There has been an ongoing debate in Lebanon recently over whether it should establish a national oil company (NOC). NOCs are institutions comprising financial, technical and legal experts, among other parties, which have sufficient knowledge and expertise to conduct oil and gas exploration. NOCs undertake development projects that mainly involve:
- large-capital investments;
- long-term agreements; and
- high financial risks.
in the context of this debate, it is worth assessing whether the establishment of an NOC in Lebanon would be beneficial.
NOCs have assisted in the economic development of many countries, particularly those whose economies are primarily based on oil and gas. In recent decades, Statoil in Norway, Aramco in Saudi Arabia and Petroleum in Qatar, among others, have proven how an NOC can become a world-leading company and compete with private international oil companies.
Since an NOC is a separate legal entity, it serves as an intermediary for the host country or government when signing an agreement directly with foreign companies. Thus, the host country protects itself and limits its liability. Establishing an NOC enables the host country – particularly emerging countries, such as Lebanon – to rely on the expertise of international oil companies at first, so that eventually they can control the entire project. However, in other countries, NOCs have been the victims of corruption, leading to government failure instead of state development. Therefore, before establishing an NOC, a country must thoroughly study the benefits of its establishment, as well as its role and allocated budget.
The government should first estimate the quantity and value of its resources. According to the Offshore Petroleum Resource Law, an NOC should be established "when necessary and after promising commercial opportunities have been verified". As Lebanon is still in the pre-licensing phase, any commercial opportunities are still unknown. Thus, conducting discussions on establishing an NOC before the verification of commercial opportunities has started is premature.
Further, the government would have to allocate funds to the NOC, even though it is yet to have a function. To date, the Lebanese Petroleum Administration has been a leader in the sector through its cooperation with the Ministry of Energy and Water. If an NOC was to be created now, both institutions would have the same role, with no enhanced results.
Once the commercial opportunities (if any) have been assessed, discussions on establishing an NOC will be more worthwhile. During the development phase, an NOC would enable the government to develop its expertise during the early stages of a project in order to better manage it later on. Conversely, the government would have to secure funding for the NOC, including all of its employees and consultants, until it started to generate revenues.
Many Lebanese stakeholders are keen to establish an NOC as soon as possible, as it would create many employment opportunities and foster energy capacity early on, which would ensure that the NOC was well prepared once production began. Further, many interested parties support the idea of an NOC on the basis that it would be an independent entity that would be less politically involved and influenced. Such opinions forget that:
- commercial opportunities are yet to be verified; and
- the government would have to finance the NOC from its own budget, without firm confirmation that such funding is well vested and will generate returns.
Until the commercial opportunities have been assessed, the government should develop a strong foundation for an NOC that is based on transparency by adopting NOC principles and joining the Extractive Industries Transparency Initiative. This will ensure that the NOC, once established, will perform well and align with international standards.
For further information on this topic please contact Mohamed Y Alem or Jana Tebbo at Alem & Associates by telephone (+961 1 999 717) or email ([email protected] or [email protected]). The Alem & Associates website can be accessed at www.alemlaw.com.