Show us the money

A new draft law seeks to safeguard future revenues

by Jeremy Arbid

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

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

Anti-corruption law

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

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

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

Robust legal framework needed

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

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

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

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

Transparency measures pending approval

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

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

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

1) The potential for bribery

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

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

2) Who ultimately benefits?

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

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

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

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

3) Tracking draft legislation

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

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

4) What about the money?

That state revenues from seismic data sales – the first earnings from Lebanon’s oil and gas sector – are not being publically disclosed does not bode well for the potential billions more to come. In searching for clarity on the issue, Executive has not alleged theft or wrongdoing of any public official. Yet the government has stonewalled the question, trivializing its importance. When Executive asked then Minister of Energy Gebran Bassil in an October 2013 interview about the status of the money, he downplayed its significance, “You know this is very small compared to what we will be gaining, so I don’t know why you are… There is no ambiguity at all. This money is put in an account on which everybody agreed, and the Minister of Finance has approved. Without their approval we could not have opened an account.” Then he sued the magazine.

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

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

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Jeremy Arbid

Jeremy is Executive's former economics and policy editor.

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