Marketplace Middle East - Blog
Qatar’s Masterplan
There was a monster of a boardroom battle taking place in the heart of Germany’s industrial base in Stuttgart. On one side, there was Wendelin Wiedeking of Porsche and on the other Ferdinand Piech the Chairman of Volkswagen and a member of the one of the founding families of Porsche.

After intense board meetings, Wiedeking was forced out after a failed takeover attempt of its larger rival VW. The story itself is not that unusual with nasty power-plays the norm; what makes it more intriguing is the role of the third party, which happens to be the ruling family of Qatar.

Wiedeking was hoping to get a $10 billion investment from Qatar for an up to 25 percent stake in Porsche and the option to buy around 20 percent of VW. Qatar was Wiedeking’s white knight that would help the German sports car maker stay independent.

Just a month ago, German media was reporting a deal was “imminent” and Qatar was poised to add a prestige brand to its portfolio. The story was not written that way. Instead, Qatari officials led by the Prime Minister Sheikh Hamad bin Jasim bin Jabir al-Thani did not play their hand too early. As they say here in London, they kept their powder dry, wisely waiting for the German tug-of-war to finish.

This offer to put that much into play by Qatar is interesting on many fronts. It for one would take Qatar into Germany, a new market and the largest one in Europe. We have seen the Qatar Investment Authority take stakes in Barclays Bank and Credit Suisse, plus supermarket chain J. Sainsbury. This deal is in a different league.

The sum would be the largest investment to date by a factor of two and could raise red flags of concern in Germany. Sovereign wealth fund specialist Sven Behrendt of the Carnegie Middle East Center in Beirut says that Germany recently passed legislation, similar to that in the United States, which calls for a review of any non-European investment. As one of the lead bankers flatly noted to me on background, there is no way the government would want any foreign entity to be the largest shareholder in a German icon, whether it is Porsche or Volkswagen. It gets even more complicated since the State of Lower Saxony is a 20.1 percent shareholder in VW.

The move by Qatar is also fascinating because it sheds light on the rapid evolution of the State. In an interview here in London, Qatar’s polished Minister for Economy and Finance Yousef Hussain Kamal took me through what were near bankrupt times ten years ago. That financial crisis led the country to focus internally and invest in the expansion of its oil and more importantly natural gas operations.

Today, Qatar is producing the equivalent of more than three million barrels a day if you combine their gas and oil exports. They have a surplus base of a half trillion dollars and it is growing rapidly.

Officially, their sovereign fund is “only” $65 billion and expected to hit $100 billion in a few short years. But even that number is a bit misleading. The Emir of Qatar and his cabinet have wisely spread the wealth into a number of entities, including the Qatar Foundation. A trip to Doha will quickly fill in the blanks if you have not seen what is being developed in hyper-speed.

As Minister Kamal noted, Qatar will use the benefit of being the largest natural gas exporter to build out three lines of additional regional expertise: financial services (especially the insurance market), health care and finally higher education and technical training.

The goal, the minister confidently states, is to be zero dependent on hydrocarbons by the year 2020, maybe a couple years later as a result of this current global crisis.

The crisis, by Qatari standards, has required capital injections into their banks and the cleaning up of real estate assets, but real growth this year is expected to be between 7-9 percent. That gives some insight of what is happening in Doha, why they have the capital to go abroad in a much more sizable way and how that all fits into Qatar’s Master Plan.
Signals along the Silk Road
The ancient Silk Road was arguably one of the most important trade routes with a history stretching back two thousand years, but it's today’s revitalization of those links between Asia, the Middle East and Europe that makes for fascinating viewing and deal-making.

Like the Silk Road which is going through its own rebirth, the Nabucco Gas Pipeline project came from the brink of extinction at the start of this year, to an actual signed memorandum of understanding this week in Ankara.

On Marketplace Middle East, we take particular interest because it is a classic example of how the Middle East is playing a role in shaping business and energy policies as a bridge between East and West.

For one, Turkey will serve as the key transit country for this gas pipeline, after the success of the BTC oil pipeline set up three years ago with a similar concept in mind.

Secondly, Middle East supplies will be essential for this project to get off the ground. Kurdish officials in Iraq expressed an interest in providing their energy earlier on and that was backed on a national scale by Nouri al-Maliki this week when he attended the official ceremony with leaders from five transit countries.

But this modern day Silk Road effort requires a big leap of faith to push ahead with the near $11 billion pipeline project.

"We have received clear signals from Azerbaijan, Iraq and Turkmenistan that gas will be available for European gas imports," said Reinhard Mitschek, Managing Director of Nabucco Gas Pipeline International.

If one reads between the lines, he may only be referring to Nabucco, but also to competing pipelines backed by Russia. In this large-scale game of geo-politics, no one wants to shut the door in the face of some of the major players, even if relations may be less than ideal at this juncture.

When asked if, for example, Azeri President, Ilham Aliyev was hedging his bets by supplying gas to Russia and other countries, Mitschek stated matter-of-factly they will diversify their exports to maintain, "industrial and economic relationships with Russia."

On this New Silk Road, the political winds can change direction rather quickly, so Central Asian leaders, literally squashed in between Russia, China and Europe are juggling those priorities and trying to keep all the balls in the air. Kazakhstan, the natural resource-rich state, with a bounty of oil, gas, coal and uranium, has oil pipeline connections to all three of those players.

Nabucco will launch in 2014 with up to 10 billion cubic meters of natural gas in the pipeline. Officials say about three times that amount is expected by 2020. That is when it will get even more interesting. To fill that "pipe," supplies will be needed from Iran -- which sits on the second largest gas field in South Pars.

In a recent interview on our program, European Energy Commissioner, Andris Piebalgs said with the cloud of Iran’s nuclear enrichment hanging over the economic sanctions regime in place, it is too early discuss that potential. In a game of carrot and stick, Turkey’s Prime Minister, Recep Tayyip Erdogan said he would like to see Iran’s gas as part of the Nabucco project. No date for that effort was announced.

A great deal needs to happen between now and 2020 for Iran’s gas to get the green light. Before that happens, international oil companies will have to re-engage in the country to prepare its energy sector for exports.

In preparation of this week’s Nabucco signing, I researched what the pipeline network looks like currently -- it resembles a spaghetti bowl of lines crisscrossing the terrain, and with a Russian bias.

This will begin to change with the Nabucco project, but Russian-backed pipelines are being built in parallel. One across the Baltic Sea to Germany, the Nord Stream, is costing about $10 billion. The other, the South Stream pipeline, crossing the Black Sea to Italy will cost about double that.

If you are wondering if all this new capactity will be needed, think again. According to Nabucco's Mitschek, up to 200 bcm of gas will be required from the East as production continues to drop in Europe.

This means that if all goes as planned and demand recovers along with the global economy, all three new arteries of energy will be welcomed in this new world order.

Nevertheless, as veteran energy analyst John Roberts of Platts said, "Russia has to observe the rules of the game much more closely." It is true that three years of winter gas interruptions by Moscow have forced all the players of Nabucco to get on with it.

As a result, the signals from The New Silk Road are getting the all clear. Let’s hope that geo-politics doesn't interfere in what may be a bold move in name of business.

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That creaking sound
The G-8 meeting in the Umbrian hills of Italy served less to inspire unity, and more as a historical turning point, marking the passage of a tired institution.

The G-8 or “Gee-Otto” as the Italians say is misleading by both description and substance. For one, the members are no longer the leading industrialized nations, with China now the second largest economy in the world. Number two, the G-8 does not and cannot live life in isolation. In fact, 16 leaders were invited, with China’s President Hu Jintao needing to duck out early to attend to protests back home.

There was little agreement from the core G-8 on the next steps to combat the worst downturn in six decades. Germany’s Chancellor Angela Merkel called for an exit strategy from the deficit spending and pump priming to inflate the global economy.

A global climate change commitment remains challenging -– despite verbal commitments -- as the developing countries focus instead on job and wealth creation. This should not be at the expense of the environment. As mobile phone technology helped developing countries leap-frog after years of underinvestment in that sector, so too can rapidly evolving green technologies. Environmental policy is a prime example of why the G-20 is a more modern body and why the door should be shut on the creaking G-8.

We will get a better idea if the G-20 can stand on its own in September when leaders gather in the old steel town, now modern research and development hub, of Pittsburgh. One cannot miss U.S. President Barack Obama’s motivations here. Observers can almost hear him saying “You too can modernize with the times as did the old rust belt of America.”

While this summit was short on real solutions, there was a non-binding consensus on what is a quickly evolving fair price for a barrel of oil. The range of $70-80 was floated at the meeting and a spokesman for Russia’s President Dmitry Medvedev confirmed this raised few objections. Like most G-8 efforts, enforcement and follow through may be difficult, but the Goldilocks scenario –- of a price that is not too hot nor too cold –- is gathering momentum.

At the recent European Union-OPEC Meeting in Vienna, a similar consensus emerged from the closed door sessions. When oil prices slid from a peak of $147 a year ago down to $35 in December, OPEC members decided to shelve 35 of 150 projects on their books. What we have not heard since this recovery to $60 plus is whether more and more of them will come back on-line.

Middle East in Italy

Summit host Silvio Berlusconi, under fire at home for what may have happened at his private parties, wanted to use this meeting as a means to shore up poll ratings. Rather quietly, the billionaire also extended invitations to help secure Italy’s long-term energy supplies.

Leaders from Algeria, Egypt, Libya and Turkey attended this G-8 meeting. Three of the players are key natural gas exporters to Italy, the fourth, Turkey, is a key transit hub for both oil and natural gas.

A few interesting facts to be aware of: Algeria ranks fourth in natural gas exports today; a large share of that gas ends up in the Italian market. Not surprisingly perhaps, Italian contractors are playing a major role in Algeria’s natural gas development with two of the first nine tenders going to Italian companies.

There is a similar storyline playing out in Libya, where it is the largest holder of proven oil reserves in Africa, estimated at 41 billion barrels. Libya plans to expand oil production from 1.8 million barrels a day to three million in less than five years. It too is starting to ramp up natural gas production.

Prime Minister Berlusconi had a two-pronged strategy when he visited Libya last summer. He apologized for Italy’s 30-year colonial rule and committed to a $5 billion compensation package spread out over two decades. The money will be used to modernize Libya’s infrastructure and very likely cement Italy’s relationship in this neighbourhood where energy is plentiful.

Berlusconi was not reserved in saying during President Qaddafi’s recent visit to Rome last month that Italian companies should have priority or be “prima fila,” the front row, for future contracts.

The G-8 may be short on concrete solutions for the global economy, but it may very well have served a purpose for Italy and by extension the European Union when it comes to energy.

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Cases for Transparency
Global downturns have a way of forcing action. What was perhaps overly ambitious in the past could be papered over as long as investors believed in the future and money was available. The climate has changed dramatically and so too has the response from business and government.

Case in point is Emaar’s proposed merger with government run Dubai Holdings, with Dubai Properties, Sama Dubai and Tatweer under that umbrella. For those not familiar with some of the landmark projects under these property brands, they include: the Burj Dubai, Dubai Towers and the giant Dubailand entertainment complex.

For one, this will create a $53 billion entity if it comes together as planned by autumn -- sizable by any global standard. Number two, expectations have changed in the region in part because of what Dubai Inc. has done over the past few years, having introduced a greater level of transparency into the process.

The word got out that there was something in the works, so instead of waiting until the structure of the deal was complete, Emaar and others decided to flip the switch. As a result, there remains a great deal of uncertainty whether a consolidated property group will be net positive to existing shareholders.

As the desert sands settled so too did the wave of negative comments surrounding the transaction. Robert McKinnon, Managing Director of Al Mal Capital believes that "from a property market perspective it is absolutely necessary and good for the market." McKinnon says the aim by the government is to clear up the property market in two years instead of letting it linger for a decade if not longer. McKinnon raised a valid question about the valuations which will be used as part of this process. Being too generous now with valuations in the short term, will not pay dividends long term.

Ask Japanese investors what their experience was in the 1990s, which many still refer to as the lost decade. The fact the Japanese government decided to muddle through that decade without taking bolder measures though is a good lesson for everyone in the region today. This Dubai merger is designed in part to put a brave face on what has been a painful 40 percent correction in property values over the past year. Everyone will be eager to see which projects survive the merger process at the end of the day.

Even in Saudi Arabia the default by two well-known family entities in the Kingdom is being handled in a much more transparent fashion than would have been the case just a few years ago.

The Saad Group and Algosaibi restructuring of more than $6 billion in debt will incorporate nearly 40 different lenders. At least a dozen banks have come forward to say they do indeed have exposure to what many commonly refer to as the "problem" but they added it won’t be mission critical to their operations.

This debt restructuring is a tricky one for Saudi regulators and for the region in general. As family entities and not publicly traded companies, Saudi central bank officials say the long arm of the law may in these cases have limited jurisdiction. Unless laws were broken, regulators in this more transparent environment will not likely play a major part in the process.

Officials told me there is no systemic risk to the banking system, but it will indeed be painful for those who chose to lend at such prolific levels. It does not take a genius to read between the lines, that government bank bailouts won’t be in the works even if this first round of numbers is lower than the final tally in a few months time.

What perhaps has not changed, if we use the Emaar merger and the debt restructuring as our benchmarks, is the desire by government officials to remain behind the scenes as both plans take shape. It is not difficult to reach officials on the phone or approach them in person, but few if any want to be on the record before they feel all the paperwork is in order and they are confident the worst is behind us.

In this era of globalization and internet chatter, the region is indeed introducing greater transparency, but full disclosure may still be a ways off.

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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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