July 2016
When Should Lebanon Establish a National Oil Company?

The prospect of creating a national oil company (NOC) in Lebanon is now at the forefront of a national discussion concerning the country’s nascent oil and gas sector. Recent calls for the establishment of an NOC are based on a belief that Lebanon stands to gain by creating an institution to oversee various aspects of the sector. To adequately assess whether an NOC should be established, it must first be determined whether establishing one is viable at all and if so, at what stage an NOC could benefit Lebanon.  
 
Such a political debate is invariably seeped in history. Indeed, Lebanon looks to other NOCs in the region, such as Saudi Aramco and Qatar Petroleum, which manage their respective petroleum sectors very capably. Additionally, Lebanon is familiar with the region’s history of nationalization of petroleum assets and the strong attachment to sovereign control over natural resources. But others in Lebanon will point to governance failures that have marred the performance of many NOCs in the Middle East and beyond.
 
These examples from the region may inform the debate, but Lebanon can draw more useful lessons from countries with recent discoveries or in the early stages of production such as Cyprus, Kenya, Mozambique, and Ghana. Many emerging producers, like Lebanon, do not know what oil and gas reserves they have. This uncertainty about the scale of future oil and gas activities means that countries should proceed very cautiously when establishing an NOC. To justify its establishment, a company should have a useful role to play, be affordable, and the government should also be able to hold it to account.  
 
What is considered useful and affordable changes considerably from the pre-exploration to exploration and production phases. In fact, at the pre-licensing phase, the creation of an NOC is not warranted because it would have little to do. The Lebanese Petroleum Administration has proven capable in overseeing the sector and does not need to be supplanted by a new organization. In any case, the existing legislation in Lebanon does not sanction its establishment, since the Offshore Petroleum Resource Law states that an NOC could be considered “when necessary and after promising commercial opportunities have been verified.”
 
Following commercial discoveries, an NOC could legally be established and mandated to manage or hold minority stakes in licenses on behalf of the government—a classic role for new NOCs in emerging producer countries. Such an NOC is unlikely to bring concrete benefits to Lebanon during the development phase (the one to five years during which the oil companies determine how they can commercially produce oil and/or gas they have discovered). The state would have to provide an NOC with funds until production begins.
 
The value of creating an NOC early is that it gives the company some years to build its skills before production starts and allows it to learn with foreign oil company operators about how to manage a complex project. But there are risks too. The main danger is that it would not stay small, become a bloated state-owned enterprise doing favors for the ruling elite, and provide no benefit to the country. The creation of a national oil company to hold minority equity stakes at the development phase should therefore only be considered if it can be designed to stay lean and focused, if financial controls are put in place to mitigate the risk of it developing into a vehicle for patronage, and if the state’s minority equity interests in licenses can be negotiated according to terms favorable for Lebanon.
 
A less classic option, but one adopted in Ghana and Kenya, is to create an NOC with downstream responsibilities. It could support the creation of domestic markets and infrastructure to bring offshore gas to shore. This role could be beneficial to Lebanon, which relies heavily on energy imports to meet domestic demand, but presents significant risks if the NOC is not guided by a clear government strategy for economic development and industrialization and if transfer prices are not market based (as cheap energy inputs would benefit some companies and not others and would be a disincentive for foreign oil company investors). The government should also consider that the private sector is dynamic and capable in Lebanon and local private companies could make necessary investments in infrastructure to gather and process gas from offshore facilities if they are supported by an enabling environment for investment (e.g., fiscal incentives, clear policy and pricing signals, early information on the petroleum project’s expected supply).
 
While there is commonly a political interest in bestowing more responsibilities on NOCs, a point to consider is that the larger the NOC’s budget, the smaller the “state take” (share of revenues from production going to treasury). As the state ultimately pays, the government should consider carefully what NOC role is beneficial to the country. The ambition or scope of an NOC’s mandate would also have to be guided by the size of the resource base and the capacity of the state to hold an NOC to account. In early production, some countries have let unrealistic expectations of oil revenue flows shape their decisions about NOCs’ future roles.
 
No matter the shape and role an NOC takes on in Lebanon, it will present some very real governance risks. While various processes and rules can mitigate these risks, many of these depend on strong political leadership. Accountability processes can only be effective when the roles of all organizations involved in the petroleum sector are clear and when those responsible for oversight are capable enough (and motivated) to detect good and poor performance. The introduction of an NOC without clear political reins and direction would certainly lead to governance failures. It may become the pet project of some powerful figures, promoting special interests, rather than the public good.
 
This discussion leads us to the conclusion that an NOC could be more useful to Lebanon once production begins—if indeed it ever does. Before then, it will be a draw on the state budget and its contributions to the management of the petroleum sector will be limited. Civil society in Lebanon should also ensure the creation of an NOC is delayed until a higher threshold of political leadership and broad-based consensus can emerge to guide and control it.