Lebanon oil resources between realistic hopes and political greed

Wed, 03/05/2014

A double edged political and economic crisis is currently sweeping over Lebanon. Whilst the economic crisis has resulted in the increase of deficit of the balance of payments and of budget, higher unemployment, and has exacerbated endemic social ills, many politicians now place high hopes on Lebanon’s oil resources, believing that this will allow Lebanon to emerge from its current economic and social crisis. On the other hand, many people and observers seem more skeptical and fear that Lebanon may yet be missing another golden opportunity.

Meanwhile, official sources have estimated the size of Lebanon’s wealth in natural gas to be some 96 trillion cubic meters, in addition to some 850 barrels of crude oil which are likely to bring tens of billions of dollars annually according to preliminary estimates. In terms of oil exploration, the Ministry of Energy finally launched a pre-qualification call for bidding in February 15th 2013, following the passing by the House, 2 years earlier, of the necessary legislation for oil exploration, namely “law 132” (the law on petroleum resources in maritime waters), and that is back in August 17th 2010. As a result, 52 companies submitted their pre-qualification bid of which 46 were subsequently qualified, including some of the largest oil companies of the world. However and since one year ago, the process stumbled and the deadline for submission was actually extended three times in view of the prevailing political situation. It is now hoped that the bid will be called on the 10th of April 2014.

However, the process of contracting companies to begin oil exploration still faces several key hurdles, notably: the conflict over maritime borders with Israel, and the absence of stability in the region, coupled with heightened regional and international competition in the Arab region. These two factors can cast their negative shadow on the outcomes of the bidding, as they may discourage companies from investing in a turbulent context.

In addition to the above-mentioned challenges, Lebanon continues to suffer from political instability which recently manifested itself in the protracted process to form the new cabinet, and which at time stumbled on the sensitive issue of nominating the Minister of Energy. The absence of political and security stability is also bound to affect the dispositions of international companies to get into a high-risk venture in Lebanon.

More of significance to people , addressing the hopes that this windfall may bring to Lebanon, will require a more realistic, and fact-grounded perspective, that gives due consideration to a number of central issues namely: first, the actual size of the oil wealth and expected financial returns, secondly, the terms for commissioning oil exploration to companies, and whether these terms actually serve Lebanon’s interest, thirdly, the capacity of the Lebanese state to oversee oil exploration and production, and finally the way in which political diversions and bickering, both internally and externally, will impact on the way oil wealth is distributed.

This brings to the central stage the important issue of creating an independent and sovereign fund, as per the stipulation of law 132, which states that oil and gas royalties will be channeled into a sovereign fund that will be managed to the benefit of future generations.
The two main challenges related to the setting up of this sovereign fund reside in the nature of its governance and in whose interest will revenues be used. We thus conclude with the following key question: will Lebanon’s new oil resources provide a real opportunity to move the country to a state of citizens and rights or will it be used to keep the currently failing confessional system afloat?