purpose of its oil fund is, according to Vasily Astrov, an economist at the Vienna Institute for International Economic Studies: “reduce the vulnerability of the state budget to the volatility of world oil prices,” and to sterilize “the impact of oil-related foreign exchange inflows on the money supply and inflation.”

To Lebanon’s credit, the Lebanese Offshore Hydrocarbon Resources Law provides a clear provision that state hydrocarbon proceeds shall be injected into a sovereign fund.

The strategy shall be to keep the capital and part of the proceeds in an “investment fund for future generations”, while using the remaining funds to “guarantee the rights of the state and avoid serious, short or long-term negative economic consequences”.

In theory this is an excellent provision, however, the practical benefits thereof shall be largely affected by the seriousness of the special law that needs to be enacted by the Lebanese parliament to define the management structure of the sovereign wealth fund, and its investment principles, not to mention the effective implementation of such law. A close eye should be kept at how the Lebanese authorities will perform in the coming years in this respect.

Worthless oil and gas?

Indeed, some critics may argue that Lebanon’s oil and gas resources would be worthless to the country if they are badly managed and exploited. As the coming decades will show, the true worth of these ‘valuable’ resources will come down to the ability of the Lebanese authorities to manage this industry with high technical capabilities, foresight and transparency.

MALEK TAKIEDDINE is a legal consultant in the oil and gas sector and managing director at Al Jad legal firm

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Economics & Policy

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by Executive Editors
written by Executive Editors

NSSF raises coverage costs

The National Social Security Fund (NSSF) has increased its rate to cover an overnight stay in private hospitals from LL30,000 to LL90,000. The move came after private hospitals threatened to stop taking NSSF patients because the rate was too low in the face of increasing costs of care. This increase in coverage will be met with a rise in the ceiling of employees’ monthly contributions to the sickness and maternity category from LL30,000 ($20) to LL50,000 ($33). In this category, employers pay 2 percent from an employees’ salary, but this was previously capped at LL30,000 for salaries over LL1.5 million ($1,000). Under the new agreement the maximum contribution has been increased to LL50,000 by raising the salary cap to LL2.5 million ($1,666). The NSSF suffers from serious problems relating to underfunding and understaffing, with 45 percent of its positions vacant and the average age of employees exceeding 51 years old. According to the fund, the government’s accumulated obligations at the end of 2011 amounted to LL829 billion ($550 million), while they only received some LL120 billion ($80 million) from the state’s coffers that same year.

Spending in uncertainty

The Lebanese are continuing to spend, with private consumption for the first quarter of 2012 up on the same period in 2011. Investment spending is also up but at a markedly lower pace. Total spending, measured by the aggregation of cleared checks, point of sale and ATM transactions, edged up by 3.1 percent year-on-year in the first quarter of 2012, reaching $19.2 billion. This compares to the 1.5 percent increase in spending registered in the same period in 2011. The total cash withdrawals from ATMs by Lebanese residents increased by 7.9 percent annually, while point of sale purchases increased by 24.6 percent on a yearly basis. The figures show the Lebanese are continuing to increase expenditures despite the fragile economic and political environment that has prevailed, locally and regionally, since early 2011. The investment component was up at a comparatively lower pace due to uncertainty over the Lebanese and Syrian security situation. Imports of investment products went up a mere 2.3 percent year-on-year in the first quarter of 2012.

Logistical failure

Lebanon has crossed the finish line in 96th place in a global survey on logistics, slipping from its place at number 33 in the same survey in 2010.  The World Bank’s Logistics Performance Index (LPI) assesses the logistics gap among 155 countries and reflects perceptions of the logistics environment of trading partner countries. Lebanon also fell from 4th place to 26th from 2010 to 2012 among the upper-middle income countries category. The results are based on a survey of operators across the world who give feedback on the logistics of “friendliness” of the countries in which they work. It assesses customs procedures, logistics costs, infrastructure quality, the ability to track and trace shipments and timeliness in reaching destinations.

Upping industry, outing taxes

The Ministry of Industry has signed a deal with the American University of Beirut (AUB), the National Council for Scientific Research and the Lebanese Industrial Research Achievements program (ILRA) to improve the quality of industrial research in Lebanon. It is hoped the agreement will contribute to helping Lebanon generate industrial high value-added products for the economy while enabling AUB students to conduct academic research relevant to industry. Elsewhere, the Ministry of Industry said that a long sought-after law to reduce taxes on industrial exports by 50 percent was approved by the cabinet but was awaiting ratification from Parliament. Industrial exports amounted to $527.1 million in the first two months of 2012, up 10.6 percent from the same period in 2011. The sector as a whole constitutes 7 percent of gross domestic product according to the most recent figures. In 2002 the sector constituted around 11.5 percent of GDP.

MEA profits crash

The nation’s flag carrier Middle East Airlines (MEA) announced a 55.9 percent drop in operating profits between 2010 and 2011. It is not possible to verify the actual financial statement of MEA as it does not publish a detailed balance sheet or income statement, but the company’s chairman Mohammad Hout said the operating profits had dropped from $90.6 million in 2010 to $40 million in 2011. He blamed rising fuel prices, increases in wages and turmoil in the Arab region. Lebanon entered into the top bracket of the open skies policy in 2002, which liberalized aviation and increased competition in and out of the country, but Hout has complained that not all countries in the region are abiding by the agreement’s rules. The ex-head of Lebanon’s civil aviation authority, Hamdi Shawk, claims the Minister of Transport and Public Works, Ghazi Aridi, and MEA are retreating from the policy of liberalization. Neither the minister nor MEA responded to Executive’s repeated requests for comment. The company is more than 99 percent owned by Lebanon’s central bank and previously mooted plans to partly privatize the carrier by listing on the Beirut Stock Exchange appear to have been shelved.

Electrified employees

The government-owned electricity provider Electricite du Liban (EDL) was wracked by open-ended strikes, protests and sit-ins by part-time and contract workers last month. As workers protested against the cabinet’s failure to endorse their full-time employment draft law. The workers have been pushing for permanent employment with full benefits, voicing fears that they will lose their work to service providers. The EDL employees association claims that there are only 1,700 full-time employees at the company while it needs more than 5,000. The Minister of Energy and Water, Gebran Bassil, told reporters that “the company cannot contain more [permanent employees] than it can bear.”

Gray days ahead

Lebanese youth have a more downbeat view of their economic prospects than their Arab counterparts, according to a new report. The ASDA’A Burston-Marsteller 2012 Arab youth survey indicated that 63 percent of Lebanese youth are very concerned about the rising cost of living, 63 percent are worried about the economy and 60 percent are worried about unemployment. While the same proportion of Arab youth are concerned about the rising cost of living, only 48 percent are worried about the economy, and 44 percent are worried about unemployment. More than half of the respondents said that they had fewer opportunities than they did 12 months earlier. The survey covered the United Arab Emirates, Oman, Qatar, Bahrain, Saudi Arabia, Kuwait, Egypt, Jordan, Lebanon, Iraq, Tunisia and Libya.

Typically below potential

Lebanon’s projected real gross domestic product growth (GDP) of 3 percent in 2012 is well below the economy’s potential, according to the International Monetary Fund (IMF). It identified the implementation of strong domestic policies as essential to stimulating confidence, which requires good fiscal discipline to reduce the debt-to-GDP ratio downwards from its current standing somewhere around 140 percent. The IMF identified the need for reforms in infrastructure, as well as improvements in the business climate to help create a dynamic economy and boost job creation. This comes on the heels of a UN study that highlights that the labor-intensive productive sectors have been marginalized in Lebanon, contributing to lower productivity, higher unemployment and the exodus of much of the nation’s young talent.

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