Ali Noureddine
This article was translated from Arabic.
Lebanon’s financial crisis has prompted the government to explore measures that would allow it to save vital industries like the energy sector from total collapse. The latter has been plagued by decaying infrastructure encompassing power plants, distribution, and service lines since the 1990s, resulting in nearly day-long power outages that predated the country’s present financial problems.
Since the onset of the crisis, the energy sector’s troubles worsened, with Lebanon’s cash-strapped government unable to acquire much-needed fuel for its power plants or finance grid maintenance and operations. The budget deficit and the Central Bank’s foreign currency reserves, which the government could draw from to buy gasoline, have been the primary challenges facing the Lebanese government. As a consequence, the state-owned Electricite du Liban (EDL) has had to intensify power cuts, reducing daily power to two to three hours.
Financial crisis and electricity woes
In the midst of this financial crisis, the Lebanese government has spent the last two years exploring for alternatives to help the country get the most power while staying within its budget. In this regard, it’s important to note that the demand for solutions in the power sector isn’t only driven by the public’s need for this service.
Before the IMF could approve a loan arrangement with Lebanon, the International Monetary Fund (IMF) urged the Lebanese government to present a comprehensive reform plan for the energy industry. The latter would first allow for 24-hour power delivery, followed by a rise in EDL charges to assist the government close the budget deficit. However, it is generally understood that the Lebanese people would be unable to pay any rate increases until EDL supplies uninterrupted energy, eliminating the additional cost of private generators. This viewpoint emphasizes the relationship between resolving the issue of power outages, EDL’s capacity to change its prices, and the elimination of the budget deficit.
To understand why the IMF insists on a required solution for EDL’s financing problem as part of the country’s larger financial reform strategy, consider that money given by the Lebanese government to EDL since the 1990s are comparable to 40% of the country’s total public debt. Since then, the average annual transfer made by the government has been equivalent to half of the state budget deficit.
In other words, EDL shortages have contributed significantly to the country’s public debt and annual budget deficit, prompting the IMF to recognize that any financial reform would be unachievable without first addressing the energy sector’s funding issues. It should also be emphasized that the Lebanese government has lost USD 30 billion as a consequence of payments made to fund EDL’s deficiencies between 2010 and 2020 alone.
Egypt’s gas export project
With no financial resources, Lebanon is now required to secure power as part of its comprehensive energy plan, prompting the government to pursue Egypt’s “gas project.” The proposal entails sending gas to Lebanon via pre-existing, underutilized pipelines that connect Egypt’s natural gas reserves with Northern Lebanon via Syria and Jordan. EDL will be able to use the gas in the Deir Ammar Power Plant to generate a fifth of Lebanon’s energy demand once it arrives at its final destination.
The project’s second phase involves shipping Egypt’s natural gas to Jordan, where it will be utilized to create electricity in Jordan’s power plants before being sent to Lebanon via Syria. As a consequence, Lebanon will gain from the project on two fronts: Egyptian gas will be imported directly to Lebanon, and power generated by Egyptian gas will be imported from Jordan.
The ambitious project requires funding in order to pay for the gas that would need to be imported over the next several years, as well as the necessary maintenance operations to renovate the gas pipelines that connect Lebanon and Egypt. Funds are also required to maintain the power lines that connect Lebanon and Jordan, as well as to cover the cost of electricity production in Jordanian power plants using Egyptian gas.
For that reason, the Lebanese government turned to the World Bank (WB) to negotiate a long-term loan of USD 500 million, to cover the next five years. In return, the WB put in place a set of conditions that include tying the ambitious project to a comprehensive plan for the electricity sector, before it would consider funding it. Consequently, the Lebanese Ministry of Energy and Water (MEW) worked on a plan for several months, before it was finally approved by the council of ministers in mid-March.
Lebanon was eventually able to complete the rehabilitation and maintenance work, as well as reach the necessary agreements with Egypt, Jordan, and Syria on the project’s specifics and the contracts under which it would operate. The final piece of the puzzle is the World Bank’s signoff of the necessary credit to purchase gas, which were delayed due Lebanon’s parliamentary elections, held on May 15. It’s worth noting that Lebanon would still need special permission from the US administration to explicitly exclude the project from the Caesar Syrian Civilian Protection Act, which prohibits any financial transactions with the Syrian regime seeing as the latter will receive a portion of the natural gas that will pass through its territory.
If Lebanon obtains WB clearance and US exemptions in the next months, the government will be able to deliver up to 10 hours of energy per day by the end of the year, based on the comprehensive energy plan it has been drafting. Furthermore, starting 2023, the government will be required to steadily boost its electrical supply over the next few years, with the purpose of reaching 24 hours of supply a day by 2026.
The Arab Gas Pipeline
The pre-existing gas pipes, which had been off the table since 2012, have resurfaced as a result of the country’s financial crisis. The Arab Gas Pipeline was first built in 2003, and it proceeded through numerous phases until finally connecting to Northern Lebanon in 2009. The pipeline was used to import around 28 million cubic feet of gas per day to power Lebanon’s northern power facilities. However, the crisis in Syria directly hampered the operations, forcing it into complete shutdown. The pipelines connecting the Sinai Peninsula were also heavily damaged in 2012 due to instability and security incidents.
If the Arab Gas Pipeline is resuscitated it will become a worthy experience to build upon, by exploring the possibility to link the network to Turkey from the north at a later stage and to Iraq from the east. Such a project will also enable the gas pipeline to export any outstanding production to European markets through Turkey, or to the Iraqi market, which relies on Iran for its gas supply.
The US government has backed the concept of resurrecting the Arab Gas Pipeline, promising to grant the required exemptions under the Caesar Syrian Civilian Protection Act. This sort of potential project might help reduce Iraq’s dependency on Iranian gas in the future while also providing an alternative to Russian gas for Europe.