Marketplace Middle East - Blog
Pipeline Politics

There is a nasty tug of war going on. It does not involve two teams pulling at ropes, but two consortiums wrestling to see their pipeline prevail. This big time struggle will certainly have implications for the Middle East, but it is too early to tell just how.

The Summit on Natural Gas for Europe and Security and Partnership recently brought together 29 leaders and ministers to Sofia, Bulgaria. They signed a declaration to support the “rapid development of international gas infrastructure … to guarantee diversification of gas supplies.” Nice words indeed after Europeans saw their gas supplies interrupted every year for the past three years, but it brought us no closer on how to get there.

In case you missed the story on our program, Turkey is positioning itself as a key transit point for the Nabucco pipeline, a 3,300 kilometer project that can take gas from the Caspian Sea region to Europe. Backed by the European Union and the United States, it would cost nearly €8 billion to pull off.

In the other corner (considering this a heavyweight boxing match) is the Russian backed South Stream project, weighing in at €10 billion. Italy’s Eni is involved and would take gas from Russia, under the Black Sea, to Bulgaria and beyond. It also helps in terms of political clout that Europe’s largest economy Germany has long established ties to Moscow as well.

Turkey’s President Abdullah Gul said the “necessary political will” is there in his country to implement the project, but it does not seem to be anywhere else. As veteran oil and gas analyst Mehdi Varzi said, I am just curious why they (Europe and the U.S.) are not putting their weight behind it.

We are expecting a decision on whether to proceed with Nabucco by June, but in the meantime there is a lot of scrambling and lobbying going on with those who control the gas -- Azerbaijan, Turkmenistan and Kazakhstan. While this real life, high stakes drama plays out, Middle East players are beginning to show their cards on the other precious fossil fuel -- natural gas.

Qatar is way ahead of anyone else here,” says Varzi, and that is a fair bet considering the amount of money the nation is putting into the Ras Laffan gas operation.

"Ras Laffan is the future of Qatar, simply because of the reserves. This is the gas city of the world and the gas city of Qatar," says Faisal Al Suwaidi, CEO of Qatargas.

The tiny state sits atop the largest single gas field in the world and ranks number three behind Russia and Iran in reserves. The North Field is feeding natural gas to the United Arab Emirates and Oman via the Dolphin Energy project, and loading up giant LNG tankers for markets such as Britain, with Poland knocking at the door as well.

Iran this past week sent signals that it is gearing up to develop the same field on its side of the territorial divide, South Pars. Iran’s state export gas company said China’s Sinopec may join Repsol of Spain and Royal Dutch Shell to develop the Persian LNG project. The Iranians say a decision is expected by mid-May.

Varzi, originally from Iran, says the country’s “energy development is very confusing and it arises from what I call political bickering in the country.”

It is obvious that the weight of sanctions is forcing companies to tread a fine line -- they want to be involved in future developments, but they want to see political daylight before rushing ahead. Industry analysts say we could witness the Obama effect, with the olive branch extended to Tehran, but it will take the June elections to pass before we begin to see clarity on that front.

The so-called peace pipeline is also in the mix. It could deliver gas from Iran through Pakistan to India. We have heard about it for years, but again resistance from Washington has stalled activity.

That is the backdrop for the region’s number one and two holders of reserves -- but with Saudi Arabia, UAE and Algeria all in the top ten, future prospects get interesting.

The current price scenario is complicating matters. While oil is trading at around $50 in this global slump, natural gas is at the equivalent of $20-$30 a barrel. Unlike oil, the bulk of all shipments are passing through pipelines these days, which means you need both upstream partners and downstream customers to make this equation work.

Because developments (minus Qatar) have been slow off the mark, the Middle East is not awash with available natural gas. All the buildings and desalination plants require fuel to run them – gas is the cleanest burning and cheapest alternative available.

So the headline number of the region sitting on 45 percent of the world’s gas reserves looks promising; getting it to market remains the challenge.

The Perils of 21st Century Piracy
We are becoming experts of geography, or at the very minimum, we're intrigued by the region’s sea lanes -- and 21st century piracy off the coast of Somalia.

Needless to say, having two key arteries for hard goods and up to 40 percent of the world’s oil passing through an area can pique one’s interest.

Welcome to the Suez Canal, feeding into the Gulf of Aden and the Strait of Hormuz that funnels into the Arabian Sea. The two passageways were taken for granted until the swashbuckling style of these less-than-modern-day pirates threw trade off kilter and confidence for a loop.

We have heard from scores of experts on the subject, with the average television viewer peering into the coverage wondering the obvious: why is it that a flotilla of military vessels cannot wrestle complete control of the seas off the coast of Somalia?

Now that U.S. Secretary of State, Hillary Clinton has expressed Washington’s desire to rally for tighter international patrols and coordination, we are likely to see more action -- but also more challenges -- from the pirates.

First and foremost, in one of the poorest and least governed countries in the world, these pirates must believe the upside potential is superb, with the downside risks relatively controlled by their track record of success. According to a handful of sources, the pirates brought in about $80 million dollars last year –- with the Sirius Star carrying a $100 million payload of Saudi crude the biggest target to date.

In researching this topic you learn quite a bit along the way. Slow-moving ships are the most vulnerable, anything travelling under 16 knots. The very large crew carriers (VLCCs) are rare targets, unless carrying a huge load, which slows them down.

Martin Murphy is one who now spends his life tracking the perilous seas, and says we may be lacking perspective. He is the author of "Small Boats, Weak States, and Dirty Money: Piracy and Maritime Terrorism in the Modern World." His research indicates that no more than one percent of the ships passing through the Gulf of Aden have been either attacked or hijacked.

"The bigger impact is the psychological effect on the owners and the operators. Almost any crew man that has been pirated over any stage of their career never goes to sea again," says Murphy.

Captain Richard Phillips, as a free man, standing on soil must wonder whether his life should still be on the high seas.

When exploring the numbers, it would appear that shipping companies are steering clear of the Gulf of Aden for security reasons. Murphy invites us to think again -- he says it is more about the fees being charged by the Suez Canal Company and, therefore, the Egyptian government.

Revenues through the Suez Canal are down 21 percent year over year, partially due to those higher fees and the fact that trade is projected to be down nine percent this year, according to the World Trade Organization. The number of vessels going through the canal was down 20 percent in the same period for these very reasons.

Passage fees, according to those tracking the industry, have surged up to between $300,000 and $600,000 per vessel. Specialty piracy insurance only adds an additional cost along the way since Lloyds of London has declared large parts of the Gulf of Aden a war risk.

Sounds ominous, but again we need a bit of perspective according to Murphy. "When you compare Somali piracy to piracy in other areas of the world," says the King's College scholar, "The level of violence we see in other parts of the world, Nigeria, the Philippines, Somali piracy is uncomfortable but relatively benign."

That is certainly not our perception at the moment, but images can outgun reality anytime in this world of 24 hour news and internet activity.

This brings us to another point: the lasting impact we may see as a result of the latest rounds of attacks. Security will be fortified. The pirates will raise the stakes, and new strategies to counter their attacks are being discussed.

In a post 9/11 world, I asked Murphy if it wouldn’t be wiser to deploy armed marshals on board, as some of the airlines do. "This is a lively debate within the maritime shipping community," he said, adding that the bulk of the shipping community believes that armed guards "are inappropriate for merchant vessels." Some believe putting armed guards on board will only import more danger.

If one were to take a helicopter view of the situation, using a mix of security and diplomatic tools makes the most sense. Yes, it needs to be addressed onshore with the governments (or quasi-governments); yes, a flotilla of military ships to serve as escorts should continue; and finally, some added security onboard to fend off these renegades seems not dangerous, but logical.

And finally, let’s not overlook the impact this may have on the region in general. Countries that line the Red Sea and the Gulf of Aden have active ports; even the smaller territories such as Djibouti have attracted foreign direct investment on the back of regional growth. If the pirates are not brought under control, don’t expect foreign investors to ignore the dangers that are flaring up far too often.

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Round three of the G-20
It is not easy to round up 20 leaders, have them more or less sing from the same hymn sheet and finally agree to a communiqué that was long on bold headlines but fell short in the way concrete measures.

That was the outcome of round two of the G-20 meeting in London. This, indeed, is the worst downturn witnessed in seven decades, so it may be worth viewing the road to recovery as a 15 round boxing championship.

Behind the scenes, we at CNN had a healthy debate on what the actual package was worth -- was it $750 billion or $0.5 trillion for the International Monetary Fund. Wait a second, how do we get to $1.1 trillion? In actual fact, $250 billion of that total is being set aside for trade credits, with another $100 billion for developing countries. However, the devil is in the detail. Who will have access to those funds? Moreover, who will be putting up the fresh capital to make that happen?

These are key questions that were not addressed in London, but they are waiting for round three in Washington, at the spring meetings of the IMF and World Bank to go to the next level.

Since the financial community in general (including financial journalists) is so conditioned by the former G7 process, very few tuned into the emerging voices of the 21st Century economy, notably China, Saudi Arabia and Russia –- the new surplus countries. Not one of them offered fresh funds on the new equation of $1.1 trillion.

During the deliberations, I was on the phone with a Saudi banker who was waiting for a call from the London delegation to see what may be put on the table. I was told the Kingdom was not asked to offer more funds to the big number.

Now, there are many interpretations along that front. First and foremost, China and Saudi Arabia probably feel they have offered more than their fair share; after all they are major buyers and holders of U.S. Treasury bonds. Like the Japanese, who put up $100 billion in loans to the IMF, Beijing and Riyadh could have done the same, but it seems quite clear after the dust has settled that they were not convinced to do so.

Which leaves us where in the process? Just prior to the G-20 meeting, I interviewed the First Deputy Managing Director of the IMF, John Lipsky, in Vienna. While addressing the OPEC seminar and acknowledging the vast stimulus provided by $45 dollar oil, he expressed concern that there may be stimulus fatigue in 2010. Collectively, G-20 countries have spent about 1.8 percent of their GDP to free up capital in an attempt to put air back into the economic balloon. That is a record according to Lipsky.

What is not clear from the vague language of the final communiqué in London is what happens next year. German Chancellor Angela Merkel and French President Nicolas Sarkozy made it clear they were not offering more money just yet and they wanted to move to towards a policy agreement for global financial regulation. All agreed that better regulation is needed; how to get there was not defined. So, that is big issue number two for third round of talks in Washington.

If there is a key issue number three for round three, it has to be the fate of the Doha Development Round. While in Brussels to drum up support for his efforts, WTO Director General Pascal Lamy talked of the need to ward off protectionist measures within the current rules of the Geneva-based organization and offer a bit of "blue sky" to developing countries that cannot simply open their financial taps and spend a record amount of money.

In the communiqué there was language to cover off the financial markets (investors get extremely nervous at the thought of trade barriers), but leaders were short of concrete answers or a firm timeline to get the Doha Round done and dusted. What was agreed to, cleverly inserted by Lamy and British Prime Minister Gordon Brown, was a "name and shame" game. The WTO will identify those who are erecting barriers to free trade and they will be asked politely to watch their step. Lamy will have a great deal of work to do since the World Bank identified 17 of the G-20 as being overly aggressive with their trade claims within the current WTO framework.

There are, of course, some very worrying hurdles to cross. The Paris-based OECD is projecting that the industrialized countries will decline by a record 4.3 percent. The WTO says trade is already collapsing with a record decline of nine percent projected.

These are the numbers that make up the real story that could be outshone by the glare of photo-ops, a new U.S. president and one huge headline number of $1 trillion, but this fight against a global recession will only get more challenging in the later rounds.

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Bridge Builder
A visit to the bustling city of Istanbul captures the essence of Turkey’s evolving role in the world.

The Bosphorus strait divides Europe and Asia. The giant bridge of the same name that crosses it links the two continents together.

Beyond the symbolism of the bustling city, Turkey is currently experiencing an expansion of its role as a bridge builder -- largely due to the new occupant in the White House.

It is very symbolic that Barack Obama chose Turkey as his first port of call in a Muslim country during his first 100 days in office.

Turkey remains secular, continues to knock on the European Union’s door for membership, and has a handful of relationships in the Middle East that could be vital in the peace process.

During an exclusive interview in Brussels, Turkey’s President Abudullah Gul provided more than a few glimpses into the shuttle diplomacy, with Washington’s blessing, that is now underway.

President Gul recently met with the Supreme Leader of Iran Ayatollah Ali Khamenei -- it was no accident that it was just days before President Obama reached out with his message to Iran.

"I was able to speak in a very free and sincere atmosphere. I am sure they are listening, they are deliberating and I am sure that at the end when they are convinced that all these messages are sincere, then we can see action," said Gul on the sidelines of the European Business Summit.

Asked whether the elections will need to pass before there is a response to President Obama’s olive branch, Gul said, "The politicians before the election, they have to be populists. So, therefore after the election maybe these serious issues can be handled better."

In the meantime, Turkey is sustaining its shuttle diplomacy with Israel and Syria.

Gul, it is fair to say, is very positive about the change in leadership in Washington and the gestures overall to the Middle East.

"[Middle East leaders]should not miss this opportunity because President Obama is saying we are going to listen to you. We are not going to enforce our own policies on you. This is a good starting point."

While Middle East politics evolve, Turkey is filling another role for the West -- as an energy transport hub to counterbalance the inconsistent gestures from Moscow on supplies to Europe.

Washington was a big supporter of the BTC –- the Baku, Tbilisi, Ceyhan oil pipeline that runs from Azerbaijan to Turkey’s south-eastern coast.

The next goal is the potential building of the Nabucco gas pipeline that will deliver energy from Central Asia to Austria via Turkey. There is some good old fashioned wrangling behind the scenes over transit fees and local supplies for Turkey, while Russia is busy trying to tie up the gas supplies through its network.

But the fact is Turkey will play a bigger role on this front in the next decade.

"It is a bridge between East and West," says Nobuo Tanaka, Executive Director of the International Energy Agency. "In the energy sector it certainly contributes as a very important bridge of resources of the Middle East to the West."

According to the Center for European Reform, Turkey is near 70 percent of the world’s proven reserves of natural gas. Neighboring Iran and Iraq have still not exploited their natural gas exports.

President Gul calls Turkey position in this geo-political game "a unique role."

"You have to diversify the sources. If you have the sources you should secure transportation."

This sounds simple but, of course, it is not. With Turkey eager to see accession talks to the European Union move at a more rapid pace, there are concerns in Brussels that the Turkish leadership is playing the energy card.

Turkey can help deliver energy to the West, especially Europe, but expect a price tag to be attached.

As the former President of TUSIAD, the powerful Turkish business association noted, "There are some powers, there are even some companies, that take Turkey for granted. That there is a particular role for Turkey to play and that is it. I don’t think that it will evolve that way, in that simple manner."

No one ever said straddling both sides of the fence is easy; straddling two continents is even more complicated and yes more interesting.

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John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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