Quit clown­ing around

In­com­pe­tence in the sec­tor is no longer funny

Executive Magazine - - Leaders -

At a re­cent con­fer­ence on oil, gas, and Le­banon’s po­ten­tial fu­ture hy­dro­car­bons sec­tor, a min­is­te­rial ad­vi­sor gave an in­ac­cu­rate and sim­plis­tic pre­sen­ta­tion, prov­ing that he does not un­der­stand the in­dus­try, nor how it op­er­ates. This is who we have ad­vis­ing the top de­ci­sion mak­ing au­thor­i­ties in the coun­try for this nascent sec­tor.

High-level man­age­ment of “the oil file” to date has been noth­ing short of clown­ish. The coun­try’s first off­shore li­cens­ing round was sup­posed to close back in 2013. Oil prices were over $100 per bar­rel at the time. Forty-six in­ter­na­tional com­pa­nies pre­qual­i­fied to bid. The sit­u­a­tion to­day is dras­ti­cally dif­fer­ent. The oil price en­vi­ron­ment since the se­cond half of 2014 means cash flows have sig­nif­i­cantly re­duced com­pared with four years ago, and ex­plo­ration bud­gets have been drop­ping even as ex­plo­ration costs have fallen with them. This is not to say Le­banon’s li­cens­ing round will end in fail­ure on Oc­to­ber 12, only that con­di­tions were far more fa­vor­able for suc­cess back when the round was orig­i­nally sched­uled to close. We missed a good op­por­tu­nity for rea­sons that have never been fully


In the years be­tween then and now, very few of our politi­cians and self-pro­claimed lo­cal in­dus­try “ex­perts” have both­ered to learn any­thing about the sec­tor. Dur­ing con­fer­ence af­ter con­fer­ence, year af­ter year, the same ba­sic mis­un­der­stand­ings are re­vealed. While not a sin­gle well has been drilled in Le­banese wa­ters, ev­ery­one from taxi driv­ers to min­is­te­rial ad­vi­sors “know” how much oil and gas Le­banon has and— more sur­pris­ingly—how much these re­sources are worth. This ig­no­rance is ex­tremely dam­ag­ing when it comes to man­ag­ing ex­pec­ta­tions (think, for ex­am­ple, of all the petroleum en­gi­neers grad­u­at­ing from re­cently in­tro­duced uni­ver­sity pro­grams with hopes of work­ing in a lo­cal sec­tor that will re­al­is­ti­cally only em­ploy a few dozen of them at most). Worse, ig­no­rance in­vites the op­por­tu­nity for strate­gic blun­der.

Take, for ex­am­ple, the is­sue of what’s known as grad­ual li­cens­ing. For years, cer­tain in­flu­en­tial Le­banese used anony­mous press leaks and sur­ro­gates to ar­gue in fa­vor of award­ing all 10 off­shore blocks at once. Such a strat­egy is nei­ther strate­gic nor in line with in­ter­na­tional best prac­tice. Be­cause Le­banon has never drilled an off­shore well, its risk pro­file is dif­fer­ent from that of a pro­duc­ing coun­try. If com­mer­cial dis­cov­er­ies are made in Le­banese wa­ters this could im­prove Le­banon’s risk pro­file, and in­for­ma­tion gath­ered from drilling could be used to fine­tune mod­el­ing and in­ter­pre­ta­tion of ge­o­log­i­cal sur­vey data. By grad­u­ally award­ing off­shore ex­plo­ration and pro­duc­tion rights over the course of time—in­stead of do­ing so all at once—Le­banon can get bet­ter deals in the fu­ture if dis­cov­er­ies con­firm its seem­ing at­trac­tive­ness. This is not a hard con­cept to un­der­stand, yet the de­bate was only set­tled in mid-2016 when For­eign Min­is­ter Ge­bran Bas­sil and Fi­nance Min­is­ter Ali Has­san Khalil (who is also a po­lit­i­cal ad­vi­sor to Par­lia­ment Speaker Nabih Berri) an­nounced the con­clu­sion of an “oil deal” in fa­vor of grad­ual li­cens­ing, ac­cord­ing to com­ments En­ergy Min­is­ter Ce­sar Abi Khalil made dur­ing an in­ter­view with Ex­ec­u­tive shortly af­ter the deal was sealed.

What no one has ever pub­licly ex­plained is what Berri re­ceived in re­turn for his ac­cep­tance of grad­ual li­cens­ing. Facts on the ground sug­gest it was which blocks to put on of­fer. Back in Septem­ber 2013, the Min­istry of En­ergy and Wa­ter an­nounced five blocks would be open in the first li­cens­ing round (1,4, 5, 6, and 9—see map page 17) at a time when grad­ual li­cens­ing was still not fully agreed upon. Af­ter the “oil deal,” how­ever, the blocks on of­fer changed. Blocks 5 and 6 were swapped out for blocks 8 and 10. This means all three of the south­ern blocks, parts of which Is­rael is lay­ing claim to, are now on of­fer. This a clear at­tempt to as­sert Le­banese sovereignty, but it could have a detri­men­tal im­pact on the suc­cess of the li­cens­ing round.

The orig­i­nal block choices were based on con­sul­ta­tions with the 46 pre­qual­i­fied com­pa­nies back in mid-2013, ex­plains Wis­sam Ch­bat, pres­i­dent of the Le­banese Petroleum Ad­min­is­tra­tion (LPA), the sec­tor’s reg­u­la­tor. Com­pa­nies voted on which blocks they were most in­ter­ested in ex­plor­ing, and the top five blocks were 9,6, 4, 5, and 1. Ch­bat ex­plains that more seis­mic sur­veys have been con­ducted in Le­banon since 2013, chang­ing the pic­ture of prospec­tiv­ity for Le­banon’s off­shore. How­ever, he ad­mits pre­qual­i­fied com­pa­nies have largely ig­nored the new data (mean­ing they haven’t pur­chased it), which means their pic­ture of Le­banon’s off­shore is likely the same as it was in 2013, when blocks 8 and 10 re­ceived five and three votes, re­spec­tively, com­pared to 19 votes for block 6 and 16 votes for block 5. Ch­bat says the block change choice was made by the LPA based on in-house data in­ter­pre­ta­tions. He in­sists the LPA’s goal is mak­ing the round com­pet­i­tive with an eye on award­ing a con­tract that will lead to a com­mer­cial oil and/or gas dis­cov­ery. Asked di­rectly if of­fer­ing blocks the com­pa­nies said they are not very in­ter­ested in would re­sult in fewer bid­ders, Ch­bat dodged the ques­tion, ex­plain­ing that the LPA can­not ac­com­mo­date ev­ery cor­po­rate strat­egy.

While it is not wrong to choose blocks to send po­lit­i­cal mes­sages, this should be some­thing de­bated and de­cided pub­licly, es­pe­cially if do­ing so could re­sult in fewer bids, thus mak­ing the round less com­pet­i­tive. Why not open seven blocks in the first round— those the com­pa­nies wanted and the two ex­tra south­ern blocks that help Le­banon as­sert its sovereignty? Is the gov­ern­ment pur­pose­fully try­ing to steer bids to­ward the south­ern blocks? If the se­cret goal here is an award in the south, how far will our lead­ers go to acheive that?

This sec­tor de­mands sound man­age­ment based on tech­ni­cal prin­ci­ples. Le­banon must not cede its rights to Is­rael, but it also can­not sign a bad deal sim­ply to as­sert it­self. The po­lit­i­cal ma­nip­u­la­tion of this sec­tor thus far has us se­ri­ously con­cerned for its fu­ture. The LPA have proven ca­pa­ble and—hav­ing cov­ered their ac­tiv­i­ties since the reg­u­la­tor’s cre­ation in 2012— Ex­ec­u­tive can say they have rec­om­mended the cre­ation of a fis­cal frame­work in line with best prac­tice. When bids come in, the LPA will eval­u­ate them and rec­om­mend with whom to sign con­tracts. The ul­ti­mate de­ci­sion, how­ever, lies with the Coun­cil of Min­is­ters. The Coun­cil must make its rea­son­ing for choos­ing win­ners pub­lic, and any de­bates about this must also be made pub­lic. We can­not con­tinue clown­ing around.

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