Reinforcing Transparency in Subcontracting in the Lebanese Oil and Gas Sector
on 4/1/2019

Executive Summary

This policy brief analyzes the subcontracting process in the nascent Lebanese oil and gas sector from the perspective of transparency. The possibility that contractors and subcontractors engage in corrupt contractual arrangements, away from governmental or public scrutiny, is especially high in countries with weak institutions and ineffective civil society organizations. Examples of these corrupt arrangements include the award of contracts to firms in which politically exposed persons hold stakes directly or indirectly. Another example is the possible exclusion of qualified suppliers from competing for contracts in order to benefit specific subcontractors. In these cases, Lebanese citizens not only stand to lose the immediate economic benefits of the natural resources of their country but also can suffer from slower economic growth and a degradation of the rule of law in the long run.

The policy brief reviews the regulatory framework of subcontracting in the Lebanese oil and gas sector. It offers recommendations aimed to better shield Lebanon from the risks of corruption associated with the award of contracts to subcontractors. Up to this day, very few international benchmarks exist with respect to subcontracting per se. Faced with such paucity of international standards, the brief surveys the international best practices applicable to contracting in oil and gas and constructs a suggested list of best practices on subcontracting. The policy brief evaluates the governance of subcontracting in the Lebanese oil and gas sector in light of that list. Three legal instruments stand out in the Lebanese regulatory framework of subcontracting in oil and gas. The Offshore Petroleum Resources Law (‘OPRL’) of 2010 provides the general legal framework under which the Lebanese government contracts with oil companies to explore and produce oil and gas. The OPRL is also the main instrument which enables oil companies to enter into agreements with subcontractors. The Petroleum Activities Regulation (‘PAR’) of
2013 is an executive decree which delineates further the rights and obligations of the parties involved in the exploration and production of oil and gas, including subcontractors. The Exploration and Production Agreement (‘EPA’) of 2018 contains the specific terms of the agreement between the Lebanese government and three oil companies, Total, Eni, and NOVATEK, to explore and produce oil and gas in Blocks 4 and 9 of the Lebanese Exclusive Economic Zone.

This policy brief analyzes the strengths and weaknesses of the current regulatory framework of subcontracting in the Lebanese oil and gas sector. Important anticorruption mechanisms are already included in the aforementioned legal instruments. For example, all actors involved in Petroleum Activities are required to collaborate with the Lebanese government to prevent corruption and may not engage in any activity which could be construed as corruption (Art. 162 PAR). Likewise, every Right Holder is mandated to notify the Lebanese Petroleum Administration (LPA) of any arrangement or agreement to be entered into in connection with the Petroleum Activities in which such a Right Holder or its Affiliate has a direct or indirect interest that could reasonably be expected to conflict with the interests of the State (Art. 42 EPA).

Nevertheless, the policy brief shows that more can and should be done in order minimize the risk of corruption in subcontracting and to ensure that the oil and gas sector is effectively contributing to the development of Lebanon. To this end, it highlights several aspects of the PAR and the EPA which should be reconsidered to reinforce transparency and public oversight of subcontracting. Luckily, the OPRL imposes no legal constraints on reinforcing transparency in subcontracting through executive decrees and amendments to the EPA. Consequently, the proposed reforms can be put into effect without going through the laborious legislative process.

The policy brief recommends that the regulatory framework of subcontracting in the Lebanese oil and gas sector should be amended to achieve the following goals:
• Allowing all potential suppliers to participate in the competitive bidding process without any restrictions as long as the contractors’ requirements are met.
• Guaranteeing the publicity of the beneficial owners of subcontractors and the accessibility of the awarded contracts.4
• Minimizing the risk of corruption by excluding the holders of public office whose participation in the subcontracting process would give rise to conflicts of interest.
• Monitoring the preferential treatment obligations in the award of contracts and efficiently resolving any related disputes.

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