On Oct. 27, 2022, Israel and Lebanon signed a breakthrough agreement establishing a permanent maritime boundary between them in the Eastern Mediterranean Sea. The two countries have technically been at war since 1948, and the deal was the result of more than 12 years of negotiations, most recently spearheaded by U.S. diplomat Amos Hochstein and his team at the U.S. State Department.
Governments around the world praised the agreement. U.S. President Joe Biden noted that “Energy—particularly in the Eastern Mediterranean—should not be a cause for conflict but a tool for cooperation, stability, security, and prosperity.” French President Emmanuel Macron lauded the deal as “an important step towards more peace for Israel, for Lebanon, and all the countries and peoples of the region” and said it would “also contribute to the prosperity of both countries.”
Several countries in the gas-rich Eastern Mediterranean—such as Egypt and Cyprus—have taken steps to explore their offshore reserves in recent years. Israel began commercial oil and natural gas extraction several years ago, and Lebanon has explored the prospect since 2021. But doing so without an agreed-on maritime boundary was risky for both countries—and potential investors.
On Oct. 27, 2022, Israel and Lebanon signed a breakthrough agreement establishing a permanent maritime boundary between them in the Eastern Mediterranean Sea. The two countries have technically been at war since 1948, and the deal was the result of more than 12 years of negotiations, most recently spearheaded by U.S. diplomat Amos Hochstein and his team at the U.S. State Department.
Governments around the world praised the agreement. U.S. President Joe Biden noted that “Energy—particularly in the Eastern Mediterranean—should not be a cause for conflict but a tool for cooperation, stability, security, and prosperity.” French President Emmanuel Macron lauded the deal as “an important step towards more peace for Israel, for Lebanon, and all the countries and peoples of the region” and said it would “also contribute to the prosperity of both countries.”
Several countries in the gas-rich Eastern Mediterranean—such as Egypt and Cyprus—have taken steps to explore their offshore reserves in recent years. Israel began commercial oil and natural gas extraction several years ago, and Lebanon has explored the prospect since 2021. But doing so without an agreed-on maritime boundary was risky for both countries—and potential investors.
Israel drew up a development plan for gas exploration in 2017 and signed a gas export deal with Egypt and the European Union in 2022. Extraction and production off Israel’s coast are already underway, and sales are expected to reach their maximum capacity this summer. Lebanon, however, lags behind—even though it is desperate for the economic and financial relief that an oil and gas sector could potentially bring. In January, the government in Beirut signed an agreement with France’s TotalEnergies, Italy’s Eni, and QatarEnergy to start exploration later this year. However, some experts project a timeline of five to six years before Lebanon can produce oil and gas if commercially viable reservoirs are found. Lebanon’s maritime borders with Cyprus and Syria are also yet to be clearly demarcated, leaving other potential reserves inaccessible.
According to the World Bank in January 2022, Lebanon’s ongoing economic crisis is one of the three most severe crises to occur anywhere since the mid-19th century. After 25 years of being considered an upper-middle-income economy, Lebanon dropped to the ranks of a lower-middle-income nation last year. Today, unemployment stands at almost 30 percent, and triple-digit inflation means at least 74 percent of Lebanese live on less than $14 per day. Reuters reported that the Lebanese lira has lost about 97 percent of its value since 2019. Public service provisions and infrastructure are at the breaking point, decades of gains in human development have been reversed, and public institutions have all but crumbled.
All of this is happening against a backdrop of political turmoil. Lebanon failed to form a government after May 2022 parliamentary elections, which resulted in a hung Parliament with no clear majority. The situation was exacerbated when then-President Michel Aoun’s term ended on Oct. 31 of last year. Parliament has since been unable to agree on a successor, and the country is currently being governed by a caretaker government with very limited legitimacy and authority.
Lebanon’s offshore oil and gas reserves could eventually become an economic lifeline for the beleaguered country. But creating effective foundations for future exploration and extraction may be difficult in Beirut’s politically fractured environment. We foresee three institutional challenges for Lebanon in accessing its resource wealth. If they can be surmounted, then the country may finally be able to unlock potential for its people.
First, Lebanon has a record of systemic, widespread corruption and political patronage, which could prevent the country from enjoying prospective gains from oil and gas revenues. Beirut ranks 150 out of 180 countries (tied with six other nations) on Transparency International’s Corruption Perceptions Index and earns poor governance marks from the World Bank. Much of this is a result of Lebanon’s confessional political system, whereby power is tenuously shared among various religious sects. Sectarian patronage networks also often control bureaucratic appointments, including in oversight agencies and the Lebanese Petroleum Administration (LPA), a public institution that was established by the government in 2012 to plan, supervise, and manage the country’s offshore petroleum sector.
Transparency, predictability, and access to government information are key to attracting foreign investment and stabilizing the Lebanese business environment. If the past is prologue, then those individuals in power could expropriate foreign investments as well as oil and gas profits in Lebanon for private or political gains, diminishing their benefits to the Lebanese people. Undisclosed conflicts of interest between public officials and government contractors create concerns that politicians could interfere in the licensing process—for example, by favoring one contractor over another or creating shadow companies.
Fortunately, Lebanon has taken some steps in recent years to increase transparency and accountability as well as reduce corruption and poor management in government. These include the 2017 passage of the Right of Access to Information Law, which gave citizens the right to retrieve government records and other information, and the 2021 Public Procurement Law, which meets United Nations standards for combatting fraud, corruption, and abuse; reducing waste; and increasing transparency in the public sector. A financially and administratively independent National Commission for the Fight Against Corruption was also formed by the government in 2022 to focus on investigating public officials’ violations of existing laws, such as the right of access to information, whistleblower protection, and illicit enrichment. It is yet unclear how effective these measures will be.
In 2018, the government issued the Enhancing Transparency in the Petroleum Sector law. And since then, the LPA has put in place mechanisms to publicize and disclose all aspects of the process of oil and gas exploration and extraction; the LPA’s publicly available petroleum register, for example, is supposed to record licenses when awarded. Both the law and the status of the LPA could be updated and strengthened to ensure more transparency and autonomy.
Even if Lebanon can generate resource wealth, it must decide how to preserve it for future generations. This presents Lebanon with its second big challenge. The 2010 Offshore Petroleum Resources Law requires Beirut to create a sovereign wealth fund; currently, a parliamentary committee is considering at least four blueprints for how to do so. The proposals—from different political parties—differ on setup, structure, discretion, and control of the prospective sovereign fund.
According to analyst Andrew Bauer, sovereign funds can “become sources of patronage or corruption”—making them a potentially risky endeavor in Lebanon. There could be political quarrels and backroom deals about how government authorities oversee fund management, and the appointment of a board to manage the fund would inherently be mired in sectarian tension. Given Lebanon’s economic crisis, another concern is that officials may redirect potential oil and gas proceeds toward financing government expenditures and reducing public debt rather than investing in the security and prosperity of future generations. When Lebanon’s central bank did so in the past, the result was abject failure—draining foreign reserves and further devaluing the Lebanese pound.
The so-called Santiago Principles, created by the International Working Group of Sovereign Wealth Funds, provide detailed recommendations for good governance of sovereign funds, including transparency, accountability, prudent investment practices, and open dialogue. Lebanon did not sign on to these principles in 2008 but should consider following them going forward. The country could also consider a radical approach similar to Alaska’s, which grants every Alaskan a direct capital transfer from gas revenues as a tax refund. Or Beirut could follow Norway’s Norges Bank Investment Management, which invests oil and gas proceeds in safe bonds and shares that—although subject to market forces—helps avoid corruption and conflicts of interest.
Finally, even with all the right structures to manage oil wealth in place, the most recently available data demonstrates that Lebanon will be burdened by increasingly weakened government capacity. Budget cuts and wage erosion due to hyperinflation have significantly drained an already feeble public administration, leading to a mass exodus from and absenteeism in the civil service that has precipitated an emigration-induced brain drain.
Public sector vacancies in Lebanon are at 72 percent. According to the most recent government assessment on the impact of the financial crises on institutional capacity, at least one line of service has been discontinued in 52.6 percent of public agencies surveyed as of December 2021; only 40 percent of these agencies confirmed they had the capacity to sustain service provisions beyond 2022. A 2021 World Bank report underscores that these conditions may “lead to a human capital catastrophe, from which recovery would be very difficult.”
Since 2019, many public servants who were trained by the LPA to regulate the process of gas exploration and production have left the oil sector. Even more critically, the term of the LPA’s governing body expired in 2018—and the agency has since lost a majority of its staff, including two of the six members of the LPA’s governing body. The government has failed to appoint a new governing body due to political disputes; the remaining four members of the expired body are considered caretakers. With such a mass exodus, there are few people left in the public sector to monitor and control exploration responsibly and legally.
The good news is that Lebanon is not alone in its efforts to amass new oil wealth. Hochstein’s maritime agreement must be the beginning of stepped-up diplomatic efforts to retool Lebanese public institutions and put the country on a path out of poverty. The Biden administration and other foreign governments can help by pressuring Lebanon for transparency, predictability, and accountability in developing an oil and gas sector and seeking to harness its proceeds. Washington can also push Beirut to implement a reform agenda agreed upon by the International Monetary Fund as well as raise human and financial capital through official development assistance, diaspora bonds, and public diplomacy-funded partnerships among U.S. and Lebanese universities, government agencies, nonprofit organizations, and private sector firms.
Lebanon is at a crossroads. Decisions about how the country proceeds with its burgeoning oil and gas sector are inherently political, but they cannot take the form of another corrupt political deal between the country’s current powerbrokers. With proper transparency, inclusion, and oversight, however, Beirut has a chance to build a viable state for the future.
