Marketplace Middle East - Blog
The New Prize
Scottish Justice Secretary Kenny MacAskill and Abdel Baset al-Megrahi - the so-called Lockerbie bomber - must feel at this stage that they are pawn pieces on a large chess board in which they have little or no control.

They both garnered their moment in the spotlight, whether they wanted it or not. The story of Megrahi’s release kept on getting waves of momentum on both sides of the Atlantic from leaks of British government memos, the families of the victims and heads of state in Washington, London and Tripoli.

It is fair to say there might have been some disagreement over the fine print of diplomacy, because there were plenty of glitches. A hero’s welcome in Tripoli poured fuel on the fire of discord especially in the U.S.

No doubt the debate will pass and news organizations will eventually move on without the closure that many of those closely involved were seeking. What will remain a constant with regards to Libya is the desire by western governments and their oil and gas producers for a share of the spoils below ground.

The events over the past ten days had me thinking of Daniel Yergin’s seminal book on the energy industry called “The Prize”. It is not light reading, but the Pulitzer Prize winner does put all the pieces of the puzzle together.

Libya is Africa’s largest holder of proven oil reserves according to OPEC’s official estimates at 43 billion barrels. It is producing less than two million barrels per day and only uses about 10 percent of that for domestic purposes. Equally as promising for Libya is its natural gas potential. The country is already sending exports to Europe via Italy through the Melita gas pipeline.

This is where politics and economics converge. After then Prime Minister Tony Blair’s meeting with Colonel Muammar Gaddafi in 2004, sanctions were lifted and a whole boatload of energy companies (56 by Libya’s count) lined up to get involved in what remains one of the most promising, yet under explored energy nations.

BP has a two billion dollar natural gas exploration project in the works. One might even call it a race to catch up with Italian energy company ENI – which has had operations in Libya going back a half century. They now have agreements stretching out to 2042 and 2047 for oil and natural gas development.

Mr. Gaddafi’s visit to the G8 meeting in Italy by host Silvio Berlusconi was smart politics, even if the Libyan leader took the liberty to pitch his tent near the grounds of the meeting. That is a luxury not afforded others at the summit. We should not forget that a year ago the Italian Prime Minister’s gesture to pay five billion dollars to Libya to make up for misgivings during their colonial rule. A footnote included in the deal says that Italy will spread out the payments for a quarter century for major infrastructure projects. Mr. Berlusconi was candid in saying that he expected Italian construction companies to benefit as well from those investments.

Meanwhile, Britain continued its own diplomacy track on Tony Blair’s subsequent visit in May 2007 which led to what was called a “natural gas cooperation accord”. Under that agreement BP will retain just over 19 percent of the income from discoveries, with the Libyan government and its sovereign fund keeping the other 81 percent, according to state oil officials.

The harsh reality is that energy demand continues to grow in Europe and, for that matter, the entire world. The challenge for Europe is that supplies need to be found elsewhere. North Sea fields are depleting at a rapid rate. The major oil giants at this juncture still hold a technological advantage over their emerging market counterparts, but how long will that last, another decade or two?

That question cannot be answered just yet, but the reality is those who own the oil and gas want to keep a larger share of the revenues. Examples of that abound in Russia, Kazakhstan, throughout the Gulf and, yes, in Libya. As their economies and energy fields are opened up to the forces of globalization, they have rightfully hardened their position to capture as much revenue as possible.

But it would appear the prize in Libya is a big one, because the level of engagement for the last five years has been nothing short of exceptional.

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The Century Mark
In September 2007 western equity and capital markets were enjoying the go-go days of low interest rates, unusually robust (which turned out to be in many cases false) returns for hedge funds and consumers were borrowing heavily against their homes to fund Range Rovers and a range of boy toys.

During this window in time, the Middle East was starting to hit its stride. Most outside the region were unaware of the big and, shall I say, broader growth story that had been unfolding. Record surpluses were piling up, fortifying the already influential sovereign wealth funds.

This past week we marked our 100th program on Marketplace Middle East. Two years zipped by in part because the global economy was moving at hyper speed. It has not been a straight path forward, but a rollercoaster ride best reflected in the price of crude. We covered the ramifications of $147 oil back in July 2008 and witnessed its fall to $32 in December of the same year.

“It is has been a tremendous roller coaster ride,” said Khaldoon Al Mubarak Chief Executive of Mubadala on our first program. “The growth in Abu Dhabi, the growth in the region has been tremendous. It requires executives like me running around making sure we have the right deals, right partnerships in place and have the right sustainable growth strategies.”

The surge in prices past $100 last spring helped develop a new and almost certainly reoccurring theme, “three digit oil.” Anything over the century mark opens up a full range of possibilities. The tendency has been to compete against neighbors by building shiny new structures. In light of rapid birth rates all over the region and the burden it places on the education system, it is heartening to see that the next generation of leaders view the emphasis on construction as problematic.

“Real estate and brand new building while stunning architecturally, are not going to solve anything unless there are qualified people inside them,” said the Crown Prince of Bahrain Sheikh Salman Bin Hamad Al-Khalifa during our interview a month after oil prices hit a record high.

I am in the tent (a fairly empty one) that says the downturn, albeit painful for contractors still awaiting their payments and bankers who extended their bets, clears out the frothiness.

As the speaker of the UAE Parliament and Chairman of Mashreq Bank Abdul Aziz al Ghurair said in November when crisis started to bite, “Fundamentals of business have been built, now we can afford to reconsider where we are going next, being slowing down our growth, postponing some of projects, that’s okay.”

In sum, those who have been left standing are on firm ground and want to call the Middle East home – expat or not. The lobby of the Emirates Towers hotel may be less crowded today, but the discussions are based on prudent projections and having to do a great deal less with real estate projects.

The critical aspect of this recent and rapid downturn has been the sovereign wealth fund money staying closer to home. We are looking at a consumer market in total of nearly 500 million people. If money from the Gulf is invested in projects closer to home, barriers to investment and hard goods will continue to come down. There may even be greater impetus to create a single currency with more members in the Gulf as well.

That is not to say the SWFs have left the scene in the West. Qatar’s stakes in Porsche and Barclays Bank are two clear examples of snatching opportunities when they are presented and Abu Dhabi’s Mubadala has taken long term positions in General Electric, EADS and chipmaker AMD as it builds out its portfolio and the emirate’s industrial base. As an interesting side note, in the past two years Premier League fans know much more than they did about the Gulf and who controls the purse strings.

Regional and global private equity players are hopping on fewer planes to London, Paris and Frankfurt and instead are picking Tunisia, Jordan, Egypt and Morocco as their new destinations. Growth in all four of those countries is holding up nicely, despite the global turbulence and the tepid recoveries we are witnessing in the West.

What can we expect as we begin our work on the next 100 programs? Qatar, Saudi Arabia and the UAE will continue to drive new projects with the goal of completing not only their infrastructure build outs but their human capital development as well. Billions have been allocated, but privately government and business leaders want to see that all the plans are delivered with the results promised on the PowerPoint slides and the animation videos.

Finally, Dubai and other Middle Eastern cities are no longer dots on the map that indicate the hub and spoke transfer system of a particular carrier. We no longer think of the business day rising in Asia, skipping to Europe and finishing with a crescendo on Wall Street. The region has carved out its place, which is far beyond a passing fad or quick opportunity.

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Not so Golden State
While we are in the midst of a global power realignment between the G8 and the G20, I found it useful to get a temperature reading in what would be a G8 country on its own, my original home state of California.

The landscape continues to attract scores of literary writers who are drawn by the size, diversity and the light. These are the same elements that provide the business vibrancy and creative energy. But there is a critical debate underway on whether the so called Golden State has passed its golden hour and what that may mean for the U.S. economic recovery.

Anecdotally, California remains a magnet for Middle East and European visitors. My British Airways flights to and from Los Angeles were filled with visitors from the region. It is fair to say that our Gulf visitors may have set a record for both the quality and number of bags checked in. So the allure remains, but the shine certainly has been dulled for natives who can put various pieces of the puzzle together.

For one, this downturn has created new terminology in the U.S: “staycation” - a very local vacation. My queries for a Santa Barbara beach house were met with a 20 percent inflation hike due to the local competition by Americans who could not afford or at least justify plane travel overseas.

But far more serious indicators are easily found beyond the shores and nearby wine estates of California. For example, the research belt that surrounds the University of California at Santa Barbara resembles a silver mining ghost town at the turn of the 19th century. Building after building has “for lease” signs posted on former offices of technology and defense companies. California is home to a quarter of the country’s agriculture products, but the latest crop of signs is an eerie indicator for the future.

Mohamed El-Erian, the respected Chief Executive of Pimco - the giant bond fund manager based in Newport Beach, California - recently signalled out “high and rising unemployment” as the main policy issue in the industrialized world. As the economic growth gap widens between emerging and developed countries, pressure will increase on G8 policymakers to protect jobs and wages. The International Monetary Fund placed that growth gap at four percent by mid-2010; it was a record six percent at the start of this year.

While the Middle East is struggling after the contagion of the Western led banking collapse, leading projections still peg economic growth in the region at around three percent for 2010. The excitement this week that the U.S., Germany and France may have bottomed out, greatly exaggerate the breadth of the recovery. It is abundantly clear that central bankers threw as much liquidity as possible at the problem, but there is little left in the arsenal to combat the general sluggishness and unemployment that persists.

A Los Angeles based friend has spent two decades as a banker for a handful of firms. He has been without a job for more than a year and candidly admits that he is not confident that a job exists in the same sector. All options are on the table he says, even moving away from a state that he loves. After being out of work for more than a year, he is no longer counted in the official national unemployment figures now at a 9.5 percent, a 26 year high. Others I spoke with told me not to overlook the “underemployed”, those who are working again but took pay cuts of 25-50 percent in which to do so. It is certainly difficult to fund education fees and buy homes if ones purchasing power has dropped so dramatically.

I was based on the West Coast as a correspondent during the last severe U.S. recession in 1991-92. California felt it especially hard because of the collapse in defense spending after the fall of communism. Real estate prices plummeted, the fall in spending on research and development hit Silicon Valley and Hollywood was trying to adapt to the digital revolution beginning to take hold.

The downturn forced changed and Californians adapted by retooling those sectors. The economy emerged stronger than before and continued to attract new businesses and foreign visitors to its shores. Both are hoping for the same response, but for some reason after this visit my gut says the script may be written differently during this tepid recovery.

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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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