Energy Sector - "Investors Beware"
Lebanon’s Energy Sector: “Investors Beware”
December 1, 2015
Hunter Norwick – Researcher on the Lebanon Risk Assessment Team
Edited & Supervised by Jamie Arabi – Leader of the Lebanon Risk Assessment Team
Keywords: Lebanon, energy, domestic instability, corruption, corruption risk, Hezbollah, Syria, You Stink, political deadlock, Middle East
Lebanon’s future in oil and gas production in the Mediterranean has been stymied by political corruption, instability, and deadlock. The government’s failure to implement any effective program to exploit offshore resources has shown investors two things: Lebanon is abundant with risk and poor in returns.
It is a well-known secret that the government is fraught with corruption, ranging from blackmail to bribery. This year, Transparency International ranked Lebanon among the 40 most corrupt nations in the world. In 2013, 61 per cent of 800 surveyed businesspeople admitted to bribing officials, believing this was the only way to receive necessary services. The bureaucracy’s sleaziness was also exposed by the 71 per cent of people who ranked corrupt public officials as the chief reason for their poorer economic performance. Investors ought to be wary of this. Basic licensing, permits, and documentation are often difficult to obtain. The only virtue in this scheme is that corruption is rampant enough that prices are usually “fixed.”
Lebanon’s résumé nevertheless worsens over time. It has been 18 months since President Suleiman’s tenure expired, but political actors have failed to agree on any suitable replacement. This deadlock has lead to a two-year delay of first-round bidding for contracts to explore oil and gas resources in the Mediterranean. There hence lacks a coherent, legislative framework necessary to proceed with this energy initiative, and this is likely to persist now that the elections have been arbitrarily postponed till 2017. But given the gulf between these parties, even a new government is unlikely to convince rival factions to untangle their bullhorns from each other.
Further, in response to the deluge of refugees, and Hezbollah’s unilateral decision to fight in Syria, the political schisms in Lebanon are growing. Sunni factions yearn for the fall of Assad’s regime, while many Shia militants are dying to protect it. Hezbollah’s involvement in Syria, moreover, has kept investors on their toes. As of right now, blowback from Syria is a peripheral issue. But if the civil war seeps through Lebanon’s porous borders, this will result in economic peril. The Lebanese will forfeit their comparative advantage as a relatively peaceful nation in the Middle East, and capital will start flowing out of the country.
The foregoing disagreement between rival factions has further immobilized Parliament. Indeed, the failure of major political actors to compromise has lead to a burgeoning sanitation crisis on the streets of Lebanon. The “You Stink” campaign has spurred thousands of young people to protest the inadequate provision of basic services, and thus are demanding the government’s resignation. Sadly, Lebanon is becoming a failed state, and frustration is turning into desperation. Infrastructure is wanting, people are dying from a lack of healthcare, and now Beirut’s streets are decorated with trash. In piecemeal steps, the weight of Lebanon’s history is crushing its future.
All of this is bad for business, and particularly the fledgling energy sector. Exacerbated rivalries have lead to legislative logjams, and international oil companies are sitting uneasy as the government attempts to resolve its deadlock. Even more worrisome is the possible politicization of the oil industry. Massive profits from this resource have often made it a useful political weapon. It can be used to placate dissent, reduce taxes, and firmly establish patronage systems. However, unlike states which exercise a monopoly of power over citizens, Lebanon is more of an oligopoly, dominated by several pockets of power. With more to vie over, oil and gas production may in fact increase rather than decrease economic and political instability in the country.
Thus, there are four overarching points to which investors should pay heed. First, government corruption will likely stall necessary business activity. Second, political deadlock has disabled the energy sector. Third, Lebanon is de facto at war with rebel groups in Syria, exacerbating the stalemate in Parliament. And last, the absence of a president, and the arbitrary extension of the current government’s tenure, indicate that the regime is foundering. Overall, there are several hurdles one will have to make to secure a safe investment in Lebanon.
It may be wise to heed Prime Minister Tamman Salam’s ominous but telling words: “Let me be very candid: We are heading toward a breakdown.”
