Oil and Gas: Can Lebanon dodge the resource curse?

By Scott Belinksi –

Beirut , Lebanon – 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 studiesdemonstrate 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.

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.

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