Marketplace Middle East - Blog
7/16/09
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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6/11/09
Call of the Arab Youth
Iranians went to the polls this weekend after a thorough airing of heated exchanges during a handful of televised debates. The most prevalent topic surrounded whether incumbent President Mahmoud Ahmadinejad heightened or worsened Iran’s standing in the world.

The subject ignited the youth who took to the streets to share their views, but the campaign did little to address the issue that impacts the next generation the most, creating jobs for them in the future.

Every year two million Iranians are born in a country which is second in the region only to Turkey and Egypt in population size. Nearly two-thirds of the population is below the age of 30, the bulk of the youth, 98 percent, is between the ages of 15-24. With that backdrop, job opportunities and economic management should have taken higher priority.

Iran is a prime example of the challenge that exists throughout the region today. The accepted figure, according to the World Bank, is that 100 million jobs need to be created by 2020 for unemployment to stay where it is, since the birth rate continues to surge.

Youth unemployment is estimated at 20 percent depending on the market, meaning at least one in five is out of a job. The former foreign minister of Jordan and now the Senior Vice President for External Relations at the World Bank, Marwan Muasher said during an interview that “they (the youth) are basically fertile ground for radical ideas.”

What we are talking about here is a complete mismatch between skills provided in schools today and what is needed tomorrow, which, Muasher says, requires, “A totally changed mindset in which people are trained to question authority, to think critically; this is the basis for all innovation and creativity.”

The Middle East has enjoyed regional growth of nearly six percent a year before the downturn, but executives contend that to create the jobs needed we are looking at sustained growth of 8-9 percent for the next dozen years -- that will be hard to accomplish.

The policymakers and chief executives I spoke with are not throwing their hands up in despair. Instead, they are being proactive by taking matters into their own hands.

They single out Lebanon and Jordan as two economies that are providing the training necessary to foster talent. Not surprisingly, they are the two regional economies holding up best during this downturn, minus Qatar which floats on a sea of natural gas.

Within the Gulf Cooperation Council there is another reality, that the private sector is in competition with the public sector for workers. Government has a long standing tradition of creating jobs, even when the role is not needed.

As Tarek Sultan, Chairman and Managing Director of global logistics company, Agility, bluntly stated, "It makes it difficult for us to then propose jobs for them in the private sector if they actually have to work and spend a nine hour day doing something productive." This view is coming from a company operating in 120 countries with 34,000 employees from a base in Kuwait City.

The young leader added, "We would like to see more engagement by the GCC nationals in what we are trying to achieve." Translation: If you are willing to work hard, we have a job and opportunity for you.

To be fair, governments across the region are not sitting idle. The oil rich states in particular are boosting their education budgets by 10-30 percent to address this very issue. Some have probably spent too much money at the top end of the education chain by paying to bring over western institutions, instead of focusing first on primary and secondary education.

We should not forget that technical training is an important part of the mix. For example, Abu Dhabi is setting up an airline services hub with GE and EADS and they are already beginning their plans to train future technicians.

The new generation of regional leaders recognizes the challenge. Last summer when I interviewed the Crown Prince of Bahrain, Salman Bin Hamad Bin Isa Al-Khalifa, he acknowledged what he called an over reliance on the public sector.

As part of a process of labor reforms, the government has created a fund for training Bahrainis to match the jobs needed on the ground -- from financial services to food production.

What we want to do is make the private sector the main engine,” said the British and American educated Crown Prince. “We seek to do that by investing in our people, by transforming the role of government.”

Bahrain remains an attractive target for foreign direct investment, but the region as a whole is taking in only four percent of the total pool of $1 trillion looking for fresh opportunities.

To dent double digit youth unemployment, Middle East leaders need to capture a greater share of foreign direct investment. They must convince investors that they are up to the challenge, by ensuring the next generation of local executives will be as well.

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ABOUT THIS BLOG
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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