Friday, December 21, 2012

The Arab Gas Pipeline: Problems with the Pipes

The Arab protests and additional European Union sanctions against Iran and Syria have had major ramifications on current and future natural gas supplies and trade. What has made serious dents in national energy portfolios has garnered surprisingly little coverage in the international media, but involves a vast network of pipelines that are intended to connect the Middle East, Central Asia and Europe, reports Paul Cochrane in Beirut.

Delays and Sabotage

The first setback was to a pipeline project that was supposed to enable, in the words of a pan-Arabist at the Egyptian Natural Gas company, “the dawn of Arab integration” when work started in 2003. The Euro-Arab Mashreq Gas Pipeline (AGP) was intended to run 1,200 kilometers through Egypt, Jordan, Syria and end in Turkey. Egypt was to provide gas to Jordan and an off-shoot pipeline of the AGP from Arish, Egypt to Ashkelon, Israel. What gas Jordan did not consume would be piped to Syria, where Syria would then add its gas into the mix – with an off-shoot pipeline to Tripoli, Lebanon – and export gas onto Turkey, whether for Turkish consumption or to be transported onto gas-hungry Europe.
While the AGP had delays and was supposed to be finished by 2007, the pipeline had reached the last leg, from Aleppo, Syria, to Kilis, Turkey, slated for completion by the end of 2011. But the Egyptians took to the streets, President Hosni Mubarak was overthrown, and the AGP came under sustained attacks in Egypt's Sinai Peninsula with 14 acts of sabotage and attempted attacks throughout the year and well into 2012.
Egypt's gas supplies plummeted from 220 million cubic feet (mcf) per day in 2010 to 80 mcf in 2011 to negligible levels in 2012, when the pipeline was shutdown. It has cost the Israelis at least $4 billion to source gas from elsewhere, as well as having lost the highly controversial, preferential pricing deal that Mubarak and his cronies had inked with Tel Aviv in 2005, at anywhere from $0.70-$1.50 per million British thermal units (BTU), according to Egyptian media, to $2-$4 per million BTU, according to Israeli media – both well below the global average of $6-7.
Jordan also had a special price arrangement with Cairo of $3 per million BTU, but with no Egyptian gas through the pipeline, Amman has lost access to 20-25% of its gas needs, prompting the government to raise electricity prices by 9% in early 2012, which it later back-tracked on due to public outcry (Amman is keen to avoid any further reasons for the populace to protest). To make up for the short fall, Jordan has had to switch to heavy fuel oil and diesel, adding on a projected $2.4 billion to the cash-strapped kingdom's energy bill.
Syria has been marginally affected as well, having received around 50 million mcf a day of Egyptian gas – or 8% of the country's annual needs – prior to the shutdown.
Egypt turning off the pipeline has shown a chronic weakness of the AGP: the pipeline was simply over-dependent on Egyptian gas. If Egypt stopped piping gas, then Syrian gas could be piped in the opposite direction to make up for the short-fall in Jordan, but despite Syria having some 8.5 trillion cubic feet (tcf) of gas reserves, domestic and projected consumption is higher than production, meaning Syria is, and will remain, a net importer.
Egypt's domestic consumption has also been steadily rising – as has Jordan's.
So even if the AGP had been completed, whether in 2007 or the end of 2011, the only real beneficiary was Jordan, and to a lesser degree Lebanon (while the Egyptians were financially losing out due to Mubarak’s deal-making). The AGP is a nice idea, like Egyptian President Gamal Abdel Nasser's pan-Arabist ideals of the 1950s and the attempt at an United Arab Republic, but has proved equally untenable. What could inject new life into the AGP is if gas were piped from Qatar and Iraq to Syria, as well as from Iran and Central Asia via the projected Nabucco pipeline through Turkey.

An LNG tanker sails through the Bosphorus (Paul Cochrane)

The Turkish Connection

“If a pipeline comes from Iraq or Qatar there would be a principle pipeline, and a viable network,” said Ziad Ayoub Arbahe,an energy consultant in Damascus. However, piping gas from the east would require greater stability in Iraq, as well as of course in Syria now. The ongoing uprising in Syria caused the final leg of the AGP to be put on hold until the situation calms down. Given stability and willing investors in both Syria and Iraq, Damascus would stand to gain as a major transit hub. As Naeem Danhash, Project Director of the Euro-Arab
Mashreq Gas Co-operation Center (EAMGCC) in Damascus explained: “the medium- to long-term prospects for Syria to become a gas hub are excellent.”
Turkey also has greatprospects if regional geopolitics allowed for the stability needed for pipeline investment, given the country's strategic position at the crossroads between the energy-rich East and the energy hungry West.
The most audacious plan came following a meeting of five companies in 2002 (OMV of Austria, MOL Group of Hungary, Bulgargaz of Bulgaria,Transgaz of Romania and BOTAŞ of Turkey) to establish a pipeline to transport Middle Eastern and Central Asian gas some 3,000 kilometers via Turkey to Baumgarten in Austria. After the five companies met, the executives attended a performance of Verdi's Nabucco at the Vienna Opera House, and the name for the pipeline was coined: Nabucco. By 2009, deals had been inked and pipes were to be laid in 2010 with gas to flow by 2013.
Back then, Nabucco was big news and hailed as the EU's future gas lifeline after Russia caused serious alarm about energy security when Moscow stopped exports to Europe via Ukraine in the icy winter of January 2009. The impetus was there, but the Nabucco pipeline has not materialized due to ongoing financial issues – costs were projected at $10.25 billion but recent forecasts estimate it could cost over $25 billion – and the realization that the project is only commercially viable if there is access to the world's second largest gas reserves for the Nabucco mix. That possibility is now impossible, as the EU, following the U.S. lead, recently smacked sanctions on Iran to pressure the country to abort its alleged nuclear weapons program. This resulted in the EU stopping all imports of Iranian oil – some 4-5% of the EU's oil imports – as well as gas. As Dr. Tugce Varol, a Scientific Advisor at the 21st Century Turkish Institute in Ankara, stated bluntly: “Nabucco is dead.”
The irony is that the EU has repeatedly denounced the stranglehold Russia has over Europe's natural gas imports, accounting for 34.2% of total European imports, and that Nabucco was meant to loosen Moscow's grip. This is a similar story in Turkey, also not keen to have to rely on Russian gas, yet Ankara – for political reasons – has commissioned the Russians to build a $20 billion nuclear power plant in which Russia will retain 51% shares, as well as having all the technical know-how.
Turkey was also pressured by Washington to lower its oil imports from neighboring Iran (about 30% of Turkish demand) by a tenth in March 2012. And then there is a serious possibility of a falling out between Ankara and Tehran over the explosive situation in Syria. In the end, Turkey needs pipelines to be constructed on its soil.
Varol concluded that: “an energy crisis is coming. Turkey will need more than 60 billion cubic meters (bcm) of natural gas in the next five to 10 years. There are contracts for 52 bcm, and some liquefied natural gas (LNG) contracts, but there is a need to find new energy. Turkey gets 10 bcm gas from Iran but if that stops, then Turkey is in a catastrophic situation.”

 A man works on part of the AGP in Syria (courtesy EAMGCC)

The Russian Play

With Nabucco dead in the water, a new project is to be fast-tracked, the TransAnatolian Pipeline (TANAP), announced in November 2011 at the 3rd Black Sea Energy and Economic Forum in Istanbul, and a memorandum of understanding was signed between Ankara and Baku to establish a consortium to build and operate the pipeline, which is to run from Azerbaijan through Georgia to Turkey and onto Europe. Despite claims that TANAP will eventually be realized, it is still years off and Azeri gas alone will not be sufficient to cater to Turkish and European needs or have the capacity to provide enough gas for the countries connected via the Arab Gas Pipeline.
Iranian gas is needed, but the West's hypocritical stance over Tehran's nuclear program (Israel can have an undeclared nuclear arsenal but Iran cannot develop nuclear energy for civilian purposes like the Emirates) has squandered any possibility of accessing such needed energy. The winner from Europe's strategic mistake of blindly following Washington and Tel Aviv's stance on Iran is Russia, which will be able to bolster its gas export capabilities to Europe, consolidate its power in Central Asia, and have a firm friend in energy-starved Turkey. Moscow's assertiveness could sabotage another pipeline that would give Europe indirect access to Central Asian gas – the Trans-Caspian Pipeline between Turkmenistan and Azerbaijan – to give preference to the Russian-Italian backed South Stream pipeline.

The Israel-Greece-Cyprus Axis

Natural gas is proving to be a useful foreign policy tool in the eastern Mediterranean. All countries are waiting and hoping for more stability in Egypt and Syria for the gas to start flowing again, and for the AGP to be completed so that gas can be piped in from Turkey.
The politically-motivated preferential gas deal between Egypt and Israel that ended in the wake of the ouster of Hosni Mubarak has been a setback for Israel, costing an extra $4 billion a year and enabling Cairo to make more commercially viable demands of the Israelis for the gas to start flowing again.
However, the discovery in 2010 of the underwater natural gas field – the “Leviathan” – off of Israel's northern coast provided some leverage. The Leviathan could offer enough for domestic consumption and potentially for export. Lebanon shares the gas field with its southern neighbor but politicians just bicker over which ministry will get the spoils even before prospecting has begun.
In 2011, the Israeli gas find was used as a bargaining chip with Greece to prevent a second freedom flotilla from setting sail to attempt breaking the blockade of the Gaza Strip. As confirmed by a Greek consular official in Canada, Athens put its economic interests at the fore in cooperating with Israel to prevent the flotilla from departing from Greek ports. The incentive for cash- strapped Greece was future gas and electricity sharing deals with Israel.
Greece currently consumes 3.75 billion cubic metres (bcm) of gas per year, which is slated to rise to 9.3 bcm by 2020. Not wishing to be reliant on Russian gas via the South Stream pipeline, Athens was scouting for other sources – Israel and Cyprus' gas finds seemed ideal to offset forecasted demand.
In March 2012 the energy ministers of Greece, Israel and Cyprus agreed to bolster cooperation to exploit natural gas deposits in the eastern Mediterranean. The long-term plan is for gas exports to go from Israel and Cyprus to Greece, but the laying of pipe on the sea bed is slated to take at least eight years, meaning sharing of gas-produced electricity via undersea cables is more probable in the short-term.
“At the moment two major natural gas fields have been identified... both of them will suffice for Israel's needs for 50 to 60, some say 70, years,” Associated Press reported Israel's Energy Minister Uzi Landau as saying in Athens. “In the Middle East that is now caught in a tremendous earthquake, stretching from the Atlantic to the Persian Gulf and beyond, the axis of Greece, Cyprus and Israel will provide an anchor of stability.”

The politics of pipelines and the changes underway across the region are going to cause many challenges in the years ahead until some of these competing gas projects become more than just pipe dreams.

Box: Syria's “Four Seas Strategy”

Syria could be one of the region's key energy transit hubs with some 6,300 kilometers of oil and gas pipelines. But geopolitical events have thwarted Syria's “four seas strategy” which was aimed, when it was announced in 2009, at making the country a transit hub for hydrocarbons between the Persian Gulf, the Black Sea, and the Caspian and Mediterranean seas.
Instability in Iraq has been one of the biggest setbacks to the plan – the pipeline going from Kirkuk in Iraq to Banias on the Syrian coast was still not back online after the U.S. bombed it during the 2003 invasion of Iraq. Given ongoing instability in Iraq and now in Syria, it is unknown when the pipeline will be operational again, as well as when work will start on two new pipelines: one carrying 1.5 million barrels per day (bpd) of heavy crude oil from Iraq to Syria; and a smaller pipeline with a capacity of 1.25 million bpd of light crude.
Instability has also delayed the roll out of a gas pipeline from the Akass region in the west of Iraq, which is only 50 kilometers from the Syrian border that could provide up to 30 million cubic meters of gas a day and feed into the AGP. The export of Persian Gulf gas, particularly from Qatar, which has the third largest gas reserves in the world, is also dependent on a stable Iraq for the relevant pipeline infrastructure to be developed.
The viability of such connections and the “four seas strategy” will equally hinge on stability returning to Syria and for the AGP to be finished, which had reached the last stage of completion between Aleppo and Kilis, Turkey, before the uprising broke out in March 2011.
What state Syria's oil and gas infrastructure will be in following the end of hostilities will be another factor to consider with the EU having slapped sanctions on Syria in 2011 that resulted in the country losing 94% of its oil exports and prompting oil production to drop by up to 30-35% to 260,000 bpd.
Rebels also target infrastructure to debilitate further the regime.

Thursday, December 06, 2012

Conflict Versus Consumerism: Middle East Cosmetics Market

Soap Perfumery and Cosmetics magazine

The conflict in Syria has impacted on sales in the Middle East cosmetics market, but in the Gulf sales are buoyant, as Paul Cochrane reports from Beirut

It has been a been a turbulent time in the Middle East since the Arab uprisings swept much of the region over the past year and a half, not only with sales of cosmetics, toiletries and perfumes being depressed by losses in consumer confidence but also with distribution being harmed, especially by the protracted conflict in Syria. But while some markets have been particularly affected by regional instability, notably the Levant, the more stable Gulf market is coming out of recession and experiencing a return to growth.
The conflict in Syria is having a wider impact on the cosmetics and toiletries trade than just sales lost in a country which had been a burgeoning market for multinationals and regional players since its economy opened up less than a decade ago. The sanctions imposed on Syria by the US and the European Union in 2011 resulted in multinational corporations (MNCs) such as Procter & Gamble having to exit the market last November, leaving local distributors with no MNC products for retailers.
While the sanctions have directly affected MNCs, which account for an estimated 70%-80% of the Middle East and North Africa (MENA) cosmetics and toiletries market, what has hit all players is the way the conflict is impeding distribution as Syria was a major transit route for goods moving between Turkey, Lebanon, Iraq, Jordan, Saudi Arabia and the Gulf.
“We’ve made contingency plans for transportation by sea as there is the possibility of Syria blocking the route to Jordan and into the Gulf,” says Nizar Raad, managing director of Universal Metal Products, a Lebanese company that makes aluminium tubes for the cosmetics industry. “We are facing a lot of obstacles: risk, the shortage of drivers, visa delays and visa costs, all this is adding up. There are also more checks at Masnaa [the Lebanon–Syria crossing] and at Dera’a [Syria to Jordan], which holds up convoys for three to five days.”
Within Syria, demand for cosmetics and toiletries has plunged. “Demand is half of what it used to be as purchasing power is down and it is only products of first necessity which are selling, although shampoo still is,” comments Joanne Chehab, general manager of Lebanese cosmetics firm Ch. Sarraf & Co, part of the Malia Group. Malia has its own line of cosmetics, Cosmaline, and distributes for Shiseido and Wella. “We are also facing export and distribution difficulties and there is a lot of money in the market we are unable to collect. Very few companies are active today compared to before.”


The conflict has also hit the economy in neighbouring Lebanon as well contributing to a drop in tourists, which has hit sales at Lebanese cosmetics outlets. Some have even closed down. In marketing terms Lebanon is considered the ‘window dressing’ of the Middle East due to its cosmopolitanism. New products are launched in the Lebanese market during the summer season and up until this year tourists from the region, particularly affluent Gulf citizens, visited the country. “Lebanon is a test market for elsewhere in the region,” says Chehab.
However while sales of more luxurious items have been affected by the economic downturn, the Lebanon mass market remains buoyant and the relationship between MNCs and local producers is highly competitive. Retail outlets are diverse: around 60% of cosmetics and toiletries are sold at supermarkets with mini-markets following close behind. And while “pharmacies do not account for much volume [they] are important for a brand’s image, so we do special sales and promotions,” Chehab says.
In Lebanon, the personal care market is increasingly sophisticated and mirrors trends in Europe. Chehab says that for hair care products, brands have recently started to heavily market hair serums in addition to shampoos and conditioners. “Hair serums have been in the market for decades but only as of last year have all brands been simultaneously marketing them,” she explains. Cosmaline has its own line of shampoos and conditioners: Softwave is exported to Europe, the Gulf and North Africa. It changes its packaging every three years to stand out in an increasingly saturated but fast growing segment. “In shampoo there is no loyalty at all. When people see adverts or because of the smell, packaging or the perfume, they switch,” Chehab says. “Before people had just one conditioner. Now they have seven. But because of the lack of loyalty we can compete with the multinationals which is why they are still spending on marketing.”
Region wide, shampoos are primarily marketed towards women, with men typically only selecting shower gels and body washes. Hair care lines for men are still small by volume in the region although that is changing, as is demand for shampoos for children. “Ten years ago we started Softwave for men but it didn’t do very well. Every two or three years we re- study the market and now there is a market for men but volumes are not very big, although the Shiseido range for men is growing year on year,” Chehab notes.
In terms of packaging, designs are the same for the whole region but languages differ. In the Levant product descriptions are in French, English and Arabic while in Algeria it is mandatory to have descriptions in French. Elsewhere in the region descriptions are in Arabic and English, with the main product language and the brand name in English. Shampoo product sizes also differ with the 400ml bottle more popular in Lebanon, Syria and the Gulf than the typical European size of 250ml, while Egyptians are big consumers of shampoo sachets at 5ml and 12ml. Larger sizes are also popular for family use at 700ml and 4kg.


In other segments, deodorant sales are growing with sprays particularly popular in the region, especially in emerging markets Iraq, Syria and Libya. They are used not just to combat body odour but also for spraying on the body. In Lebanon however mass sales are mainly of roll-ons, a segment dominated by the MNCs.
Meanwhile “skin care is a growing segment [in Lebanon] and we saw the possibility of competing with Nivea as it is not a very crowded market,” says Chehab. The company has used its distribution agreement with a mineral water producer to market skin creams by giving away a free 500ml bottle of water and tap into growing health consciousness in Lebanon as well as much of the rest of the region.
There has also been a notable trend across the region in brands releasing rival products swiftly once a company launches a new line, whereas previously there was a gap of two to three years. “If say Lancôme launches a new face cream product, another brand responds almost immediately,” Chehab comments.
While Sarraf ’s revenues have been affected by the drop in sales in the Syrian market and the downturn in Lebanon, with 70% of its products exported the company will ride out the current storm. This year it expects to grow by 10% compared to 2011. Chehab predicts that sales volumes will continue to grow in coming years and that Lebanon will ultimately only account for 5% of overall business.
In recent years sales have been bolstered by rising demand in Iraq, North Africa, Oman and Saudi Arabia whose relatively wealthy 28 million people are currently the largest Middle East market in terms of cosmetics and toiletries consumption, followed by the United Arab Emirates (UAE) and Iran, according to market research company Euromonitor International. “A very important market for us is Saudi Arabia as there is the scale there that smaller countries like Lebanon don’t have,” says Chehab.
The oil rich Gulf countries, with the exception of Saudi Arabia, have a smaller population than the rest of the MENA region, but their significantly higher income levels make the Gulf a core market for cosmetics, toiletries and fragrance companies. According to Euromonitor statistics, the average annual spend on cosmetics and fragrance in the Gulf is $334 per person. Its hair care market was estimated to be worth $584.3m in 2010 and projected to grow 16% to $679.4m by 2014. Such growth is reflected in a rebound in sales over the past two years following a dip in the wake of the financial crisis that hit the Gulf countries in 2008.
“There was a slowdown in terms of year on year growth during 2010; the average ticket size had decreased as customers were weighing each purchase decision with added scrutiny. Currently I would say we are on the road to recovery, where we find that footfall is down but average ticket size has increased,” says Abdulla Ajmal, general manager of Ajmal Perfumes, a leading oriental perfume brand based in Dubai, UAE. Ajmal expects its growth to be 10% this year, building on last year’s turnover of $220m.
UAE based Chalhoub Group Retail which sells commercial, luxury and Arab- oriented brands throughout the MENA, has also had an uptick in business. “We experienced a rapid growth in 2011, up 25% versus 2010 brought about by the huge government social handouts in our major markets. As of August 2012, sales have not slowed down and we expect to end the year up 20 per cent,” says Salah Al Sagha, general manager, Beauty.


In the fragrance sector demand is high in the region due to the social emphasis put on smelling good, with men and women alike reapplying a fragrance or applying another fragrance throughout the day. “Perfumes are bought largely for regular use in the Gulf unlike our western counterparts who link perfumes to occasions,” says Ajmal. “For us every day is an occasion to wear your favourite perfume.” Indeed the Gulf perfume market is estimated to be worth $3bn, according to Euromonitor, while the market size for premium women’s fragrance in Saudi Arabia is estimated at $121m and for men at $101m.
“The sector has performed fairly reasonably for us, the prime reason being that fragrances are largely classified under the need rather than want set within the region,” Ajmal remarks. He says fragrance consumption is five times higher in the Gulf than anywhere else in the world.
To keep up with such demand and what Ajmal calls a “thirst for new products that never diminishes”, the company launches ten new fragrances a year. So popular is oriental perfume within the region – and it is growing globally – that major brands have introduced oriental type fragrances and are regionalising fragrances by putting an emphasis on darker colours and Arabic motifs. “We see a lot of international brands experimenting with what they classify as oriental fragrances,” he says. “It’s a phenomenon that I like to call ‘oud mania’ where every fragrance brand of repute is launching fragrances under the oud banner. Since the market potential exists, the Gulf is the right area to target where oriental perfumery is strong and growing year on year.”
In terms of retail, beauty and perfume space has grown by 30% over the past three years in the UAE, according to Euromonitor and point of sale is increasingly important for consumers as well as brands. “We are seeing a greater emphasis on customer engagement on a one-to-one basis encouraging product trail and equipping the customer with the right knowledge so that they can make an informed decision,” Ajmal comments.
Another regional trend is the growing demand for halal personal care products which are free of gelatine and animal products, particularly pork derivatives. Estimated to be worth $560m in the Gulf by Euromonitor, sales grew by 20% in 2011 and the UAE is estimated to account for half of the segment’s sales. “What’s really driving demand is the fact that the Muslim population is now dominated by a demographic of young, educated professionals and they know how to balance their Muslim and cultural identity,” says Shamalia Mohamed, founder of Amara Halal Cosmetics, a recently established company in the US that is aiming to enter the Gulf market (especially the UAE). “For young Muslims, halal has to be healthy, socially responsible and appealing. They have no problem with paying a little more for premium organic and natural cosmetics to suite their modern lifestyle.”
Mohamed forecasts further growth in the sector as awareness increases about halal m certified products. “I can see big brands jumping into this multi-million dollar market. Initially anything that is new to the market has an advantage and after a while it becomes a norm or just a regular mainstream item,” she adds.

Photo and content copyright CosmeticsBusiness.