Lessons from Cyprus: Lebanon needs to manage oil & gas expectations


The country’s finances were in disarray. The Finance Minister flew to Moscow in a last-ditch attempt to seal a deal that would secure Russia a stake in its offshore gas resources, in return for a financial support that would spare the country the need to seek a bailout, the dreaded word that evokes the painful Greek experience and comes with harsh conditions attached.

Hopes were high. After all, just over a year earlier, the country discovered significant gas resources offshore, with expectations of more to come. This new gas wealth, it was thought, would turn the country into a gas exporter and provide Europe with a much-needed source of gas that would ease its reliance on Russian gas. It was only a matter of time before revenues start to flow. A boon for Europe. And certainly, a boon for Russia, if it were to secure a stake in these resources and prevent Europe from moderating its reliance on Russian gas. The geopolitical stakes were high, and all the big players must certainly be competing to get a share.

So the prevailing wisdom claimed at the time.

But Russia was not tempted. “Their proposals were to set up a state company with the transfer of assets of gas fields and to offer Russian investors to join, purchase bonds that will be changed over into shares later. Our investors looked into that and did not show interest,” the Russian Finance Minister was quoted as saying.

The delegation flew back home empty-handed over the week-end. In the early hours of Monday morning, a €10 billion international bailout was announced, imposing capital controls and the restructuring of two local banks, with substantial losses to bondholders and depositors.

If the scenario makes you feel uncomfortable as you look at Lebanon’s finances, it should. That was Cyprus in March 2013. The outlook for Lebanon is equally grim.

Misplaced expectations and a distorted reading of the situation are sure to skew conclusions. Cyprus was tempted to misinterpret the facts. Officials hoped, until the last minute, that Russia would provide help because it was supposedly in Russia’s interest to spare Cyprus a bailout program that would also threaten its citizens bank accounts in Cyprus. After all, Russian nationals were estimated to hold around 30% of the €68 billion deposited in Cypriot banks at the time.

Similarly, Cyprus exaggerated the stakes surrounding the discovery of offshore gas resources and what it could mean for the country, for Europe and, by ricochet, for Russia. A source at the Russian Finance Ministry speaking to RIA Novosty news agency said that the Cypriot delegation’s energy proposals in Moscow failed to generate interest from Russian companies. “They invited us to take part in a tender for fields in which the seismic survey work has not been completed”, he said.

It is tempting for resource-poor countries to exaggerate the stakes of newly discovered hydrocarbon resources, particularly in times of need. But a good tip is to assume that your international interlocutors, whether big producers or financial institutions, have the necessary experience to put things in perspective where your enthusiasm might be affecting your judgement.

Lebanese authorities have so far struggled to manage expectations. The trend started in 2013, just before the launch of the first offshore licensing round, with a massive billboard campaign by the Ministry of Energy and Water telling citizens that Lebanon now has an oil wealth that can be used to develop the transportation network, support the armed forces, and finance the healthcare and education sectors etc. It continued with officials providing unrealistic estimates of the size of this hydrocarbon wealth, with one minister even claiming in front of Lebanese University students that “we have more gas than Qatar”. You would expect financial institutions to be more pragmatic, and yet Lebanese banks have one after the other released oil and gas reports filled with inaccurate data that grossly overestimated the value of an oil and gas wealth that has not been discovered yet. The trend continued with the awarding of exploration and production agreements with a consortium made up of Total, Eni and Novatek. It was an occasion to launch a new slogan: لبنان بلد نفطي, translated as “Lebanon is a petroleum country”, repeated by almost everybody, from the Prime Minister, to his cabinet members, fellow MPs, to stories splashed across Lebanese media etc. Even landowners are now advertising some of their assets by resorting to the oil & gas argument and promoting certain lands expected to “overlook future petroleum activity”! It is as if the entire country has joined in in a collective frenzy.

With a public debt of around $80 billion, a deficit of $3.7 billion in 2017, a stagnant economy, and rising youth unemployment and poverty rates, it is no surprise Lebanese citizens and political class are looking for a silver bullet. With few real economic prospects on the horizon, authorities are banking on two opportunities to retain confidence and keep hope alive: offshore oil and gas exploration and post-war reconstruction in Syria. But these are the types of opportunities that are entirely out of the government’s control. It is anybody’s guess when the Syrian war is going to end or when we will make our first commercial discovery. If all our lucky stars manage to align, these are, at best, medium-term prospects.

In addition, the presence of over a million Syrian refugees is seen by the political class as a guarantee that outside actors will not permit the country’s collapse. After all, it would not be in their interest to transform the millions of Lebanese and non-Lebanese residing in Lebanon into potential refugees banging on Europe’s doors. Europe cannot afford that, the reasoning goes, echoing a similar reasoning in 2013 that did not think it was in Russia’s interest to leave Cyprus to its fate. This is how Lebanese officials interpret the international mobilization that resulted in the organization of three conferences in a short period of time: Rome II to support the armed forces, CEDRE to support the economy and Brussels II to help Lebanon manage the impact of the Syrian refugee crisis on the country. Interestingly, on the occasions, the Lebanese discourse directed at our international partners has been much more measured. The government’s Vision for Stabilization, Growth and Employment and its Capital Investment Program prepared ahead of the CEDRE conference stayed clear from brandishing the kind of opportunities that cannot materialize in a reasonable period of time.

It is not unusual to resort to a double discourse, one addressing international partners, and another for local consumption. But we are not doing citizens any favor by inflating their expectations. Similarly, we are not doing our country any good by exaggerating the stakes of potential offshore resources or ruling out a possible collapse simply because it would supposedly not be in the interest of outside actors. Be realistic when assessing your strong points. Do not invoke shaky arguments to rule out risks, prepare for them. Above anything else, calibrate that reading grid and reconsider your assessment of the stakes involved.

This article was written for the May 2018 edition of Executive Magazine.