BrazilState participation required for Lebanon to capitalise on oil & gas potential
Lebanon will need to take on an active operational role to realise the full potential of its fledging oil & gas industry a new report argues, including the development of local expertise.
“Lebanon has officially embarked on its oil & gas journey following the signature of the Exploration and Production Agreement (EPA), and declared its entry into the club of oil nations,” so begins a new report from international management consultancy Arthur D. Little, which asks the question: “With its limited national experience in managing an oil & gas (O&G) sector, what should Lebanon’s strategy be in the coming years to enable active and, most importantly, successful national participation in the O&G upstream sector?”
The Lebanese economy is only just getting back on track after years of mismanagement led to a significant debt crisis and the nation ultimately reaching out to the international community for support in attracting investment – culminating in a number of recent consulting contracts awarded to firms including KPMG among others. More recently, global management firm McKinsey delivered the government a 1,000 page five-year economic road-map, widely noted for its proposal that Lebanon capitalise on its marijuana crop through legalisation and export.
But rather than hashish oil, the real key to Lebanon’s rebound could rest with crude, with ambitious government estimates of 865 million barrels of oil located off-shore together with 96 trillion cubic feet of gas reserves – potentially worth somewhere in the ball-park of $300-$600 billion. While these figures may not stand up to commercial reality when drilling down, and there’s still a long way to go with many future unknowns, the question remains as to how the country can best capitalise on the potential liquid gold-mine and maximise its returns?
The answer, or the first and possibly simplest one according to A.D. Little, is active state involvement in operations (beyond its current legislative and regulatory participation) – a means, as demonstrated by Lebanon’s regional oil-producing nations, to “ensure maximum governance and control over national resources, as well as guarantee maximisation of rent from oil activities.” A.D. Little forwards the comparative example of the UK and Norway, the former with effectively no equity participation since 1986 and the latter an active participant in the sector.
As a study of divergent strategies, the comparison is a relatively straightforward one, with both Norway and the UK beginning off-shore exploration in the mid-1960s, discovering oil in ’69, and since then until last year producing almost identical quantities of hydrocarbon (~45 billion barrels of oil equivalent). Yet, according to the firm’s analysis, Norway has since 1971 generated over $1.4 trillion in revenues (in 2018 terms) courtesy of its state oil assets, whereas the UK, with its fully privatized sector, has seen tax returns of only $483 billion over the same period.
While the case for active state participation in its resources sector may be strong then, this naturally leads to a more complex question for a country with limited oil & gas experience: how should Lebanon proceed in building an active state involvement in operations? The first strategic step, says the consulting firm, is to establish a clear sector governance framework in which to build, nurture and grow a commercial state oil entity. Beyond that, Lebanon will need to develop its home-grown technical expertise with a focus on quality education, and then manage the sector through disciplined, long-term strategic maneuvers, such as with respect to the entire value chain and potential for downstream capitalisation.
“The Lebanese oil sector journey, similar to that of many countries, is a long and perilous one, faced with tremendous challenges along each step of the road,” states the report in conclusion. “If the Lebanese state wishes to activate its operatorship role, a choice that would help maximise its oil rent, it will need to take strategic, bold and, most importantly, wise steps in the early years of the journey… The Lebanese authorities need to start acting fast and align over the objective of building a solid local sector.”
