Le­banon’s fis­cal co­nun­drum

What would make a good deal for Le­banon?

Executive Magazine - - Contents - Mona Sukkarieh is the co­founder of Mid­dle East Strate­gic Per­spec­tives (http://www.mesp.me), a Beirut based po­lit­i­cal risk con­sul­tancy

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There are two ar­gu­ments be­ing made to­day. Both agree the state should max­i­mize its share of ben­e­fit, though they do not agree on what is the max­i­mum ben­e­fit achiev­able. Some aim for a bid round that is as com­pet­i­tive as more com­pa­ra­ble bid rounds—while oth­ers de­mand a greater level of state par­tic­i­pa­tion.

While it is com­mend­able to stand up for Le­banon’s rights, we would all be well ad­vised to avoid mis­in­formed pop­ulism. To put it sim­ply, ar­gu­ing Le­banon de­serves a fair share im­plies the ex­is­tence of a “share.” This share can only ex­ist if the state con­tracts part­ners to ex­plore for and pro­duce po­ten­tial re­sources. There are two par­ties to the deal; the terms must be at­trac­tive enough for both sides to com­mit to sign­ing a con­tract. If no con­tract is signed the “share” van­ishes, given the ab­sence of indige­nous ca­pac­ity to con­duct up­stream op­er­a­tions.

Con­trary to some claims, per­pet­u­ated by a po­lit­i­cal class that is strug­gling to man­age ex­pec­ta­tions, cur­rent mar­ket con­di­tions are un­fa­vor­able for Le­banon. The coun­try’s off­shore area is mostly deep and ul­tra­deep wa­ters. Low oil prices since late 2014 means ex­pen­sive ex­plo­ration in Le­banese wa­ters is unattrac­tive at the mo­ment. Com­pa­nies must ac­tu­ally be per­suaded to bid by Le­banon of­fer­ing at­trac­tive fis­cal terms.

Op­po­nents of how Le­banon is con­duct­ing its first li­cens­ing round ar­gue: (1) the model ex­plo­ration and pro­duc­tion shar­ing con­tract de­cree is in con­flict with the 2010 off­shore oil and gas law as it pre­vents the state from par­tic­i­pat­ing in the ten­der, dis­tort­ing the sys­tem from an orig­i­nally-in­tended pro­duc­tion-shar­ing model to a profit-shar­ing model; and (2) the roy­al­ties and taxes, set out in the con­tract de­gree and tax law, are too low com­pared to a “global av­er­age.”

In fact, the 2010 off­shore law ex­plic­itly says the Coun­cil of Min­is­ters may es­tab­lish a Na­tional Oil Com­pany (NOC) “when nec­es­sary” but only “af­ter promis­ing com­mer­cial op­por­tu­ni­ties have been ver­i­fied,” which rules out an NOC in the first li­cens­ing round as this can­not be ver­i­fied ahead of ex­plo­ration. More­over, the state re­tains own­er­ship of re­sources in the ground and a share of the pro­duced hy­dro­car­bons once the com­pany re­cov­ers cap­i­tal and op­er­a­tional ex­pen­di­tures, mean­ing Le­banon’s cho­sen model con­tract is a clas­sic pro­duc­tion-shar­ing sys­tem. The distinc­tion some wish to es­tab­lish be­tween a pro­duc­tion-shar­ing model and a profit-shar­ing model is non-ex­is­tent.

As for the fis­cal terms, com­par­ing them to a “global av­er­age” may seem to lend an air of se­ri­ous­ness and pro­fes­sion­al­ism, but in re­al­ity, it is closer to com­par­ing ap­ples to or­anges given the di­verse range of coun­tries with oil and gas re­sources. These coun­tries in­clude legacy pro­duc­ers with re­sources lo­cated in a va­ri­ety of en­vi­ron­ments and other as­pir­ing pro­duc­ers. One can­not com­pare a coun­try with proven re­serves to a coun­try where drilling has not yet be­gun. Sim­i­larly, one can­not com­pare coun­tries or prov­inces where ex­plo­ration is rel­a­tively cheap and easy to coun­tries or prov­inces where it is ex­pen­sive and com­plex. Fi­nally, one can­not ig­nore Le­banon’s po­lit­i­cal risk, es­pe­cially con­sid­er­ing the coun­try’s first li­cens­ing round is now slated to close more than four years be­hind its orig­i­nal sched­ule. These are all ele­ments that af­fect how at­trac­tive a coun­try is to for­eign com­pa­nies. One way to com­pen­sate for Le­banon’s rel­a­tive dis­ad­van­tage (i.e., no proven re­serves in both a high-cost drilling and high-risk po­lit­i­cal en­vi­ron­ment) is of­fer­ing at­trac­tive terms for po­ten­tial in­vestors.

A more co­her­ent ap­proach would en­tail iden­ti­fy­ing a group of coun­tries or prov­inces with sim­i­lar basins (deep-wa­ter off­shore, and a more or less com­pa­ra­ble sta­tus—early ex­plo­ration or pro­duc­tion ac­tiv­ity). Ide­ally, we would also add other ele­ments: A lo­cal mar­ket that is com­pa­ra­ble in size and the ex­is­tence of lit­tle or no ex­port in­fra­struc­ture, in ad­di­tion to the so­ciopo­lit­i­cal en­vi­ron­ment. By com­par­ing Le­banon to a “global av­er­age,” those mak­ing this ar­gu­ment have steered the dis­cus­sion to­ward un­rea­son­able de­mands and in­flated ex­pec­ta­tions.

Fu­ture li­cens­ing rounds will not nec­es­sar­ily be gov­erned by the ex­act same le­gal frame­work. Fu­ture ex­plo­ration and pro­duc­tion-shar­ing agree­ments (and the roy­al­ties in­cluded in them) will not nec­es­sar­ily be the same. Fis­cal terms are not set in stone. Though reg­u­la­tory sta­bil­ity is im­por­tant, they may change in the fu­ture to adapt to new re­al­i­ties. Re­al­ism is key, whether now or in the fu­ture.

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