Oil and gas sector won’t save Lebanon’s ailing economy: Analysts

The Lebanese government is “misleadingly” leveraging the oil and gas sector – rather than the necessary deeper structural reforms – as the solution for the country’s crumbling economy, analysts have told Al Arabiya English.

Amid ongoing mass protests, Lebanon’s President Michel Aoun has continued to promote the country’s fledgling oil and gas sector, claiming last week that “drilling will begin within two months, putting Lebanon in the club of oil-producing countries and securing a long-term economic asset.”

Aoun, who protesters are demanding to step down along with the entire government, promised that the necessary decrees to begin extracting oil and gas would be “the first item on the agenda of the government’s first session.”

But, analysts told Al Arabiya English that this narrative is disingenuous.

“It is misleading in the sense that we are embarking on a long process, with a lot of challenges and uncertainties,” said Mona Sukkarieh, political risk consultant and co-founder of Beirut-based Middle East Strategic Perspectives (MESP).

“The economic challenges we face right now require direct measures and structural reforms. We cannot postpone engaging in reforms in the hope that a potential future offshore wealth might give the Lebanese economy a boost several years down the road,” she added.

The country could see its first offshore project by the end of this year – if there are no delays. A consortium of Total, Italian Eni and Russian Novatek are set to begin drilling for potential offshore oil reserves north of Beirut in December.

If significant discoveries were made, these natural resources could help reduce the amount that the government spends on energy subsidies for the costly and notoriously inefficient Electricite du Liban (EDL), Lebanon’s state-run electricity supplier. In 2018, the state shelled out $1.8 billion – around 3.5 percent of its GDP – on imported fuel oil for power plants, according to the World Bank.

However, the actual presence of oil and gas in Lebanon is yet to be confirmed, explained Sukkarieh.

“Lebanon does not have offshore reserves at this point. The extensive 2-D and 3-D seismic surveys conducted in our EEZ show a promising potential for hydrocarbon resources, in particular gas, but only drilling can confirm the actual presence of these resources,” Sukkarieh told Al Arabiya English.

“It is anybody’s guess when [Lebanon] will make [its] first commercial discovery,” she added.

Still a long way to go

Economists have also voiced concerns that the government may have rushed to start drilling.

Diana Kaissy, the head of the Lebanese Oil and Gas Initiative (LOGI), told Al Arabiya English that former Prime Minister Saad Hariri had been “pushing Total to start the drilling as soon as possible” because he had been depending on the sector as a “savior” for the economy.

“This is very dangerous … to have a discovery by February is like betting that you’re going to win the lottery,” explained Kaissy.

In an effort to fast-track oil and gas revenues, ministers approved in April this year the second licensing round for several new offshore blocks. The decision was taken before making a commercial discovery – a step that Kaissy believes was taken hastily.

The chances of striking a commercial viable gas discovery on the first drill stand around 20 percent, according to Kaissy. Projected oil and gas revenues are also lower than many assume, explained Kaissy, who said the sector, at best, “contributes to no more than 2 percent of [Lebanon’s] GDP.”

These risks and misconceptions undermine the economic reform plan Hariri proposed for the country before resigning in the face of pressure from protesters. The ambitious set of reforms are designed to reduce the budget deficit from 11 percent of GDP in 2018 to 0.06 percent.

Nizar Hassan, a former policy researcher at the Lebanese Centre for Policy Studies, described Hariri’s plan to reduce the deficit to 0.06 percent of GDP as “a joke.”

The plan also includes reducing spending on Lebanese utility provider Electricité du Liban (EDL) by around $663 million, and transitioning from fuel oil to more cost efficient natural gas.

This is where Lebanon’s planned offshore projects come in, as the purpose of the drilling is to secure a cheaper and cleaner source of energy and to increase Lebanon’s share of natural gas in the energy mix. But, such an energy reform initiative takes time.

“It should be kept in mind that exploration, particularly offshore exploration, is a long process. The success rate for such a drilling is estimated at around 25 percent,” Sukkarieh said.

Too little, too late

Despite pledges of $11 billion in loans and grants promised during the 2018 CEDRE conference in Paris, as well as the Lebanese government’s announced economic reforms, the country’s economy is running out of time.

Poverty could rise to 50 percent if the economic situation worsens, while already high unemployment rates – particularly youth unemployment – could also increase, according to the World Bank.

“Politics captures the most attention, but the economy has the most risks. With every passing day, the situation is becoming more acute and this makes recovery extremely challenging,” World Bank Regional Director Saroj Kumar Jha wrote in a report, after meeting with Lebanese President Aoun on November 6.

Hassan also noted that systemic change is needed to stop Lebanon’s economy from crashing. The slow pace of hydrocarbon development is one reason that politicians’ optimism about the sector is likely ill-founded.

“We are completely against relying on oil and gas,” Hassan told Al Arabiya English, adding that estimated revenue may not be realistic since “we don’t have the numbers yet.”

Hassan believes that other policies, such as creating a productive economy and reforming the tax code, are needed to achieve the government’s optimistic deficit reduction. The austerity measures introduced in the 2019 state budget and those that the government attempted to include in the 2020 state budget are also not sufficient reform steps, in Hassan’s opinion.

“They are cutting [the deficit] because money is coming from CEDRE. It’s like bad austerity. People don’t understand what it means,” Hassan added, referring to widespread public anger over the austerity measures that led to the current anti-government demonstrations across Lebanon.