February 2016
Fighting Corruption to Better Manage Lebanon’s Petroleum Wealth

Often when policy-making in Lebanon gets bogged down due to disagreements, the next thing one hears is that corruption has once more reared its ugly head. Chances are the same will happen now since the Lebanese cabinet has for more than two years been unable to approve two pieces of legislation required to kick-start the country’s petroleum production; one concerning the division of Lebanon’s Exclusive Economic Zone into blocks and the other concerning the relationship between the state and companies exploiting the resources which could be found in these blocks.
 
Upon hearing news about significant petroleum reserves likely hidden off the country’s coast, many Lebanese intuitively sensed the mixed blessing that this may bring. Many commentators, Lebanese and foreign alike, already warned particularly against the risk, and for some even the inevitability, of widespread corruption in Lebanon’s emerging petroleum sector. They variously suspect that high levels of corruption will result from an unhappy mix involving international oil companies not especially reputed for fair and transparent practices; Lebanon’s political class that is widely viewed as corrupt, greedy, and looked at with distrust; and a dysfunctional, divided, and gridlocked political process at best geared toward deals dividing up ‘the cake’ (muhasasa).
 
To be fully prepared for Lebanon’s possible transformation into a major oil and gas producer, the risks of corruption in connection to its nascent petroleum sector need to be better understood and addressed. It is instructive to assess corruption risks along the petroleum industry’s ‘value chain’ as the latter typically involves an exploration process, a production process, and a post- production or decommissioning phase.

Together with the revenue and expenditure side of oil and gas extraction, opportunities and risks of corruption may flourish variously at all stages in this value chain, depending on the robustness of regulatory frameworks and institutions tasked with upholding them. To date, legislation that has been put in place or is foreseen in terms of maximizing transparency and accountability in Lebanon’s nascent petroleum sector, although encouraging, is far from optimal, let alone corruption-proof. The key challenge in this context, especially given Lebanon’s awkward political settlement, is to sort out the right politics to uphold these good intentions, and improve and strengthen the institutions and policies relevant to the sector that have already been put in place.
 
Many legal and institutional remedies in this respect could be suggested, including assuring full transparency from the pre-qualification process onward, disclosing exploration and production agreements, mandating the relatively insulated Lebanese Central Bank to administer a sovereign wealth fund, establishing a national oil company with Lebanese citizens as its major shareholders, doling out petroleum revenues directly to citizens, or using the revenues primarily to pay off the country’s crippling debt. These proposals  all need to be carefully examined, but none of them, even if pursued, will provide the silver bullet.
 
Most important, therefore, is that Lebanon’s civil society and public at large will use the opportunity and momentum of building petroleum governance structures to find common ground in demanding and enforcing transparency and accountability. There already are various modest but promising initiatives forwarded by Lebanese civil society organizations, which were undertaken with the aim of raising public awareness and knowledge relevant to the petroleum sector and its governance, and monitoring Lebanon’s media coverage of the issue while enhancing media capacity. Yet, given the fractured nature of Lebanese civil society, and the perverse tendency of its demands and proposals to be drowned in an equally broken and dysfunctional political process, it cannot be taken for granted that civil society will exert the effective oversight and scrutiny necessary to prevent Lebanon’s petroleum dreams from turning into a corruption nightmare.
 
Truly effective public accountability in the sector requires drastic changes in relations between the country’s political class and their constituencies, and how both relate to or affect the state. No country stumbling upon sizeable natural resource reserves would wait for such fundamental changes to materialize before commencing production. Yet, a lively and informed national debate on the specificities and technicalities of Lebanon’s petroleum sector may help to create the very prerequisites of such wider political change, and help create more favorable conditions to counter the risks of corruption if or when petroleum production begins and the revenues start coming in.
 
The political deal that will eventually emerge to resolve the current gridlock over the two pieces of legislation concerning block-delineation and contract arrangements involving the oil companies is a first and crucial test. There is too much at stake to let muhasasa once again allow corruption to thrive.