A better deal: new law passed in Lebanon on oil and gas taxation

On 19 September 2017, the Parliament of Lebanon passed a new law with strong ring-fencing measures that will help get a better deal for the country from extractives.

With the recent discoveries of deep-sea gas fields, there are now real prospects of securing substantial revenues which can support better public services. But this will only be possible with the right legal framework and strong oversight from Parliament.

Westminster Foundation for Democracy (WFD) has supported the Lebanese parliamentary Public works, Energy, Water and Transport Committee for two years. Working closely with the committee chair, WFD brings international expertise and convenes meetings of MPs, officials and ministers. This has given the Committee some of the tools it needs to introduce new laws to improve transparency, stewardship and management of the extractives sector. The WFD programme has also supported the Parliament to raise its profile in oversight of the sector and highlight the vital role for Parliament at each stage.

In August 2016, WFD provided the Committee with an international comparative study on management and governance of the oil and gas sector. During meetings to discuss the study, the Committee adopted a recommendation to introduce a new oil and gas taxation bill.

A follow-up workshop with WFD in February 2017 provided an opportunity for Lebanese MPs to debate taxation of the oil and gas sector. This included contributions from Nick Butler, former Group Vice President for Strategy and Policy at BP and a former senior policy adviser to the UK Prime Minister. His recommendations focused on ‘ring-fencing’ to bring the Lebanese system into line with best practice worldwide. As he explained:

“Ring-fencing is a well-established part of energy taxation systems around the world. It allows the profits and the costs associated with each particular field development to be assessed and taxed separately.”

“If a major field is very profitable it can be taxed at the appropriate rate without all the profits being offset by expenditure elsewhere. It ensures companies cannot use losses on other activities – including onshore activities in energy or any other business – to offset their liabilities in respect of the offshore field.”

“Following the discovery of oil and gas in Lebanon, the country is expecting significant changes and lot of reforms are required.”

This resulted in the Committee deciding to amend the bill to strengthen original provisions on ring-fencing. Committee Chair Mohammed Kabbani MP, commented:

“Following the discovery of oil and gas in Lebanon, the country is expecting significant changes and lot of reforms are required. Certainly, the Parliament must play an important role in this process, the collaboration with WFD allowed for this to take place.

“Through the sharing of best practices and information, a comprehensive approach in the adoption of the Oil and Gas Taxation Law was followed, constructive engagement from relevant ministries was facilitated by the programme; the evidence provided on the ring-fencing generated an informed debate and decision. This support reinforced the oversight role of the Parliament and its centrality in shaping key polices.”

(Photo: Oil and Gas Taxation Bill discussed at a WFD workshop with members of the Public works, Energy, Water and Transport Committee.)

Along with ise securing a good deal for the Lebanese public purse, the parliamentary Committee is playing an important role – with WFD support – in transparency, good governance, management and oversight of the sector.

Support from the Foundation recently resulted in Parliament recommending Lebanon completes the process of joining the Extractive Industries Transparency Initiative (EITI), a global standard for the good governance of oil, gas and mineral resources.

Committee member Joseph Maalouf MP has also recently lodged a new draft law on transparency of the Oil and Gas Sector. The Committee launched this initiative at a WFD workshop in November 2016, which brought together Lebanese MPs on the topic: “Oil and Gas- A legislative initiative to fight corruptio” .

On 19 October 2017, WFD will facilitate a workshop on parliamentary scrutiny of the Sovereign Wealth Fund Bill. This will aim at debating and designing a sound model of governance for the fund which will manage Lebanon’s assets.

(Main photo: Lebanon’s General Assembly meet to vote on the Oil and Gas Taxation Bill.)
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Lebanon: Progress towards Extractive Industries Transparency Initiative

Lebanon is well on its way towards joining the Extractive Industries Transparency Initiative (EITI), a major step towards ensuring that the profits from Lebanon’s oil and gas reserves contribute to the country’s economic development. Westminster Foundation for Democracy is working to support the Public Works and Energy Committee oversight role to make sure this becomes a reality.

The Lebanese Parliament is currently debating a draft petroleum transparency law. This reaffirms the commitment to join the EITI made by the Lebanese Council of Ministers in January 2017, and demonstrates the impact that the initiative is already having.

Since the discovery of 96 trillion cubic feet of gas and 865 million barrels of oil in the early 2000s, membership of the EITI has been on the agenda. The announcement that Lebanon will join the EITI has, therefore, renewed optimism that the emerging oil and gas sectors will be effectively overseen by the Parliament, and that citizens will benefit from the expected income.

In reaction to the announcement, Mohamad Kabbani, the Chair of the Public Works and Energy Committee, said “this is part of our campaign and efforts towards achieving transparency of the oil and gas sector in Lebanon. We worked hard to push the government to join this important initiative and the Committee has issued a specific recommendation on this.”

While Lebanon’s oil and gas extraction has not yet come on stream, the Public Works and Energy Committee recognised the importance of establishing a regulatory framework and mechanisms to deliver transparency in the sector before contracts with oil companies are signed. This will be crucial if Lebanon is to avoid the ‘resource curse’ phenomenon that has blighted many other oil-rich nations.

Since the discovery of 96 trillion cubic feet of gas and 86 million barrels of oil membership of EITI has been on the agenda.

To this end, WFD has been providing technical assistance to the Public Works and Energy Committee, to support its work on new legislation and overseeing Government energy policy. Building on this, the Committee is taking a leading a role in championing parliamentary oversight of the energy sector. Mr Kabbani explained, “We are also supporting the adoption of a bill entitled Transparency of Oil and Gas, so that we can ensure full transparency of this promising sector”.

In October 2016, Joseph Maalouf, MP and member of the committee, released a draft transparency bill, and in February 2017, WFD supported the Committee in reviewing a draft bill on oil and gas taxation. In the coming months, the Committee will be working with relevant ministries on drafting a proposal to establish a Sovereign Wealth Fund.

Through these activities, the Public Works and Energy Committee has continued to exert pressure on the Government to enforce a regulatory framework demanding responsible oil and gas exploration, ensuring that oil and gas companies adhere to international standards. After more than two years, the Committee had a break-through in autumn 2016, when the Government approved two decrees that had delayed the development of an offshore oil and gas sector since 2013.

Joining the EITI had been another issue that had faced blockages. Through supporting the initiative of the Public Works and Energy Committee to act as an effective forum for the discussion and promotion of energy policies and proposals, WFD has played an important role in assisting the Committee in its mission to push for EITI membership.

Looking forward, WFD will continue to assist the Public Works and Energy Committee in overseeing the adherence to EITI standards, playing a continuing role in oversight of the sector, and enforcing the legal framework on energy transparency once contracts are signed and the oil and gas come on stream.

(Top:photo: WFD organised workshop in Beirut with the Public Works and Energy Committee)
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Case study: Lebanon’s energised parliamentary oversight

Are Lebanon’s oil and gas reserves a blessing or a curse? “It is definitely a blessing,” says Joseph Maalouf, an MP in the Lebanese Parliament. “The challenge is going to be in the management of the sector. It must be done in a transparent fashion, otherwise we will make a curse out of it by not re-establishing the trust that should exist with the Lebanese population.”

Moves to exploit Lebanon’s reserves, estimated at 96 trillion cubic feet of gas and 865 million barrels of oil, have been an issue of acute sensitivity for the country. Wrangling over the appropriate legislative framework has frustrated observers, contributing to a broader problem facing Lebanon’s politicians. “There is a big lack of confidence between the citizen and the elected official, it’s a huge trust issue,” MP Maalouf explains. “This lack of trust is causing a lot of assumptions, accusations and stereotyping that corruption is everyone’s practice.”

Lebanon’s Parliament can play a critical role in addressing this. Its oversight role is being championed by Mohamad Kabbani, who has been a pioneer in holding the executive to account ever since becoming Chair of the Public Works, Energy and Water Parliamentary Committee in 2000. This has not been easy in what he calls a “paralysed” political context. “Sectarianism protects corruption,” MP Kabbani explains. “That is not theory, this is practice. When I conduct oversight work it is interpreted as being sectarian. I am depending on the facts, but they say I am being political against the minister.”

One way of helping to reduce this impression is by strengthening institutions – both that of Parliament and the Committee in question. Westminster Foundation for Democracy’s programme in Lebanon is doing this by building the Public Works Committee’s capacity to review and contribute to the Government’s oil and gas policy, ensuring that profits stimulate growth and development for the country. Other committees are also benefiting from technical advice and expertise and support for their public hearings and consultations. This work has already seen the preparation of a draft law to introduce a sovereign wealth fund, a key mechanism to ensure that oil profits are used to invest in the economy and benefit the Lebanese population; the publication of a handbook for legislators to help MPs gain a deeper understanding of oil contracts; and an update to the 2007 petrolum policy in line with modern requirements.

lebanon-eiti-meeting-2As part of this approach, in mid-2016 MPs were given an opportunity to consider the benefits of signing up to the Extractive Industries Transparency Initiative, a worldwide effort to promote exactly the kind of openness on natural resources supported by MPs on the Committee. Presentations by representative from the World Bank made the case for membership, winning MPs over. “This is an important initiative in achieving transparency in the field of oil and gas,” MP Kabbani says. He and his Committee encouraged the Parliament to adopt this recommendation. The Parliament’s Speaker, Nabih Berri, is now among the signatories to this proposal, demonstrating the significant influence of the Committee’s work.

It is a prospect which is being welcomed by campaigners and industry bodies alike. Wissam Zahabi, Chairman of the Lebanese Petroleum Administration (LPA), told WFD after the session: “I believe that providing access to open data will empower the government to gain trust of their citizens and empower individuals, the media, academia, civil society, and business to make better informed choices, expectations and judgements regarding the oil and gas sector in Lebanon.”

Mr Zahabi hopes that the Committee’s role in influencing debate on this issue could be decisive. “The fact that the energy committee endorses such a step could be a push for the Council of Ministers to take the decision, since the EITI should be announced by the government,” he adds. “The LPA has already presented the file of joining the EITI to the Council of Ministers and this complements our lobbying efforts.”

parlement-signIt’s not just the oil and gas sector which will benefit from this work. Support for MP Kabbani’s Committee is also providing an example of the value of effective committee work, encouraging others to replicate its approach. Both the Committees of Finance and  Information Technology are now engaging in oversight work, building the Parliament’s ability to represent citizens and improve policy. As this culture grows, MPs hope Parliament can provide the space needed to address some of Lebanon’s most pressing problems.

MP Maalouf sets out a vision of a Parliament without sectarian affiliation, instead based on “competencies, skills and patriotism”. But he is realistic: “I don’t think we will ever get rid of the realities, the presence of religions that live with fear.” The challenge is therefore to make the Parliament serve more effectively as a democratic, professional, responsive legislature.

This really matters. Following the YouStink Movement, Lebanese citizens are demanding greater accountability, transparency and delivery in democratic and social reforms by those in power. The growing poverty and unemployment and social pressures increase the pressure on legislatures to represent their citizens’ concerns. As a result of the social movement, there is an increasing need for the Lebanese parliament to become more open, accessible and representative. In 20 or 30 years, MP Maalouf hopes, this can be achieved. “I tell you what I dream,” he says – “to live the democracy we claim to have.”

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