Lebanon's oil: Jobs first, sales to follow

Once the Exploration and Production Agreement (EPA) is finalized between the government and the consortium for offshore exploration in blocks 4 and 9 of Lebanon's Exclusive Economic Zone, the country can expect to generate returns within three years of joining the hydrocarbon race in the Eastern Med
by Georgi Azar

22 December 2017 | 17:10

Source: by Annahar

  • by Georgi Azar
  • Source: Annahar
  • Last update: 22 December 2017 | 17:10

This photo shows an offshore oil rig off the coast of Cyprus. (AFP Photo)

BEIRUT: Last week, Lebanon’s Cabinet approved two bids by a global consortium of energy firms – comprised of France’s Total, Italy’s Eni and Russia’s Novatek – for offshore oil and gas exploration, capping off a grueling process that began more than two decades ago. 

Once the Exploration and Production Agreement (EPA) is finalized between the government and the consortium for offshore exploration in blocks 4 and 9 of Lebanon's Exclusive Economic Zone, the country can expect to generate returns within three years of joining the hydrocarbon race in the Eastern Mediterranean.

Significant returns are expected on three main fronts, experts say. These include job creation, procurement contracts for local businesses, and direct revenues from the sale and export of hydrocarbons.

This, however, hinges on whether the exploration phase, estimated to take between two and five years, uncovers significant amounts of hydrocarbons within Lebanon’s Levant basin, thus paving the way for the production phase to begin, Roudi Baroudi, CEO of Energy & Environment Holding in Doha, told Annahar.

Baroudi says the exploration phase entails conducting more seismic surveys and a minimum set of exploration wells to be drilled in order to determine the closest, most commercially feasible base from the two awarded blocks; with drilling expected to begin in 2019 according to Energy Minister Cezar Abi Khalil. 

Baroudi, who has more than 37 years of international public and private sector experience in the fields of oil and gas, says once a commercially viable discovery is made, "jobs would begin to flow as a result of the consortium energy firms recruiting and training professionals as preparations for the production phase expand.”

Laury Haytayan, Senior Officer at the Natural Resource Governance Institute (NRGI), a policy institute focusing on the responsible management of oil, gas and mineral resources, shares Baroudi's optimism. "Lebanese professionals have a lot to gain," she says, noting to Annahar that the exploration and production agreement stipulates “an 80 percent local employment force.”

More jobs will be created once production kicks off, Haytayan adds, "with engineers, managers and rig operators being sought out."

Employment opportunities would expand beyond the petroleum sector, says Walid Nasr, Chairman of Lebanon's Petroleum Administration.

"Although the petroleum industry is more capital intensive than labor-intensive...this new economic activity would generate jobs within the legal, auditing and accounting industry,” he explains.

This would undoubtedly reduce unemployment among fresh Lebanese graduates, economists say.

The EPA not only gives preferential treatment to the local labor force but also in terms of the procurement of Lebanese originating goods and services, Nasr adds.

Nasr told Annahar that this would bolster the competitiveness of domestic businesses and contribute to economic growth.

This is further evident when taking into account the different host of industries and other ancillaries that would prop up to service, manage, and transport the oil and gas as well.

If experts’ predictions turn out to be accurate, and production kicks off, Lebanon will begin to witness a constant stream of revenues through three different channels: royalty fees, the share of profits and taxes on earnings.

The EPA agreement would likely entitle Lebanon to a government take ranging between 65 and 71 percent and 55 and 63 percent when taking into account all proceeds from oil and gas emanating from blocks 4 and 9 respectively, says Haytayan.

These include the government's share of profits, a royalty fee of four percent of gas produced and a percentage varying between 5 and 12 percent of oil produced as well as taxes applicable to petroleum activities.

Lebanon and its citizens have much to look forward to provided that “the hydrocarbon income is built on the right foundations,” Baroudi says, hailing the consortium members as “highly qualified in deep and off-shore drilling,” and praising the adequate job of the LPA. 

The right foundations that Baroudi alludes to, however, are grounded in the Lebanese government’s ability to properly manage the influx of revenue it expects to generate.

The most touted proposal is channeling the oil and gas proceeds from royalty fees and share of profits into a Sovereign Wealth Fund (SWF) tasked with managing the accumulated income, as “this would boost transparency and exude confidence that returns would be put to good use”, Professor John Patterson of Aberdeen University, told Annahar.

By creating a Sovereign Wealth Fund while engaging Lebanon’s civil society, the government can gain the confidence of the country’s citizenry by “using profits to pay off part of Lebanon’s national debt as well as invest in healthcare and education, as stipulated in the draft law that’s still to be ratified” says Haytayan.

However, Patterson maintains the need to “for Lebanon to manage its expectations”, with a more measured and realistic approach needed moving forward. “Experience from around the world shows us that society has elevated expectations in terms of how much money will be generated”, he says, adding that Lebanese need to be cautious and pragmatic of when “they’ll actually see that money.”

Nonetheless, Lebanon has ample reason to be optimistic, with Baroudi laying it out bluntly, “after 25 years, despite all the delays that have occurred, Lebanon is coming out with a professional, transparent platform, and contracts whose terms are beneficial for both the state and any private companies taking part.”

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