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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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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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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