While the Eastern Mediterranean is well known for its major (and underexploited) gas reserves, Lebanon is the latest country in the region to join the oil rush, after Egypt’s fitful entry into the market and Israel’s more straightforward path to exporter status. Seismic surveys
in 2013 estimated Lebanon’s offshore fields to hold 96 trillion cubic
feet of gas and 850 million barrels of oil. On January 27th, the
government finally opened the bidding for five offshore blocks in a
first licensing round, after a three-year delay brought upon by
political instability.
The fractious Lebanese government hopes
that these energy reserves and the wealth that should come with them
will alleviate the country’s notorious power shortages and budget
deficits. But, history is littered with examples of fragile countries
going completely off the rails because of the warping effects oil has on
their economies – will Lebanon follow suit or can Beirut dodge the
resource curse? Michel Aoun, who was elected President at the end of October, after a grueling 29-month standoff, vowed
to use the fund for the good of the Lebanese people, financing
development projects and revamping ailing infrastructure. In this, his
government wants to follow the example of developed economies that have
the advantage of better governance and economic planning, greater
regional security, and long-established transparency practices. However,
even if Lebanon’s estimated reserves turn out to be as substantial and
as profitable as its leaders predict, replicating that success won’t be
an easy feat.
For the time
being, the government is off to a good start. To send a message that it
will handle the future proceeds from exploiting its reserves
responsibly, Beirut is pushing a plan that would require all
oil-generated proceeds be deposited into a national sovereign wealth
fund (SWF), which emulates the path followed by Norway and more recently
by Saudi Arabia. Norway, the country that manages the world’s
largest wealth fund, sets the gold standard when it comes to
transparency. The Norwegian Government Pension Fund Global (GPFG)
publishes online details of every investment it makes to uphold its
culture of political trust. As former fund supervisor Martin Skancke put
it, the trust the fund enjoys comes down
to “relatively high levels of equality and cultural homogeneity.” Even
with unexpected bumper profits, Nordic frugality and trust in government
meant the public has thus far been content to put hundreds of billions
into the fund and let the money stay there.
Saudi
Arabia’s SWF is still a work in progress and is the result of the
Kingdom’s Vision 2030 economic diversification plan. The centerpiece of
the strategy is to sell a 5 percent stake in Saudi Aramco (whose total
reserves add up to 260 billion barrels), the proceeds of which will go
towards increasing the country’s Public Investment Fund (PIF), which
made headlines in 2016 with its $3.5 billion investment in Uber and $100 billion joint initiative
with Japan’s SoftBank. The strategy is paying off, as financial service
hubs are jockeying to host the listing, although some candidates are
going the extra mile: on her trip to Bahrain in December to attend the
Gulf Cooperation Council summit, Britain’s Theresa May highlighted
Saudi Arabia’s status as a trusted partner and pointed to Vision 2030
as an example of the reform her government wants to encourage in the
oil-dependent Gulf monarchies. The kind words had an ulterior motive:
London is a leading candidate for a share of the Aramco listing, and Saudi Arabia is one of the markets May needs to make her Brexit strategy work.
But can Lebanon really replicate Norway’s prudent management or
Saudi’s global appeal? Aoun’s promises hit the right notes, but
Lebanon’s precarious stability and endless political wrangling could
lead its own sovereign wealth fund straight into a brick wall. Even if
the security situation has been relatively calm amidst regional turmoil,
oil and gas initiatives were paralyzed for years over political battles and the fight for the presidency.
If
officials in Norway point to homogeneity as an explanation for good
governance, Lebanon is the exact opposite. Not only is the country home
to 18 sectarian groups,
but it also hosts one of the largest refugee populations in the world.
Each of the sectarian communities, several of which have their own armed
militias, has a say in power sharing. This makes political consensus
shaky and turf wars a matter of armed conflict as much as backdoor
horse-trading. The country’s rival power centers already fight
constantly over the tools of state, and a major influx of oil revenue
could become the new apple of discord in simmering sectarian rivalries
between Lebanon’s Sunni, Shia, and Maronite Christian communities.
There are plenty of examples for how such a scenario could play out. Econometric studies
demonstrate that the more countries depend on oil & gas exports,
the higher the risk of civil conflict goes. Three factors that explain
this correlation: resource rents can incentivize challenges to the
central government, rebel groups can finance their operations thanks to
resource wealth, and poor governance and corruption can lead to
grievances and rebellion. Related: Time Bomb In Oil Markets: Goldman Sachs Issues Warning
Nigeria,
to take just one example, illustrates how mismanaging oil wealth can
actually reduce prosperity and heighten insecurity. Not only did the
average Nigerian become worse off
in relative terms in the last three decades, but the state has to deal
with insurgent militias that blackmail government with attacks on its
oil infrastructure.
Such a scenario is just as plausible in
Lebanon. If Hezbollah – which, in addition to being an armed movement,
is also one of the leading political parties – were to benefit from the
new revenues, Lebanon’s energy infrastructure could become a target for
Israel or for rival domestic groups in future conflicts. Conversely, if Hezbollah were frozen out of a future government, it could copy the playbook written by the Niger Delta Avengers
in Nigeria by attacking production facilities and pipelines. The civil
war in Syria has already deeply impacted Lebanon, and there’s no telling
what the security outlook will look like over the next few years.
In
short, Lebanon’s leaders need to be extremely prudent in how they go
about launching their country’s energy industry. While the revenues
could be a long-term salve in terms of financial stability, they could
also make Lebanon’s volatile internal politics even deadlier. It’s a
fine line between a blessing and a curse.
By Scott Belinksi for Oilprice.com
