Anti-Corruption Safeguards for Lebanese Oil Industry

Article Summary
If Lebanon becomes an oil or gas exporter, one important safeguard against corruption is simply choosing to deal with major oil companies instead of small ones, as major companies are subject to stricter regulations and more competitive oversight. This article outlines Lebanon’s potential relationship with oil companies. Ja’far al-Attar reports.

There is growing talk of the large gas deposits in Lebanese territorial waters, and many experts have uttered assurances that Lebanon will soon become a "rich country." But Lebanese citizens are pessimistic about the possibility of them benefiting from that wealth. They know that after their politicians have monopolized the human and material resources on land, they will not shy away from doing the same with what is hidden in the sea.

However, there seems to be mechanisms that can limit theft and ensure that some economic benefits will reach [Lebanese] citizens and help the country's economy. Two oil experts - one Arab and one foreigner - have told Al-Safir that the [only] mechanisms for keeping the crooks in check lay in the by-laws of the world's major oil and gas companies - known to be the greediest firms in the world.

The two experts say that these companies mostly operate in corrupt countries. Since the oil and gas profits often exceed the annual budgets of an entire nation, the companies found it necessary to standardize their relationships and agree on binding "rules" for oil contracts around the world. This happened in 1998, when the 34-nation Organization for Economic Co-operation and Development (OECD) adopted a Treaty on Combating Bribery of Foreign Public Officials in international trade. Under that treaty, any international company, including oil companies, that tries to bribe government officials to secure a contract or preferential treatment faces penalties stiff enough to lead to its collapse. One example is what happened to the US company Halliburton after it was revealed to have been involved in corrupt activities linked to Iraq's oil. Therefore, if a company tries to get preferential treatment by offering to bribe a Lebanese government official, it would imperil its future. This is not only because of the severity of the sanctions, but also because of the oversight that companies all over the world exercise over each other for competitive reasons.

However, this only applies to major international companies, and not to smaller ones or others that belong to countries that are not part of the treaty. Therefore, to avoid corruption and to guarantee a positive outcome, it is essential that an oil contract be signed with a major company.

Scams... and Penalties

Of course, there will always be room for corruption by circumventing the safeguards. Drilling contracts can be signed with small companies that may be willing to bribe government officials. But in return, the companies will extract [no oil] for many years because they lack the expertise and the financial and technical capabilities these deposits at the bottom of the sea.

Another ploy that a government official can use is to send a broker to reach out another broker who represents a major company, and ask that the whole process to be done informally. However, it would be difficult to keep such a ploy hidden for long because of the competitive oversight that the major companies exercise over each other.

Also, any attempt by a Lebanese official to entice a company to bribe him would certainly cause major companies to react by refusing to be implicated in a corrupt environment. They would instead refrain from working in Lebanon. And after the major companies pull out from a corrupt environment to protect their international reputations, Lebanon would be forced to resort to companies that do not have the necessary expertise, finances, or technological prowess, and that would use Lebanon as a laboratory for their rudimentary experiments [in exploration and extraction]. Consequently, Lebanon would have become a victim of its politicians which would have given up their duties as custodians who ensure the continued flow of oil revenues to the citizens and future generations. [The oil exploration might be quite successful] as according to sources, the latest geophysical three-dimensional surveys by the Norwegian PGS [Petroleum Geo-Services] company indicate that positive "surprises" are possible.

Because major companies operate in places rife with corruption, so-called "sovereign funds" have been established to take part of the gas profits and allocate them to the completion of specific projects (such as roads or other developmental projects). That way, politicians may still illegitimately benefit by awarding projects to contractors among their followers, but that damage would be limited compared to what bribery by oil companies [would cause].

Oil Predictions Based on the Neighboring Region

The first step in oil exploration is for the government to sign contracts with specialized international companies to conduct a preliminary survey of the identified area (off the coast of Lebanon) and estimate the amount of oil located in it. But this will only give a preliminary estimate. Afterward, the findings will be  analyzed and sold to international oil companies, which will bid for contracts after the government declares that it will issue exploratory licenses.

The Arab expert stresses that it is impossible to determine with certainty the presence or quantity of oil at the bottom of the sea before drilling starts. The presence of oil is determined by four conditions that cannot be all satisfied at once, but satisfying two is sufficient reason to start drilling.

The expert maintains that finding gas in neighboring waters is not enough to confirm the presence of gas in Lebanese waters. He points out that all the gas in the Mediterranean region comes from the Nile Delta and it is known that the quantities [of gas] diminish as we move away from the source. So, for example, the amount [of gas] off the coast of Gaza exceeds the amount off the [northern Levantine coast]. Therefore, for geological reasons and according to a preliminary analysis that is then compared to neighboring countries, Lebanon probably has less gas than [its neighbors to the South].

The cautious optimism can only become a reality after four conditions have been met. The four conditions are: The presence of traces of gas or oil, the quality of the soil, the presence of a reservoir covered in a way that prevents the seepage of gas over the years, and evidence of a cause - technically called the "charge" - for gas formation. Since it is impossible to initially satisfy all four conditions, satisfying only two is sufficient to start drilling operations.

Attracting Major Companies

The two experts stress that it is in the interest of Lebanon to choose companies that satisfy three basic conditions: (1) Experience in offshore drilling, since it is different from land drilling; (2) Large financial resources to incur the costs of the operation; and (3) the know-how of modern [drilling and extraction] techniques, which are often complex. It is important to note that small or even medium companies often do not meet all three conditions.

The two experts point out that the major companies would not want to work in Lebanon if the sea basin is divided into many small blocks, because these companies are not interested in small areas. Therefore, according to the experts, the area should be divided into a limited number of blocks because the underwater fields often overlap, and when one is found that spans more than one block long and complex negotiations ensue which can halt work for years. [Dividing the area into] a few large blocks would attract the major companies and guarantee serious outcomes. The Arab expert prefers dividing the region into five blocks. But the foreign expert says that the number of blocks should not exceed three because the area in question is not large.

Extraction and Transportation Operations

The process begins with an exploratory phase. The company agrees to a specific and limited amount of time to produce the seismic analysis, which involves the setting off of explosives on the seabed to simulate earthquakes and cause shockwaves that are used to count the number, size, and thickness of the layers.

This is followed by a drilling phase. The cost of one well can be between 100 and 250 million dollars spent over a specific time period. The well may or may not [strike oil] because the studies are not ironclad. If the well turns out to be empty then the cost is borne by the company, which then starts drilling another well. But, if the well strikes oil, smaller wells each costing between 100 and 150 million dollars, will be drilled over the entire region.

After that, the "development" phase begins. It involves laying pipes to transport the gas for liquefaction before being transported to where it is used or sold. There are two possibilities for this phase: The first option is the stationing of vessels floating above the wells. The gas is transferred to the vessels and liquefied on board. But this technique is relatively new. It was developed by Shell in Australia and according to the foreign expert its results can not be 100% guaranteed. The second option is to build liquefaction plants on land, which would create a multitude of local jobs.

Some companies prefer the first option. The use of vessels avoids the cost of laying pipelines to shore, building liquefaction plants and transporting the gas. But, for the local economy, it is more useful to build gas liquefaction plants and move the gas ashore because it creates job opportunities for citizens. [It would] also allow for the creation of a petrochemical industry around those plants. Part of the extracted gas will be used for local needs (e.g., electricity), and the rest will be sold.

The foreign expert explains that the major companies often choose to transport the gas onshore as a  gesture of goodwill towards the country in question. [It is sometimes] a display of friendship that can nurture the long-term relationship between these parties.

Some believe that liquefying the gas aboard vessels is more environmentally friendly, except in the event of an accident that pollutes the seawater. But building liquefaction plants onshore to the highest standards can ensure that no accidents will occur.

Production and Profit-Sharing

The production phase is done according to a "production sharing agreement," which comes into effect at the commencement of extraction. It can be signed at the beginning of the project but some countries prefer to wait until the production phase begins before they sign such an agreement.

The production sharing agreement often divides the revenues into three portions. The first is a percentage of the revenues to be paid as royalties to the country in question. The second goes to the company to recover the capital expenditures incurred by the previous stages of production (this portion decreases with time as the expenditures are paid off, and it usually doesn't exceed 10 or 15 years). The third portion are the profits that are divided between the Lebanese state and the [oil] company.

Economic benefits to Lebanon can be obtained in advance through a contract which includes clauses requiring the oil company to stimulate the Lebanese economy. For example, if the company wants to drill or build facilities, then Lebanese contractors will get preferential status. More precisely, if the submitted bids [do not differ too much], the project is awarded to a Lebanese contractor. In the contract, the company would also agree to "Lebanonize," which means employing and training Lebanese workers and engineers in its operations. It should be noted that politicians can "benefit" from these clauses by making their contractors employ - or subcontract to - the politicians' supporters and followers.

Found in: oil, gas, corruption