LEBANON’S LAST HURRAH?

Lebanon 2018 | ENERGY & INDUSTRY | REVIEW

2018 is shaping up to be the second consecutive year to end on a positive note for Lebanon. The country held its first parliamentary election in nine years after 2017 saw parliament pass the first budget since 2005, enabling the government to pursue monumental tasks.

In May 2018, the Lebanese authorities approved an exploration plan submitted by France's Total, Russia's Novatek, and Italy's Eni to begin the country's much-needed search for oil and gas reserves. Earlier, in February, Lebanon signed its first offshore oil and gas exploration and production agreements with the same companies for offshore Blocks 4 and 9. However, part of Block 9 contains waters disputed with Lebanon's arch-rival, Israel—Lebanon has an unresolved maritime border dispute with Israel over a triangular area of around 860sqkm that extends along the edge of three of its 10 blocks. Total has said in a statement that the disputed waters comprise 8% of Block 9 and that its exploration will not interfere with any fields or prospects in the disputed area.

Both countries have indulged in a war of words, and tensions could easily escalate given the history of Lebanon-Israel relations. For Lebanon, the potential oil and gas reserves hold unprecedented significance in terms of solving its energy woes.

Before civil war broke out in 1975, Lebanon enjoyed 24-hour electricity, but the conflict destroyed much of the country's power infrastructure. The country has struggled with chronic power cuts ever since and, even decades later, the sector has failed to keep pace with growing demand for power, leading to scheduled power cuts of up to three hours a day in Beirut during peak demand and 12 hours or more outside the capital.

According to the World Economic Forum's Global Competitiveness Index for 2017-18, Lebanon ranks 134th out of 137 countries for the quality and reliability of its electricity supply. Conflicts such as the civil war in neighboring Syria and Israel's bombing campaign in 2006, along with systematic corruption, political dysfunction, bureaucracy, and wide political division have dented all efforts to fix the grid. Adding to the power woes are the well-documented financial troubles of Électricité du Liban (EDL), the state-owned power company. EDL sells electricity below cost and in swathes of the country—most notably in areas controlled by Hezbollah and other powerful political groups—people refuse to pay entirely.

According to the 2018 update of the UN's Lebanon Crisis Response Plan 2017-2020, the subsidized cost of fuel provided to EDL cost the government USD2.1 billion in 2016. To top that all off, the influx of more than 1.5 million Syrian refugees and an increasing number of Palestinian refugees has further plunged the country into darkness. In order to fight the crisis, multiple private initiatives and small plans driven by local governments have popped up. Most notorious of all is the private generator industry, which arose as a makeshift solution but has slowly grown into a deeply ingrained industry, often referred to as the “generator mafias.”

Some experts suggest that for the short term, private generators should be incorporated into the public system so that generator owners can only sell the power to the government rather than selling it to consumers on the black market. Moreover, users can then pay a single bill for electricity not corrupted by unregulated rates. Such a solution would allow the government to work on long- and medium-term power generation, which in turn would phase out the dependence on private generators.

Meanwhile, Lebanese Minister of Water and Power Cesar Abi Khalil has insisted that the only viable solution is leasing gigantic power-generating ships instead of constructing new power plants. That idea was refuted by the central inspection board and two of Lebanon's biggest political parties, the Lebanese Forces and the Progressive Socialist Party. The latter presented its own plan to the cabinet, stating that “any attempt to resolve the crisis must commence through drastic reform steps in the electricity institution and the sector as a whole. Investment in the sector without reform is futile and will lead to additional squandering of funds.”

The party proposed several steps, beginning with appointing a new board of directors for EDL and fulfilling vacant jobs, which amount to 50% of the entire sector's positions. The plan further stated a commitment to achieve financial balance by the beginning of 2020 by reducing the total electric losses to no more than 12%.

Much to the disbelief of the average Lebanese citizen, the government of late has boosted its efforts to strengthen the power infrastructure, with a special focus on renewables. In February 2018, the government announced that it had signed the first public-private partnership for the energy sector, agreeing to work with three companies to create wind farms in the Akkar region north of Tripoli. Equally important, industrial solar power generation skyrocketed over 250% compared to the previous year and solar energy installations have gained popularity among municipalities as well as industrial, commercial, and residential users. The government has also signed agreements with several international partners. One such example is DREG, a joint venture between the UNDP and the Lebanese Ministry of Water and Energy. Notably, a 2017 initiative to expand solar usage by state-owned EDL drew 265 proposals from local and international companies to build solar farms across Lebanon.

Another possible gamechanger in the short term is LPG. In April 2018, industry leaders and experts congregated in Beirut for the Middle East LPG Regional Summit to discuss the future of energy in Lebanon, in which LPG is set to play a significant role, particularly as the country looks to diversify its energy mix. Annual consumption of LPG is growing by 6% and currently stands at 280,000 tons. Around 1.3 million of the 4 million cylinders in the market have been upgraded from steel to lighter and safer composite cylinders. Add to that the fact that LNG doesn't depend on pipelines and it becomes clear why it has become an increasingly popular source of energy, particularly in remote areas.

Long-term prospects continue to limp. Lebanon's offshore energy hopes are at risk as potential reserves remain unproven and a major discovery could reignite a maritime dispute with Israel, thwarting the indebted country's expedition for oil and gas revenues.

According to a report by BMI Research, a unit of Fitch Ratings, the next 18 months will bring clarity about the sector as offshore activity picks up, but political tensions in the eastern Mediterranean will increase the risk of further exploration. However, a possible intervention by the US could bode well. Israel's energy minister said that ideas proposed in a US-led back-channel mediation over oil and gas exploration in the eastern Mediterranean raise the prospect of a partial deal in 2018.

Without doubt, potential undersea reserves are crucial for Lebanon, which according to the IMF faces a public debt amounting to about 150% of its GDP. As a comparison, Greece has a debt to GDP ratio of 180%.

Whether renewed hopes, goals, and recommendations will follow the fate of goals and promises of yesteryears or not will depend on the new government. If developments over the last two years are to go by, the future looks less bleak. Timing may also be crucial: Syrian refugees have brought international attention and funding to Lebanon. But when the war ends, that attention—and money—will shift to rebuilding Syria.