Issued by CEMO Center - Paris
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Unlocking Lebanon's Potential: Overcoming Challenges to Tap into its Oil and Gas Reserves and Establish Effective Governance for Sustainable Wealth

Wednesday 15/February/2023 - 08:40 PM
The Reference
Ahmed Seif Eldin

Lebanon looks to tap into its oil and gas reserves as it signs a deal with Israel to create permanent maritime borders in the eastern Mediterranean. The two countries have been technically at war since 1948, and the deal comes after over 12 years of negotiations. Many countries in the eastern Mediterranean have taken steps to explore their offshore gas reserves in recent years, with Israel already extracting commercial quantities of natural gas. However, Lebanon, which is in dire need of economic relief, is yet to extract any reserves. In January, the government signed an agreement with TotalEnergies, Eni, and QatarEnergy to begin exploration later this year, and a new deal with Israel could unlock the potential for Lebanon's oil and gas sector.

Lebanon's potential offshore oil and gas reserves could become an economic lifeline for the country, but creating effective foundations for exploration and extraction may be challenging in a politically divided Beirut. Lebanon has a track record of systemic corruption, widespread nepotism, and political patronage, which may prevent the country from reaping potential gains from oil and gas revenues. Institutional transparency and access to government information are key to attracting foreign investment and achieving stability in Lebanon's business environment. Three institutional challenges are expected for Lebanon in accessing its resource wealth, which, if overcome, could finally unlock its potential for the benefit of its people. The challenges include a sectarian political system, poor management by the Lebanese Petroleum Administration (LPA), and the potential for political elites to seize oil and gas investments for personal or political gain. All of this occurs against the backdrop of political turmoil, with Lebanon having failed to form a government since parliamentary elections in May 2022, resulting in a suspended parliament.

Lebanon faces two major challenges as it plans to extract its offshore oil and gas resources. Firstly, a law has been put in place to increase transparency in the petroleum sector, but the Parliament is currently discussing different proposals to create a sovereign wealth fund to ensure the resources are preserved for future generations. Secondly, there are concerns about political conflicts and secret deals that could affect the management of the funds, as well as the possibility that officials could redirect revenues towards government spending rather than investing in future security and prosperity. Analysts warn that if not managed properly, the sovereign wealth fund could become a source of corruption rather than protection.

Lebanon faces challenges in managing its sovereign wealth fund due to a lack of proper governance structures and a weakened government. The Santiago Principles, which provide detailed recommendations for the proper governance of sovereign wealth funds, including transparency, accountability, wise investment practices, and open dialogue, were not signed by Lebanon in 2008, but it should consider following them in the future. The country could also consider following a similar radical approach to Alaska, which gives every Alaskan a direct transfer of capital from gas revenues as a tax refund. Alternatively, Beirut could follow in the footsteps of Norges Bank Investment Management in Norway, which invests oil and gas revenues in safe bonds and stocks that help avoid corruption and conflicts of interest.

However, even with all the correct structures for managing oil wealth, the latest available data shows that Lebanon is burdened with a growing government capacity. Budget cuts and wage erosion due to excessive inflation have already weakened the already weak public administration, resulting in a mass exodus from the civil service and absenteeism, leading to a brain drain caused by migration.

The vacancy rate in Lebanon's public sector is 72%. According to the latest government assessment of the impact of financial crises on institutional capabilities, at least one service line has been suspended in 52.6% of the public agencies surveyed as of December 2021, and only 40% of these agencies have confirmed that they have the ability to maintain service delivery beyond 2022. The World Bank's 2021 report confirms that these conditions could "lead to a human capital disaster, recovery from which will be extremely difficult."

Since 2019, many public sector employees who were trained by the Libyan Planning Authority to organize gas exploration and production have left. More importantly, the LPA's board of directors' tenure ended in 2018 - and since then, the agency has lost most of its employees, including two of the six members of the board. The article offers the possibility of following the Santiago Principles, Alaska's model, or Norges Bank's example to address the issue.