This is one of a series of country briefings produced by NRGI to summarize the evolving situation with respect to the pandemic and its economic impacts. The analysis it contains is subject to change with circumstances, and may be updated in due course.
- Lebanon’s severe economic crisis, worsened by the coronavirus pandemic, shows little sign of abating. The country’s economy will contract by an estimated 25 percent in 2020.
- Oil and gas exploration activity continued amid the lockdown measures, but in April the government confirmed that French oil company Total did not find a gas reservoir during its drilling at Lebanon’s first-ever oil and gas well in offshore Block 4.
- In October Lebanon and Israel began talks over the disputed maritime border which spans potentially lucrative gas fields, including Block 9 which is due to be the second oil and gas field explored.
- Lebanon pays high prices for imported oil and diesel to generate electricity. If officials continue to plan energy policy around the prospect of discovering oil and gas resources without the necessary infrastructure or discoveries to do so instead of transitioning to renewables, it will likely exacerbate the country’s financial woes.
Summary of economic impact of the coronavirus pandemic
Much of the crisis pre-dates the coronavirus pandemic, but the pandemic has undermined Lebanon’s prospects for economic recovery. The Lebanese pound has lost over seventy percent of its value since January 2020, and U.S. dollar reserves are so limited that banks have constrained withdrawals. In March, Lebanon failed to service some of its sovereign debt (Eurobond) and is now officially in default.
In July the Lebanese government halted discussions with the IMF on a much-needed multibillion-dollar bailout when the government and the Lebanese Central Bank could not agree on figures presented to the IMF and on the country’s recovery plan. Lebanon’s failure to make economic reforms and curb corruption, in addition to the default, mean that international lenders have limited their support, and the country’s recovery plan remains largely unfunded. In addition to finding a way forward with the IMF, Lebanon must negotiate with international lenders to restructure existing debt following the March default.
While the population was struggling with the economic meltdown and the debacle of the government’s policy response to the pandemic, on 4 August a catastrophic blast hit the port of Beirut, destroying the surrounding area. Houses, apartments, shops, offices, and hospitals were turned into rubble, killing more than 170 people, injuring another 6,000, and rendering over 300,000 people homeless.
On 10 August, the government was forced to resign by the speaker of the parliament after the prime minister attempted to propose early elections. Shortly after, the major political parties named a new prime minister, Moustapha Adib. However, he quit in September after failing to win support for his proposed cabinet line-up. In October, Lebanon’s political parties chose Saad Hariri to become prime minister again. Mr. Hariri has served two previous terms in the role but was forced from office in October 2019 in the face of mass public protests about the economic situation in Lebanon. He has yet to form a new government.
Amid these political developments, coronavirus cases have spiked dramatically, and the government is unable to enforce a lockdown. It attempted to implement a two-week lockdown end of July, and another in the weeks after the Beirut port explosion, and another in November but neither were strictly enforced.
The international community, which provided some support to address the impact of the port explosion, have largely been unwilling to provide Lebanon with any other aid until the government makes significant economic reforms. However, the political class shows no signs of commitment to doing this.
Impact on the oil and gas sector
The coronavirus pandemic measures taken by the Lebanese government did not affect the drilling activities for Lebanon's first oil and gas well, known as Byblos-1, in offshore Block 4. On the contrary, the government exempted Total, the operator, from the lockdown measures and allowed work to continue with precautions taken by the local authorities to prevent the spread of the virus into the drillship. On 27 April, the minister of energy confirmed that no commercially viable gas had been found at the Block 4 well. Total has yet to submit a final analysis of the Block 4 exploration work to the government.
Total is expected to drill an exploratory well in offshore Block 9, which is south of Beirut, before May 2021. The company has continued to work on the environmental impact assessment (EIA) for Block 9 despite ongoing pandemic-related movement restrictions in the country. Lebanese law requires the company to hold public consultations in the relevant regions as part of the EIA process. Total is considering online consultations but it is not clear if this process would be acceptable to stakeholders.
Exploration of Block 9 faces other challenges. Eight percent of the block is subject to a dispute between Lebanon and Israel over the maritime border. In October, Lebanon and Israel started talks aimed at resolving the border disputes. No conclusion has been reached. Total and its partners (ENI and Novatek) were aware of the dispute when they signed agreements with Lebanon for exploration.
There are three potential scenarios concerning Block 9:
- Drilling happens before May 2021 as planned and agreed per the contract
- Drilling proceeds but after May 2021, requiring amendment of the contract or a valid declaration of force majeure)
- Drilling does not proceed, which could lead Lebanon to seek to call on the $40 million guarantee provided by the consortium under the contract to ensure the minimum work commitment is carried out
The government is still waiting to hear from Total on specific plans for drilling in Block 9.
On 31 May, the Ministry of Energy postponed Lebanon’s second licensing round for the third time, citing the low oil price and the coronavirus pandemic. The ministry did not give a new deadline (as it had with the two previous delay announcements) but said that it expects to complete the second licensing round before the end of 2021.
However, even without the coronavirus pandemic and low oil prices, it is unlikely that Lebanon would have secured good deals from international investors, because of the poor political, economic and fiscal conditions in the country. NRGI has learned that the Lebanese Petroleum Administration is now reviewing the country’s tender protocols and regulations based on the new market realities and will propose amendments aimed at supporting future investment.
Impact on natural resource governance
Given the dire economic situation, there will be little public focus on oil and gas governance, with efforts instead focusing on the aftermath of the Beirut blast and the overall political situation. With the second licensing round postponed, Lebanon may consider establishing a national oil company (NOC) to advance oil and gas development regardless of global economic conditions. It will be important that civil society organizations (CSOs) working on the extractive sector are vigilant about the risks of poor decision-making by the authorities at this time, and are prepared for renewed discussions about establishing an NOC with all the challenges that come with such a move.
International non-governmental organization Publish What You Pay is leading the Extractive Industries Transparency Initiative (EITI) process in Lebanon. However, EITI progress in Lebanon has been slow and basic processes, such as the election of civil society organizations to the multi-stakeholder group, have not taken place. This is partly due to the economic crisis, now exacerbated by the coronavirus pandemic. Additionally, momentum around the EITI process was reduced after the negative results at Block 4.
The prospects for Lebanon’s oil and gas sector remain uncertain, with Block 4 drilling fruitless and the government’s postponement of the second licensing round. Furthermore, if the pandemic significantly delays drilling at Block 9, and the economic and political crisis is unresolved, the risk is that investors will pull back and Lebanon’s oil and gas future will not materialize. At a minimum, the pandemic will delay new discoveries or further drilling. If Lebanon and Israel cannot come to an agreement on disputed maritime areas then there are implications for both countries’ development of oil blocks. Israel could challenge any work in Block 9, but Lebanon could similarly challenge any exploration at Karish, an Israeli block that Lebanon claims. The available options if current talks do not yield a solution are to pursue international arbitration or to take the case to the International Court of Justice or to the special court set up by the United Nation’s Law of the Sea (UNCLOS). Absent an agreed or enforceable resolution of the dispute, conflict between the two countries is a risk.
Within this challenging economic and political context Lebanese authorities must give serious consideration to the country’s energy strategy. Relying on fuel oil and diesel oil to produce electricity is not sustainable for Lebanon. The high price Lebanon pays for fuel is causing a major budget deficit. The alternatives are gas and renewables. However, no “local” gas from Lebanon’s fields has been discovered, and imported gas needs power plants that are not yet operating. Meanwhile, the renewable energy sector also has, to date, lacked momentum and faces governance issues, mainly concerning licensing. In avoiding the risks associated with a fossil fuel-based future, Lebanon’s government and civil society actors should focus on enabling legal reforms in the renewable energy sector to expedite its development.
Laury Haytayan is the Middle East and North Africa program director at the Natural Resource Governance Institute (NRGI).