Lebanon’s Oil Backed Loan, a lost Strategic Gamble?
on 8/3/2020

The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of any third party.


The First Offshore Dry Well

On the 27th of April 2020, and on behalf of its partners ENI and NOVATEK, Total E&P Lebanon declared the end of its first offshore drilling campaign in the Block 4 located 30 kms north of Beirut. Results of the Byblos 16/1 exploration well pointed to gas shows and lacked major hydrocarbon accumulations in the targeted reservoir [1] [2]. The Lebanese Minister of Energy and Water Mr. Raymond Ghajar held a rescue press conference to alleviate public disappointment and to stress on the untapped hydrocarbon potential of Lebanon. As growing and alarming concerns are raised nationally and internationally on the delicate financial, economic and social crisis affecting the country (superseded by the COVID-19 epidemy), the government opened the door to intensive discussions with the International Monetary Fund (IMF) and International Creditors.  In such a gloomy period for Lebanon, the spudded dry well is not necessarily bad news for the country’s short-term political and economic restructuration. 


The Time Factor

Firstly, on a scientific and geological perspective, the first offshore well brought valuable information on the Lebanese subsurface and will update and refine the geological and petroleum systems models proposed by geoscientists along the past couple of years [3] [4] [5]. As this northern sector of the Levant Basin offshore Lebanon is still in early exploration phase, the chances of discovering a major hydrocarbon accumulation are usually estimated at 15-20% and thus spudding a dry well is not alarming. 

Secondly, this unexpected news increased the national awareness on the risks and long timelines associated with the hydrocarbon exploration phase and obstructed the attempts from the political elite to use energy resources as a tool for bargaining. Nevertheless, it is crucial to allude that the untapped potential of the Lebanese offshore might still be lucrative.

The 2nd Licensing Round that was initially set by the Lebanese Petroleum Administration to the 31st of January 2020 has been postponed to the 30th April 2020 and then to the 1st of June 2020 due to the COVID-19 health crisis [2]. As exploration costs are high in such deep to ultradeep water settings (>1500m) and due to the current global economic and health context, delays in further exploration are expected and financial returns further postponed. 


Commodity for Loans Strategies

The Lebanese government rescue economic plan highlights how delicate the situation has become in one of the world’s most indebted countries with 53% inflation this year, 48% of population impoverishment, $28 billion in external balance of payments financing needed by 2024 [6]. This economic plan proposes a rebalancing of the budget through better tax collections and reforms, public sector and bank restructuration as well as recovery of stolen assets and revamping the monetary peg. 

However, the Oil Weapon that was once thought to be a heavy weight and a turning point in the negotiations with International Creditors vanished from the political and economic debate. The latter might reveal to be a “decent” news for the economical restructuration plan proposed by the Lebanese government as more efforts are set on internal structural reforms rather than a volatile commodity-oriented economy that spends billions from its energy revenues to re-pay debts. Here, the Oil for Loan Strategic Gamble seems to have (coincidentally) failed.  

The IMF along with many International Creditors including China and Russia back their economic relief plans to needy countries by loan securities, set through collateralized sovereign debts. The debts comprise bonds/loans backed by existing assets or future income owned by the sovereign or government as state owned enterprises, physical commodities destined for export markets (i.e., oil, gold, diamonds) or future revenue streams [7]. Collateralization is covered in a contract in the event of a default, a creditor would obtain control over the said collateral. 

Latin American (e.g., Mexico, Venezuela, Brazil), African (e.g., Angola, Chad, Republic of Congo, Sudan) and Middle Eastern (e.g., Iraq, Iran) countries have benefited from those loans along the past decades but have later been heavily criticized for their lack of transparency, accountability, and rampant corruption [8] [9] [10]. In Latin America, the total estimated loans by Chinese banks amounted to USD 141.2 billion in the period 2007‒2016, of which roughly USD 98 billion—or 70 per cent—was held in reserve for the oil and gas sector [11]. Negative aggravated outcomes in times of high commodity volatility as in 2014 and 2019 affected both sovereigns and lenders. The Sino-Venezuelan oil-for-loan deal become China's high-stakes gamble and Venezuela’s main commodity loss, [12] while Angola’s oil-backed debt drained much of its Oil to  secure debt payments leaving it with much less revenue for subsidy plans [7]. In such countries inflation rates are skyrocketing, the social gap is increasing with poverty rates exceeding 40% of the population [13]. 


Awaited Structural Reforms of the Lebanese Economy

The previous case studies show that relying on commodities (i.e., Oil and Gas) -and without deep economic structural reforms- to reimburse debts could jeopardize the economic and financial health of a sovereign and may lead to socio-political instabilities [8] [9] [10]. McKenzie (2017) primarily advised the Lebanese government [14] to reform the agricultural, industrial and touristic sectors. The latter will help increase the country’s revenues and attract foreign regional and international investments. However, the 2019-2020 turmoil shifted the national attention towards three key issues, a. the shortage in foreign currency reserves, b. the fluctuation in the currency exchange rate and c. control measures on capital withdrawals from banks. Adding to that the long-lasting corruption and renewed political tensions.

Creditors (including the IMF and the CEDRE Conference donors) stressed on the need for deep tangible structural reforms of the Lebanese economy to conform with the international policies and regulations [6]. 

Official negotiations with the IMF kicked off on the 13th of May 2020 [15], and since then, many hardline exchanges around needed reforms are weighing heavily on the dire socio-economic and political situation, and in this long process, the Oil and Gas commodity is no longer a game player (at least for the short term).

Currently, major Oil and Gas Players in the Mediterranean (Total, Eni, ExxonMobil, Qatar Petroleum) have officially informed the Cypriot government of delays in their hydrocarbon exploration timelines due to the current economic and health situation to 2021 [16] while Iran is kicking off its tight trade and military collaboration with China with Oil being at the center of discussions [17].  



[1] Total-Lebanon Press Release

[2] Lebanese Petroleum Administration

[3] Nader, F.H., 2011. The petroleum prospectivity of Lebanon: an overview. Journal of Petroleum Geology, Vol. 34(2), pp 135-156

[4] Hawie, N; Deschamps, R; Granjeon, D; Nader, F.H; Gorini, C; Muller, C; Montadert, L; Baudin, F 2015. Multi-scale constraints of sediment source to sink systems in frontier basins: a forward stratigraphic modeling case study of the Levant region. Basin Research doi: 10.1111/bre.12156

[5] Bou Daher, S., Ducros, M., Michel, P., Hawie, N., Nader, F.H., Littke, R.,2016. 3D thermal history and maturity modelling of the Levant Basin and its eastern margin, offshore-onshore Lebanon. Arabian Journal of Geosciences DOI 10.1007/s12517-016-2455-1

[6] Reuters Business News April 6, 2018

[7] Imam, P., 2019 Collateralized Sovereign Debt – Costs and Benefit. International Monetary Fund African Department

 [8] Meidan, 2016. China’s loans for oil: asset or liability? Oxford Institute for Energy Studies.

[9] Downs et al., 2017; China’s National Oil Companies Return to the World Stage: Navigating Anticorruption, Low Oil Prices, and the Belt and Road Initiative

[10]   Vasquez, P., 2019. China’s Oil and Gas Footprint in Latin America and Africa. International Développent Policy | Revue internationale de politique de développement. Article 11.1 | 2019

 [11] Gallagher, K., P. and Myers, M., 2016, “China-Latin America Finance Database,” Washington, DC: Inter-American Dialogue.

[12] Wang, Q., & Li, R., 2016. Sino-Venezuelan oil-for-loan deal – the Chinese strategic gamble?  Renewable and Sustainable Energy Reviews Volume 64, October 2016, Pages 817-822

[13] World Bank

[14] McKenzie report

[15]. Reuters

[16]. Financial Mirror

[17] New York Times


Photo Source: Bloomberg

Leave a Comment