Left behind: Emerging oil and gas producers in a warming world

Published in Climate Policy journal

Summary

The push for decarbonization is dampening resource prospects in nations with undeveloped oil and gas. It is critical to reduce greenhouse gas (GHG) emissions from the petroleum sector, but there are equity issues related to requiring a shift away from oil and gas before development gains are made, especially in countries that have contributed very little to historical emissions. We review the prospects for five emerging producers to produce oil and gas at the lowest emissions intensity while achieving their economic and environmental goals. We find they lack the required capacity for stringent emissions management and to manage transition risks. The low-carbon pathway presents its own challenges with plans that lack national specificity and offer no substitute to the fiscal potential of the petroleum sector, and a lack of supportive technical assistance and finance. A just transition (JT) approach in these countries will not be about reskilling as they move away from a petroleum dependent economy, but instead about engaging with citizens to break the mould of petroleum-led development expectations and defining the new pathway for development. These countries will require support for transition planning that ensures that any oil and gas production minimizes GHG emissions, and limits the risk of economic lock-in, to invest in broad-based benefits and in a credible shift to a low-carbon economy. Inadequate international support risks leaving some countries behind, or to essential changes being contested in the transition.

Key insights

  • Emerging producers are not yet dependent on the petroleum sector, and are broadly energy poor, climate vulnerable, lower income countries.
  • These countries hold high aspirations for the petroleum sector to address their development needs.
  • The growing consensus that there should be no new oil and gas projects creates perceptions by emerging producers of injustice around the transition and could result in change being contested or some countries being ‘left behind’.
  • A just transition approach for these countries will minimize the oil and gas resource curse and its economic lock in, to ensure the sector is developed with broad societal benefits that do not increase national emissions.

Is Lebanon Set for an Oil Bonanza?

‘Congratulations to the Lebanese people (…) on Lebanon entering the club of oil countries,’ tweeted the country’s energy minister, Cesar Khalil, after Lebanon’s first petroleum licensing round finally took place last fall. On 14 December 2017, the Lebanese government approved the bid by a consortium of three companies – France’s Total, Italy’s Eni and Russia’s Novatek – for two offshore blocks, after process had been held up for three years while political parties were in deadlock over the nomination of the president and the approval of key legislation.

Political expectations are high that discoveries will be made and the legislature is reviewing draft bills establishing a sovereign wealth fund and a national oil company. But there is a risk that Lebanon overplays its hand.

Lebanon holds estimates of potential natural gas reserves of 25 trillion cubic feet (tcf) based on seismic studies, but these have not have been confirmed by drilling and may not amount to reserves that are commercially viable. The Lebanese public, which has expressed both frustration and apathy over the repeated delays and policy paralysis, will call the government’s bluff if there are dry wells, if future discoveries are not commercially viable or the sector does not deliver the transformative impact that was promised.

Managing expectations

A number of politicians have stoked hope in the power of the petroleum sector to change Lebanese lives. In December 2013, then-Energy Minister Gebran Bassil said oil and gas revenue would bring ‘economic independence’ to his country, covering the public debt, creating jobs and spreading wealth. A nationwide billboard campaign advertised these promises. Government officials have circulated figures of potential resources – in the order of 95.5 tcf of natural gas with 50 per cent probability, which were interpreted by non-experts as proved reserves. Any estimate of the petroleum riches of Lebanon is educated guesswork until a well is drilled.

The Lebanese government should be explaining to the public that the risk of exploration failure is high and the journey to production is a lengthy one. Exploration won’t start before 2019. The consortium has committed to drill two wells in 2019, one in each block. There will likely be dry wells. According to Richmond Energy Partners data, industry commercial success rates for exploration between 2012 and 2016 were 31 per cent overall and 7 per cent for frontier provinces such as Lebanon. If there is a discovery, revenues from production would likely not arrive until 10 years after the first bidding round.

If the long timeline to (possible) production and the roadblocks along the way are not explained, citizens might (reasonably) assume that the absence of transformative revenues is down to corruption. The World Bank’s Worldwide Governance Indicators put Lebanon in the 14th percentile globally in 2016 in terms of perceptions of ‘control of corruption’, which indicates a fertile ground for public mistrust in the government’s handling of petroleum revenues.

A government-wide coordinated public communication strategy on the petroleum sector would help to deliver a balanced message on the sector’s prospects. To regain trust, the government should also make contracts available to the public and introduce open competitive tendering processes.

Minimizing geopolitical risk

Lebanon’s exploration programme is taking place in a context of high geopolitical risk. One of the blocks awarded straddles an 860-square-kilometre zone of disputed waters with Israel. The border has been a hot button issue for years between the two countries, which are technically in a state of war. Israel and Lebanon each unilaterally demarcated their exclusive economic zones and neither can legally be considered as final.

When drawing the acreage map to include the disputed waters, Lebanese officials had rightly tried to contain tension by stating that this was aimed at asserting sovereign claims and companies might not explore in that area. But the December award introduces fresh uncertainties, because the winning consortium has committed to doing just that.

The geopolitical tension between the two countries draws on issues beyond resources and there has been an escalation of aggressive posturing between them in the past year. With the Syrian conflict drawing to an end and Saudi Arabia and Israel both trying to contain Iran’s expansion in the region, Lebanon may be a theatre for proxy wars. In such a context of heightened regional tensions, the development of resources in or near disputed waters could be used as a trigger for war.

Mitigating this risk at this stage is critical. To de-escalate tensions, the government of Lebanon or the consortium could clarify where exploration work will be confined within the awarded block. A longer term solution lies in the settlement of the border dispute through mediation. The legal courses of action – arbitration and bringing the case to the International Court of Justice – are problematic because they require a commitment from both parties to respect the decision and to recognize the court’s jurisdiction, and the latter option requires Lebanon to recognize the state of Israel.

Lebanon has overcome many internal challenges to get this far in the development of its petroleum sector; but the road to joining the ‘club of oil producers’ is long and perilous, and the real challenges are now starting to take shape. Mitigating regional risks and managing the public’s expectations are critical to set the country on the right track.

Prospects for Good Governance in Lebanon’s Nascent Petroleum Sector

There is increased interest in oil and gas exploration offshore Lebanon, but the country lags behind its neighbours in developing its resources. The institutional and legal framework necessary to this process has been slow to emerge as a result of political infighting. However, thanks to relatively high state administrative capacity and support from foreign technical advisors, an adequate framework for investment has been created. Future governance challenges relate to less satisfactory standards in terms of transparency and the risks of corruption.

The report is available at the link below.

Establishing a National Oil Company in Lebanon

Countries which are exploring for or have discovered oil and gas are keen to increase national participation in their petroleum sectors and often see a national oil company (NOC) as a corporate vehicle for the defense of national interests in the upstream. Many of these emerging producers, including Lebanon, have expressed interest in guidelines on how to time the creation of an NOC and determining an optimal role for it. In Lebanon, there have been calls by politicians and commentators for the creation of an NOC. However, the Offshore Petroleum Resources Law (OPRL, article 6) clarifies a necessary threshold for creating an NOC: ‘When necessary and after promising commercial opportunities have been verified, the Council of Ministers may establish an NOC on the basis of a proposal by the Minister based upon the opinion of the Petroleum Administration.’ This reasonable threshold is clearly not met in Lebanon, as the country has not held its first licensing round. In the pre-discovery phase an NOC will therefore not be needed in Lebanon. It is useful nonetheless to examine the idea more closely and debate it, should it receive more serious consideration at a later stage. Key questions in this process are: When is the right time to create an NOC? What would Lebanon want an NOC to do? What would this role cost? What corporate governance mechanisms would an NOC need in order to perform effectively and avoid major pitfalls? What governance framework would keep it in check? Ultimately, if sufficient benefit to Lebanon cannot be established, the idea of creating an NOC should be questioned. The experience of other emerging producers can provide Lebanon with answers to some of these questions. Section 1 reviews common rationales for creating an NOC, contrasting the experience of established and emerging producers. Section 2 examines various types of NOCs and considers the potential benefits and risks of each model in the Lebanese context. The aim of this paper is not to recommend a specific model, nor to advise for or against the creation of an NOC in Lebanon, but rather to narrow down the available options taking into account the national context. Section 3 focuses on the governance framework that would be required to establish an NOC that is capable and accountable. The paper concludes with a review of the most appropriate NOC models for each stage of development of the petroleum sector.