Lebanon’s faulty oil and gas framework

The possible development and production of oil and gas in Lebanon could be an important historic event that brings with it great hopes for the recovery of the economy and the well-being of the Lebanese people.

However, it could also have perverse effects similar to what is known in economics as “Dutch disease” – namely inflation, corruption, a decline in traditional economic activities and so on. That’s why it is urgent to avoid the lapses and correct the dangerous anomalies that are already apparent. These can be summarized in the following points.

First, a hybrid exploitation regime has been introduced, with the Lebanese state’s participating interest equal to zero. Among the main hydrocarbon exploitation regimes in use around the world, Lebanese officials have decided to opt for an unprecedented cross between the concession regime and production-sharing agreements.

However, instead of combining the best of both systems referred to in very general terms in the 132/2010 oil law, the authors of the first two implementation decrees, which have yet to be approved, largely undermined the advantages of each, emptying them of their substance in two primary ways.

Regarding royalties, which are specific to the concession system, rates have been fixed at abnormally low levels compared with international norms. And regarding the state’s effective and active participation in industrial operations, which is peculiar to the production-sharing system, the implementation decrees have simply ruled out any such participation for the moment.

Although one of the most important and positive provisions of the 2010 law is that it underlines the principle of a state participating interest in the oil and gas sector, the authors of the implementation decree concerning the exploration and production agreement model contract indicated very surprisingly in Article 5 that “there is no state participating interest in first licensing round.” There is no clear reason for this wonderful gift to the interested companies, which means the state will arrive at the negotiation table with a letter of resignation in its pocket!

Second, there is a $14 billion revenue shortfall due to discounted royalty rates. If there is one norm that is generally known and applied in the oil and gas industry, it is that the operator is required to pay the host country a royalty rate equivalent to at least 12.5 percent of production. Surprising as that may seem, the authors of the Lebanese implementation decrees have curiously fixed the rate of oil royalties at 5-12 percent depending on the level of production.

What is even more astonishing is that the royalties rate for natural gas is simply the lowest in the world, having been set at a fixed rate of only 4 percent. A simulation contained in a report I prepared on the Lebanese oil and gas sector shows that this totally unjustified discount relative to international standards will result in annual losses for Lebanon of $238 million in the case of gas and $325 million in the case of oil. This would mean a total shortfall of more than $14 billion over the period of the 25-year exploitation agreements.

These are minimum estimates of the likely losses generated solely by the low royalties tax rates. Other, very probably greater, losses would result from a new draft fiscal law imposing a 15 percent corporate tax (compared to 20-38 percent in other oil- and gas-producing countries) as well as various duty exemptions granted to the oil-right holders, including dividends, real estate, imports and reexports, stamp duty and so on.

Third, the prerogatives of Lebanon’s legislative power have been hijacked. The 2010 law, whose 27-page outline provided very general principles and no figures or percentages, cut a very pale figure alongside the tens of pages of text that comprise the first two implementation decrees. The latter set out in great detail the legal, financial and other provisions of the planned oil and gas exploitation regime. All this happened as though the 128 members of Parliament had authorized the six civil servants making up the Petroleum Administration, which comes under the control of the Energy and Water Ministry, to legislate on their behalf in an area of such vital importance for the country.

This reality represents a serious blow to the basic principle of the separation between legislative and executive powers. And yet no institution is better placed than Parliament to launch a healthy national public debate on this subject.

Fourth, there is a paramount need for a national oil and gas company. The implementation decrees ignores a major provision of the 2010 law regarding the establishment of a national oil and gas company. This firm would act as the eye and arm of the state in Lebanon’s energy policy, and its tasks would include having a direct and active involvement in the upstream and downstream activities of the operating companies.

If this does not happen, Lebanon will find itself in the position of some developing countries more than 40 years ago: as a sleeping partner and tax collector and inspector looking on powerlessly at what foreign companies are doing in their country. In this regard, the state may find itself unable to adequately gauge what determines the taxable profits of a multinational company: industrial and commercial operations, spending, depreciation, selling prices and so on.

Fifth, the movements involving the sector have been opaque and shaped by political interests. Another large anomaly is the fact that the spotlight has been trained on the billions in oil wealth that would flood into our economy, whereas there is an astonishing silence surrounding the measures that have to be taken immediately and at all costs to maximize our revenues.

An impressive media campaign has induced a section of the Lebanese population to believe that it would be enough for the two implementation decrees to be approved for the promised billions to gush from the waters of the Mediterranean Sea. But, surprising as it may seem, only a few civil servants or influential figures have been able to see the texts of these two decrees that the Lebanese have been talking about for months.

It is not surprising that this situation has raised a number of question marks and rightly or wrongly prompted serious suspicions – suspicions that only a frank and transparent debate in Parliament can allay. In the absence of such a debate and such transparency, the dreams aroused by the oil and gas sector could finally end in nightmares involving corruption, the squandering of an important national asset, the exacerbation of social and political tensions and more.

Nicolas Sarkis, a petroleum economist, is founder and former chairman of the Arab Petroleum Research Center. He wrote this commentary for THE DAILY STAR.

A version of this article appeared in the print edition of The Daily Star on June 23, 2014, on page 7.




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