Economics & Policy

Summer still to shine

by Karah Byrns
written by Karah Byrns

 

In 2010, the travel and tourism sector represented 22 percent of Lebanon’s gross domestic product, according to tourism minister Fadi Abboud, with the country witnessing an increase in tourist arrivals of approximately 17.2 percent on the previous year. While 2011 began with high hopes for tourism, regional unrest and internal turmoil has quickly unraveled that spirit of optimism and confidence. As one Arab regime after another came tumbling down or brutally clung to power, and as the Lebanese government collapsed and pushed the nation yet again into a period of uncertainty, bleak predictions for the tourism sector began to circulate.

In January 2011 the first hit came when STR Global announced that hotel occupancy rates in Beirut had hit 41.6 percent, a 20.9 percent drop on 2010 rates. Drops in tourist arrivals and airport traffic further fueled fears, along with the kidnapping of seven Estonians in an isolated incident in the Bekaa valley and stern travel warnings released by the United States, Bahrain and Saudi Arabia. As unrest continues to boil in Libya, Yemen, Bahrain and now neighboring Syria, the question remains as to what type of summer tourism Lebanon can realistically expect.

Of all the events in the region, it is the unrest in Syria that will affect Lebanon’s tourism industry the most. Many Western tour operators group Lebanon and Syria together as part of a Middle Eastern package; if travel to Syria is impossible then the Lebanese leg of the tour in most cases is also dropped. Western tourists also have a tendency to group countries in the Middle East together conceptually and may not be willing to vacation anywhere in the vicinity of what they perceive to be a ‘hot zone.’

Regionally, land travel to Lebanon through Syria will be cut off, which will lead to a decrease in tourists coming by road, particularly from Jordan and Iran. Last year, Jordanians were the top nationality to visit Lebanon. According to Pierre Achkar, president of the Federation for Tourism and the Hotel Association in Lebanon, most of these tourists were middle-class Jordanians arriving by car. If the security situation in Syria continues to deteriorate during the summer, then the number of Jordanian tourists will inevitably fall off compared to previous years. The number of weekend visitors from Syria will also come to a standstill.

Given the political complexities facing Egypt, the 60,000 Egyptian tourists that came to Lebanon last year may also be deterred. As for the Gulf tourists, Achkar predicts that they will continue to be hesitant, “but the moment we have a government in Lebanon — any government — they will comeback,” he said.

Although the figures released since the beginning of the year have been consistently negative, Director General of the Ministry of Tourism Nada Sardouk said, “Lebanon has seen a small drop compared to other countries in the region.” She also suggested that there is a need to place these numbers into perspective.

In an interview with Executive, Sardouk pointed out that while the number of tourists arriving in Lebanon in the first quarter of 2011(340,700) dropped by 13.36 percent compared to the first quarter of 2010 (393,200), the number arriving this year is still significantly higher than it was during the first quarter of 2009 (297,700), which at the time was considered to be a record year for Lebanese tourism.

The same logic can be applied to Rafiq Hariri International Airport figures, which registered airport passengers (arrivals, departures and transits) of 1.02 million for the first quarter of 2011, 1.07 million for the first quarter of 2010 and just 886,700 for the first quarter of 2009. While there has thus far been a year-on-year decrease of 4.5 percent in airport passengers, 2011 still reflects a significant increase over the last two few years.

While regional circumstances and internal instability have caused a slump, figures could be considerably worse than they have been thus far, given the serious challenges facing the country and the region. There is a definite slowdown in the growth of the tourism sector, but there are also constructive forces that are tempering the hit. One of these appears to be investment in the hospitality sector.

Private sector investors are largely adopting a positive stance; summer 2011 will see the opening of a slew of new restaurants, nightclubs, pubs and even an extreme sports theme park. Some of the biggest names in hospitality will be re-opening with new indoor and outdoor spaces, and an enticing set of trade shows, cultural performances and concerts scheduled.

Massive investments are also underway; the Phoenicia InterContinental Hotel invested $20 million for its 50th anniversary renovations, including re-designing its Eau De Vie and Mosaic restaurants, the Cascade tea lounge and opening the Whisky Mist nightclub; Edde Sands invested a reported $1.5 million in refurbishing its rooftop restaurant, an Italian seafood restaurant in the Byblos port and the first Beirut branch of the eCafe in the historic district of Sursock; Movenpick renovated its rooms and is opening a fusion ‘chill-out’ lounge, and Le Gray’s investments included a new Asian restaurant, conference facilities, additional suites, a new roof terrace lounge and a second bar targeting the young, cosmopolitan crowd.

Beyond the luxury hotel chains in Beirut, food and beverage concept creation and management company Add Mind, which manages trendy nightspots such as White, Rococo and Gem, will also be investing heavily in the summer. The company has scheduled openings for five new venues between May and June, from Batroun to Beirut to Damour. “No one knows what can happen in Lebanon but hopefully we will have a good summer,” said Add Mind Chief Executive Officer Tony Haber. “If nothing happens internally, this could be one of our best summers ever.”

Virgin Megastore Sales Director Abdo Husseiny, who is responsible for ticketing, also expressed high expectations for 2011, which he anticipates will see better sales than 2009. “We are expecting the best summer so far,” he said, citing projections of between $10 million and $12 million in ticket sales revenue. “We are planning even more events this summer than we did in 2009 and 2010,” he added. Who will enjoy the new facilities and events, however, is another question entirely, as convincing Western tourists to venture to the Middle East will be difficult, while Arab tourists will be both wary of regional travel and largely returning home for the full month of August, as Ramadan this year will fall in the middle of the busiest part of the summer.

Lebanese tourists drive the market

In reality, the notion that more than 1.5 million foreign tourists per year have been driving the tourism and hospitality sector in Lebanon is only partially true. Data gathered by the Ministry of Tourism only classifies visitors according to the passport they use to enter the country, which means that many diaspora Lebanese returning as tourists for the summer are not counted in the figures.

“Things aren’t looking good for non-Lebanese tourists this summer, but we can still expect a large number of Lebanese expats,” said Nassib Ghobril, head economist of Byblos Bank. “We should also see decent spending levels from this group, as they are the ones who truly move the tourism sector; they are the biggest group in spending. Maybe hotels will suffer, but that’s it,” he said.

Ghobril’s logic perhaps explains the heavy investments hotels are making to revamp or add venues that can benefit from local and summer expat crowds, and not just on foreign tourists occupying rooms. While many hotels may see a drop, it could well be a smaller one than expected given that 2010 Ministry of Tourism statistics indicate that the top nationality staying in hotels and furnished apartments were Lebanese.

Lebanese nationals accounted for 19.5 percent of the total number of clients for 2010, followed most closely by Saudi nationals, (12.3percent), Jordanians (7.1 percent), Iraqis (6.5 percent) and Syrians (5.5percent).

In the food and beverage sector, Haber confirmed that “70 percent of ourbusiness depends on local Lebanese, and nearly 30 percent depends on Lebanese expats visiting Lebanon.” Husseiny echoed similar expectations regarding entertainment sales, counting on foreign tourists to make up only about 5 percent of total ticket sales, with the vast majority allocated between local Lebanese (70 percent) and expatriates (25 percent).“The Lebanese are used to ups and downs, even the ones who are coming to visit from abroad,” Husseiny said. “They came when things were happening that were far worse than what we are experiencing now; they will come again this year.”

According to Nizar Khoury, head of the commercial department for Middle East Airlines, as of today, overall flights for the summer into Lebanon show no growth, but are equivalent to last year’s figures. For summer bookings, however, flights coming in from the region and the Gulf in particular are less full than they were last year, showing what Khoury referred to as “a substantial decrease,” while summer reservations on European routes have picked up, showing an estimated 5 percent increase from last year.

Given Western wariness toward the region at present, this pickup is likely due to an increase in the number of expatriates visiting Lebanon, not Western tourists. “Lebanon will fare better than other countries in the region in terms of tourism coming from abroad due to our expats,”Ghobril said. “Lebanon has the advantage of having expats who return frequently for a holiday, and Lebanese expats are going to float this season.”

Looking closer to home

While the tourism sector in Lebanon for the last several years has been driven by high-spending tourists, especially those from the Gulf, Lebanese Economic Association Founder and President Jad Chaaban suggested that it is time for a change in direction.

“This model drove growth for the last few years but this type of tourism was hit hard by the financial crisis and now the regional situation,” he said. “This model has proven too risky because it focuses on only one type of tourist, and I think now we can see that it’s time to diversify.”

According to Chaaban, the focus on big spenders from the Gulf led to unsustainable growth centering on investment in Greater Beirut without the creation of a significant number of jobs throughout the country. Leveraging other assets to appeal to different types of tourists is part of a diversification strategy that Chaaban suggests to mitigate risks, beginning with tapping the local population.

“Internal tourism is a huge, growing market,” Chaaban said. Although internal tourism is something that remains off the radar for the Ministry of Tourism, he explained that Lebanese in general enjoy day or weekend trips and would do so more often if more comfortable and affordable facilities were available for overnight stays. “Due to the increased price of housing, not all Lebanese families have a second residence anymore and many want to escape the city for a weekend to relax and enjoy a change in scenery,” he said.

Lebanese still constitute the largest numbers staying in hotels and chalets, and according to Ghobril, “these are not just expats, but Lebanese residing here who decide to go for a local holiday outside of the city.” While there are no figures quantifying the economic effects of local tourism, Ghobril insisted that “local tourism is underestimated for the value it generates for the economy.”

The recently opened five-star boutique hotel Byblos Sur Mercan bear witness to the importance of internal Lebanese tourism. The hotel is expecting high summer occupancy rates this year between 60 and 85 percent, but estimates that 60 percent of its guests this summer will be a mix of local residents and Lebanese expatriates. “Locals come to Byblos as an escape away from the busy capital,” said Sales and Marketing Manager Mona Mounzer. Given the rate at which Byblos is evolving as a relaxing destination for boutique shopping, fine dining and cultural activities, a cosmopolitan local following is sure to emerge.

Developing internal tourism not only makes the country more attractive for its residents, but also creates a form of sustainable growth that promotes rural economic development by bringing more visitors to areas outside of Beirut. A fresh example of this model at work is in Batroun, which is preparing for a booming summer season. Local beach resort Bonita Bay is being fully renovated and upgraded with a new restaurant, primping itself to be a more upscale, trendy resort venue of the north. With a 700-person capacity,it is aiming to lure more visitors to the area. “We are going to be re-branding Bonita Bay with a new logo and mood, and we will be advertising it all over Lebanon,” said Operations Manager Shadi Ayoub.

Not far from the beach resort is another newcomer to Batroun, a spacious restaurant and event venue called Batrouniyat, which was fashioned from a historic home more than 300 years old. The restaurant relies on nearby villages to supply its organic ingredients and traditional Lebanese preserves, and in so doing directly supports many farmers in the caza, or local district.

“No one was supporting the growth of this area, so we decided to do something to help,” said manager Charbel Faour. The venue also occasionally doubles as an exhibition hall for local artists, in addition to being a charming restaurant decorated with traditional furniture, candles and mosaic tile floors. Locals told Executive that it has already reinvigorated the town in the six months since its opening last winter, and Faour confirmed that it brings in approximately 600 people per Sunday for brunch. “Today, 95 percent of our brunch customers come from outside the area of Batroun,” he said. “I even have customers who come from as far as Saida.”

In the south, the Rest House Tyre and Al Fanar Hotel in Tyre enjoy relatively high summer occupancy rates but cater primarily to local tourists, as well as international workers with the United Nations who are stationed near the border. In the Bekaa valley, the West Bekaa Country Club also provides primarily local Lebanese guests with a comfortable place to stay for the night. However, according to Chaaban, there is plenty of room for more hotels. “The Dhiafee program [a United States Agency for International Development project] set up a chain of ecotourism destinations in Lebanon to create an interesting network of places to visit on a circuit… where visitors can stay overnight in quaint cottages and bed and breakfasts,” he said. “This is a growing market with a lot of potential that should not be overlooked.”

Even Casino du Liban thrives on local tourism. Ninety percent of revenues for Casino Du Liban are estimated to come from gambling activities, and the majority of players come from all over Lebanon. Marketing Manager Lara Hafez estimated that locals account for 64 percent of players, 26 percent are regional visitors and the rest from various international destinations.

“I think that the majority of the 2 million tourists we saw last summer were of Lebanese origin,” said Chaaban. “Relying on wealthy expats and Arabs… is a short-sighted way of developing our tourism sector.”

While expats may conceal the drop in tourism this season, continuing to depend on them will not help the tourism sector to move toward its full potential in the future. To develop foreign tourism will require a strategy that caters to different types of visitors from all over the world. By diversifying the sources of tourism, the country will not only shield itself from risk, but also maximize long-term return.

Where have all the Arabs gone?

While Arab tourists accounted for 42 percent of last year’s foreign tourists, 2011 is due to see a drop in this number, with land travel via Syria compromised as overall regional security deteriorates. Joe Yacoub,Country Manager of international VAT refund operator Global Blue told Executive that “tourist expenditures in Lebanon are stagnant,” explaining that there should have been an increase compared to 2010.

“The unrest in some Middle Eastern countries did have a negative impact on the overall tourist spending,” he said, as residents of Arab countries outside of Lebanon represented 52 percent of the total spending in the first quarter of 2011. “The unrest in Syria… affected total in-store sales coming from Syrian tourists, while incidents near the border with Jordan are affecting incoming tourists from Jordan as well,” he said. According to Yacoub, there was an 18 percent decrease in Jordanian spending in the first quarter of2011.

Despite the fact that the greatest amount of tourist dollars spent in Lebanon came from Saudi Arabia (18 percent) and the United Arab Emirates (12 percent) during the first two months of 2011, according to Global Blue calculations, it is not clear how much of this spending is from Lebanese expatriates and how much is from foreign nationals, as calculations are based on the country of residence and not nationality.

“It is worth mentioning that Lebanese expatriates are considered tourists in relation to the VAT refund scheme,” Yacoub said, emphasizing that many refunds typically attributed to Europe, the Americas and Australia are actually for Lebanese expatriates. Regardless of whether the majority of spending from the Gulf is coming from Lebanese expatriates or foreign nationals, and in spite of the regional unrest, relying too heavily on tourists from the Gulf can no longer fully sustain Lebanon’s tourism economy, as travel trends suggest that Gulf travelers are exploring different destinations and traveling less frequently to Lebanon.

“We have taken Arab tourists for granted in Lebanon,” said Ghobril, who underlined that there is now more competition on the market for Arab tourist dollars from Europe, Turkey and East Asia, which recently launched an aggressive marketing campaign targeting Gulf countries. “We should not underestimate the competition outside the region,” he said. “Turkey has already benefited significantly from the situation in the Middle East.”

With more competition vying for wealthy Arab tourists and Ramadan due in the middle of the summer for the next several years, a new strategy for keeping the Lebanese tourism sector going strong is in order.Signs of a strategic shift are already visible in the hospitality sector,where, in anticipation of Ramadan breaking the season in half, hotels have been actively promoting Lebanon as a destination for leisure and business tocountries outside of the region.

“We are trying to replace the Gulf tourists who will not becoming during Ramadan with tourists from Turkey, Russia and Eastern Europe, as they are not as afraid to come to Lebanon as Europeans and Americans,” said Achkar, referring to the strategy of his own two hotels, the Printania and theMonroe Hotel.

Le Gray, on the other hand, is striving to recuperate the losses from Middle Eastern countries with a steady flow of European and American tourists throughout the month of Ramadan. This year, the hotel invested significantly in promoting Lebanon as a destination through international exhibitions and sales trips in the Middle East, Europe and the United States. “We are initiating strategies to highlight new angles to promote Lebanon as a destination, mainly through art and culture,” said Public Relations Manager Rita Saad.

Even Casino du Liban has begun looking further afield for foreign players. Often viewed as an indicator of high-end tourism, the casino is expecting a good season across all of its business units, with gaming rooms expected to work at full capacity, as well as its restaurants, entertainment venues and banqueting facilities. However, according to Hafez, it is looking to diversify beyond the Arab market to make up its share of international players, and is investing in a strategy to target players from neighboring countries like Greece and Cyprus, as well as Turkey and Russia, where recent casino closures have left players looking abroad for more exciting options.

China is also on the list of international target markets.“This market holds huge potential, with a rising interest of Chinese gamblers to come to the Middle East. But we still need a few more years to start witnessing a regular flow of clients from the Far East,” said Hafez.

The Ministry of Tourism has also been very active, participating in international fairs and exhibitions in Russia, Europe and Turkey in addition to the Arab world. In Europe, the Ministry of Tourism is targeting France, the United Kingdom, Germany, Spain and Italy, and has launched a new website for leisure tourism for the French market.

“The Ministry of Tourism is very interested in Europe, but different countries require a different approach,” said Serge Akl, director of the Tourism Office of Lebanon in Paris, France, which is Lebanon’s only tourism office abroad. Country-specific websites are set to follow the French site. “The last step will be the Americas, as these markets will be challenging to reach because there are so many negative images to change,” he said. Back in Beirut, the Ministry of Tourism is also working to develop relations with the Iranian embassy to support more visits from Iranians, who represented 80 percent of non-Arab Asian arrivals in the first quarter of 2011, mainly because of the Persian Noruz holiday. But as 75 percent of these tourists came by road through Syria, further travel plans may well be on hold until the dust of the uprising settles.

More to offer than “beach and booze”

As the market for tourism becomes more competitive worldwide, a well-rounded tourism development strategy for Lebanon will need to rely on promoting the country by focusing on the diversity that differentiate sit from other places around the globe. Marketing Lebanon as a destination for sea, ski and nightlife not only overlooks some of the country’s greatest assets to attract tourists, but also limits the scope of its attractiveness to visitors from the Arab world.

It is unlikely European or American tourists will journey to Lebanon specifically for these things, given that they have other options for sea, ski, and nightlife far closer to home, most likely at cheaper prices. WhileLebanon is a glamorous destination for luxury shopping and services, fine dining, gambling and nightlife, focusing only on these aspects of tourism limits the growth of the sector and the country’s ability to attract more tourists from all around the world. In a country that possesses five ancient UNESCO World Heritage sites and a biodiversity of more than 1,500 species of flowers, plants and trees in just a 10,400 square kilometer space, there is much more to the country than is currently being promoted.

“When looking at the Western market, the target is an educated tourist,” said Akl. “An intellectual person wants to visit Lebanon as a destination of discovery where they can experience something enriching — from history, nature and architecture to a vibrant scene of contemporary art, cinema and design… in addition to our state of the art dining and nightlife,” he said.“It’s about marketing l’art de vivre that Lebanon is famous for, together with its rich heritage and fun-loving, hospitable people.”

When Akl organizes press trips for the French media, he notes that basic sun and sea tourism interests very few. “They become interested when I begin showing them that Lebanon has something more unique and interesting to offer,” he said.

In a special Milan Design Week 2011 edition of Elle Decor Italia, Beirut received a 10-page section featuring the capital not only as a party town but also as a sophisticated cultural destination.

“This type of exposure changes European views aboutLebanon,” Akl said. “Expressing the post-civil war era through things like cinema, music and art shows that Lebanon has something pertinent and intelligent to say to the world, and people want to come and experience that.”

Cultural tourism can also be highly lucrative. From July 13 to 16 this summer, art collectors from all over the world will be congregating in Beirut to experience the city as a cultural destination when they come to visit the first edition of the Menasart Fair, the first international art fair to be completely dedicated to contemporary art from the Middle East, North Africa and Southeast Asia. In the event’s regular newsletter, fair manager Laure d’Hauteville announced on March 24 that “the present stable situation of Lebanon offers a stunning contrast with its surrounding environment.”

Ecotourism could also be an attractive resource for Lebanon, given its abundance of natural treasures — the Qadisha Valley, the Cedar Reserves, the Jeita Grotto, the Balaa sinkhole, and the entire stretch of the Lebanese Mountain Trail (LMT), to name a few.

“Ecotourism is gaining market share,” said Karim el-Jisr, founding member of the LMT, which opened in 2006. “Ecotourism can easily cater to up to 100,000 tourists per year provided that the sector is better organized and there is a commitment to nature conservation,” he said. Last year the LMT welcomed 30,000 visitors and this year it anticipates approximately 50,000 visitors despite regional turmoil, as “ecotourism is more flexible than conventional tourism,” he said.

The LMT also helps to sustain businesses in villages alongthe trail, providing a much-needed injection of economic activity to the ruralareas through which it passes.

“Ecotourism is undervalued in Lebanon,” said Hana Hibri, author of the book “A Million Steps”, which recounts her 30-day journey along the LMT in 2009. “There are many misconceptions about ecotourism. It’s not only for low-budget travelers and it’s not competing with traditional hotel tourism.If anything, it complements it,” she said. If hotels organized packages for travelers to end their hike with a rewarding spa weekend in luxurious five-star surroundings, Hibri felt there would be plenty of hikers that would gladly signup.

Adventure tourism that goes beyond hiking and into extreme sports is also a new niche for Lebanon to explore, given the country’s 300 days of sunshine and temperate climate for most of the year. In 2009 the three-day cross-country Lebanon H.O.G. Tour brought more than 300 Harley Davidson ridersfrom Europe, Australia, the United States, Jordan, Syria, the GCC and beyond, in what became the world’s largest official Harley Davidson tour. A cap on the number of riders the event could accept had to be applied for the following year, due to a lack of sufficient accommodation facilities across Lebanon.“These are people who are brain surgeons, doctors, business owners, architects, engineers, you name it. The profile of a Harley Davidson rider is a five-star client, so we need to take them somewhere where they can all be hosted comfortably,”said Marwan Tarraf, General Manager of Harley Davidson Lebanon.

Turning up the speed a notch, Gilbert Khoury of High On Wheels, the exclusive distributor for Ducati and other elite motor sport brands in Lebanon, is launching an extreme sports theme park near Dbayeh in July. As Lebanon’s first such attraction, the park will offer a vast range of pulse-raising pursuits for an equally broad base of clients. “This park willmost definitely attract tourists from the region and Europe,” said Khoury, who is banking on Lebanon’s temperate year-round climate to attract visitors from more extreme climatic zones who want to enjoy exciting outdoor sports.

Taking care of business

In addition to being a diverse vacation destination, Lebanon also has potential as a destination for corporate travel. Being a gateway to the Middle East, a cultural bridge, and place where diversity of religion, thought and language coexist, Lebanon is a place where people from European and Eastern cultures can feel at ease, and for regional or international companies this accessibility is a great asset.

“MICE [Meetings, Incentives, Conventions, Exhibitions] tourism is very important for the tourism sector and the national economy,” confirmed Sardouk. “MICE provides jobs by creating a chain of value for different sectors, including agriculture, industry, transportation and hospitality,” she said. “The participants in the meetings, exhibitions and trade shows can also discover the country, and we see about 80 percent of them expressing a desire to come back for pure tourism.”

On the 2011 World Economic Forum Travel and Tourism Competitiveness Index (TTCI), Lebanon ranked third out of 139 countries globally for the frequency of business travelers who extend their trips. “High occupancy rates in Beirut are highly correlated to business travel for regional corporate meetings,” said Achkar.

For hotels, MICE also provides another revenue stream that helps to diversify their risk across other activities. The Phoenicia InterContinental has begun to rely more heavily on MICE, as this sector has recently begun to show significant growth. MICE has been the hotel’s strongest growth market for the past two years as a result of heavy collaboration with the Ministry of Tourism and local tour operators.

“We have seen high demand not only from Arab and neighboring Near East countries, but also strong demand from Turkey, Europe and even Latin America,” said Phoenicia Director of Sales and Marketing Daniel Weihrauch. “The second half of 2011 also looks very encouraging, with multinational companies booking regional events and global conferences with us,” he said.

Despite the challenges of 2011, MICE tourism in Lebanon still appears to be going strong. HORECA, a four-day international trade show for the hospitality and food service industry which took place in Beirut this spring was the most successful edition to date. “It’s confusing because this runs contrary to the overall situation in the country and the region,” said Joumana Damous Saleme, managing director of Hospitality Services, the company that organized the show. “We had last minute cancellations from Egypt and Iran, but the rest of our international exhibitors attended,” she said. HORECA attracted more than 25,000 visitors and 350 exhibitors, an increase over last year of 10 percent and 15 percent, respectively. 

International exhibition and conference organizer IFP remains optimistic about its summer trade shows. “I can say we are looking at a potential of 30 percent growth in revenues, maybe more if things in the region settle down soon,” said IFP Chairman Albert Aoun.

The popular trade show for yachts, Beirut Boat 2011, taking place this month, has already attracted more than 120 participants, among them the biggest names in the marine industry, making the show 30 percent larger than 2010. Furthermore, the upcoming real estate show in late May and Early June at BIEL, “Project Lebanon 2011” will be 25 percent larger than last year, withmore exhibitors and exhibition space. In addition to “Energy Lebanon,” a regional electricity trade show that will run from May 31 to June 3, IFP is also adding a new summer show, Outdoor Lebanon 2011, to its busy event schedule from June 22 to 26. The show will promote outdoor sport equipment for all types of activities, such as hunting, hiking, sea sports, ATV-riding and more. “We expect this event to be a success,” said Aoun. “We are expecting growth in this year’s shows.”

Based on 2010 figures, IFP expects summer shows to attract 3,000 to 4,000 international visitors. “We have to keep in mind that business visitors and high income tourists make a good impact on the country’s tourism and hospitality sector,” he added.

Message in a bottleneck

With much of the Middle East in the throes of revolution and Lebanon still trying to form a government, facing the indictments from the Special Tribunal for Lebanon and still recovering from the 2006 July War, tourism represents far more than an economic activity.

“We need to break the perception of Lebanon as a location of terrorism,” said Akl, pointing to the value of tourism as a form of public relations for a small country with what one could call a fairly negative world image. When measuring the tourism economy in Lebanon, the value of an individual tourist goes far beyond the number of dollars spent in the country. When that tourist goes back home and speaks positively about Lebanon, it creates a type of PR that the Lebanese are highly familiar with: word of mouth.

“Lebanon has been using tourism as a major international PR tool for a while now, but the brand image [that was] built was interrupted several times by political instability, which led to economic instability,” said KatiaYasmine, managing director of regional PR agency TRACCS.

Unfortunately, on the 2011 World Economic Forum Travel and Tourism Competiveness Index, although Lebanon ranked third in the region for human, natural and cultural resources, it ranked 113 out of 139 countries globally for how well the country manages marketing and branding.

Before worrying about branding, however, the country has greater issues to deal with. The Ministry of Tourism admitted last year that Lebanon is not prepared in terms of infrastructure — namely water, energy and transportation — to support more than 15 to 20 percent growth in tourism. “In the strategy of [caretaker] Minister Fadi Abboud over the last year the focus has been to look at how we can spread the number of tourists over the year and over the country,” said Sardouk. “More growth could be supported in the country if this happens,” she said. For such alternatives to work, however, better signage, roads, maps and accommodation facilities in other cities outside the capitalare required.

In 2011, the World Economic Forum concluded that “ground transport infrastructure should be further developed, and safety and security issues must be addressed,” in order for Lebanon to truly become more competitive. Even when the country experiences a period of relative stability, however, the media buzz that thrives on political propaganda and negative forecasting does not help to advertise Lebanon as a destination for tourism. Once stability and safety are relatively secure, this has to be proactively communicated.

“The basic starting point is security and stability,” said Ghobril. “People don’t care about politics; they care about safety.”

0 comments
0 FacebookTwitterPinterestEmail
Comment

Obedient Al Jazeera

by Paul Cochrane
written by Paul Cochrane

Since Al Jazeera’s launch in 1996 its slogan has been “the opinion and the other opinion.” Its objective of telling both sides of the story has won over many audiences, while at the same time making the channel more than a few enemies — namely Saudi Arabia, which set up Al Arabiya in response to the Qatar-based network’s regional and global rise.

Banned at one point or another in nearly every Middle Eastern country, Al Jazeera has for the most part lived up to its truth-seeking pledge, but its slogan is now in danger of being undermined by its lop-sided coverage of the Arab revolts. The year began all roses for Al Jazeera, credited with being instrumental to the overthrow of the Tunisian and Egyptian regimes due to its round-the-clock coverage of demonstrations and its ability to give the uprisings widespread visibility. As a result, Al Jazeera has been praised in the Western media and by the White House, which was apparently glued to Al Jazeera English’s (AJE) coverage of Egypt. British newspaper The Daily Telegraph gushed in April: “The ‘Arab Spring’ uprisings of 2011 are being hailed in Washington as the ‘Al Jazeera moment’,” and Australia’s Sydney Morning Herald trumpeted: “Al Jazeera is changing minds and hearts.”

Missing from these glowing accounts, though, was that the uprising in Bahrain was barely covered by Al Jazeera Arabic, with only slightly better coverage on AJE. Given Al Jazeera’s integral role in the  Tunisian and Egyptian revolutions, itsmuted coverage of the Bahraini uprising since it began in mid-February has comeas a slap in the face to the countless demonstrators there. Furthermore, AlJazeera gave the detention and alleged torture of hundreds of Bahraini demonstrators scant coverage compared to similar events in Egypt, while the channel also failed to air potentially damning footage of the demolition of the symbol of the uprising, the Pearl roundabout, and 16 Shia mosques — a silence that could only be called an abdication of Al Jazeera’s self-proclaimed duty to objectively inform regional opinion.

At the heart of the matter is Qatar’s membership in the Gulf Cooperation Council (GCC), established in 1981 as a security pact among the Gulf monarchies in the wake of the 1979 siege of Mecca. Qatar’s position in the GCC pushed Doha to deploy troops to Bahrain when martial law was declared on March 15, but a casualty of this military intervention has been Al Jazeera’s objective news coverage.

With regard to Bahrain, Al Jazeera seems quite clearly to be acting as an extension of the Qatari government’s foreign policy and leaves the channel vulnerable to accusations of “double standards,” politically acceptable uprisings in the name of democracy — in Libya, Egypt, Tunisia and Yemen for instance — are covered and supported; uprisings against the Qatari national interest — such as in Bahrain — are largely dismissed. Ironically, Al Jazeera was banned in Bahrain last year, which the channel suggested may have been because of a report it aired on the country’s poverty, but which Bloomberg suggested was related to Manama’s wanting to increase Qatar’s rent for use of the Hawar islands.

A 2009 United States diplomatic cable, released by Wikileaks, highlights the geo-political role of Al Jazeera, with US ambassador to Qatar, Joseph LeBaron, noting: “Al Jazeera’s ability to influence public opinion throughout the region is a substantial source of leverage for Qatar…Moreover, the network can also be used as a chip to improve relations. For example, Al Jazeera’s more favorable coverage of Saudi Arabia’s royal family has facilitated Qatari-Saudi reconciliation over the past year.”

Al Jazeera’s “objective coverage” should also come under greater scrutiny in regards to Libya given Qatar’s vested interests there, including Doha’s role in the NATO-led air strikes and the inking of an oil distribution agreement with the Libyan rebels the day before the strikes began. Uncritical coverage of Qatari issues has also been a hallmark of the station since its inception. Thus, while Al Jazeera has generally helped raise the baron network news coverage and pushed television reportage to a new level, those who’ve championed the channel as some sort of media Messiah immune to the failings of major Western news outlets should take heed — there is “the opinion and the other opinion”, and then there is the opinion of the Emir of Qatar.

Paul Cochrane is the Middle East correspondent for International News Services

0 comments
0 FacebookTwitterPinterestEmail
Finance

Q&A – Simon Cooper

by Vanessa Khalil
written by Vanessa Khalil

Simon Cooper is deputy chairman at HSBC Bank Middle East and North Africa (MENA). Herecently sat down with Executive to discuss the effect of the regional unreston business and investment in the MENA region, as well as growth opportunities for the future.

With all the capital outflows, the foreign investments that have been stopped, the people who have been laid off, the expectation that unemployment will rise rather than fall, the lost tourism and the fact that the government is not spending yet, it seems it will take a lot for Egypt to not to fall into a very vicious circle. Banks in general and HSBC are exposed to a lot of risks there. There’s a risk of default from corporate clients and absolutely from individuals for the retail banking division. How are you going to manage this crisis?

I think you’ve got to step back here. First there was the physical crisis that hopefully has passed. We were able to manage that through being part of a regional network so we were able to immediately support what was taking place onshore in Egypt with our infrastructure offshore. We were the first bank to re-open in Egypt.

In terms of the credit risk, we saw a short-term blip in delinquency in February when people on the retail side were not paid because businesses weren’t open to issue payrolls. But we’ve seen that reversing in March.

We as a bank are at the higher end of the economic spectrum in our client base so we have a natural advantage in terms of segmentation of our customer base. When you look at the corporate side, the central bank of Egypt was very disciplined for many years in terms of making sure that foreign currency borrowing was mirrored by foreign currency earnings. So again the impact of foreign exchange has been largely self-hedged by the regulations over many years.

There’s certainly going to be a short term impact on tourism. Hotel occupancy is definitely lower this time this year than it would have been this time last year. I understand that people are starting to book again for October-November, which will be the next peak season for Egypt’s tourism industry. It’s too early to say whether that will be successful or not. It will be a very important barometer to see how many people do come back in.

There’s definitely a bump in the road; exactly how long that bump will last is too early to say. To my mind, it’s probably a year or two to get back on its historic trajectory but I don’t think it will take 10 years, after a sort of downward spiral from where we sit today. We now need the constitutional reform to be moved forward; we need the government to come into place and hopefully it will be a sustainable one.

You were one of the first to be in Iraq along with Standard Chartered, but in the end it wasn’t really operational. What’s your prospect for Iraq and why there?

I can’t take credit or blame; it was done before I was in the region. But talking to Lebanese customers, there’s a huge amount of interest in business opportunities in Iraq. A number of people distribute their products into Iraq – all told me that their only constraint was in getting enough product into the market, whose potential they believe is significant. I think if you look at foreign investment coming into Iraq we’ve done a lot in terms of some of our multinational clients looking to establish or grow their business [there]. It’s not going to suddenly take over the United States as a top-five economy in the world, but in terms of growth potential it’s significant. Physical security remains a high operating cost of having a branch network in Iraq. But the business potential I think is significant. We used to manage the business predominantly from Jordan, and we increasingly put more and more people into Iraq as security becomes much more stable.

Bahrain’s image as a financial hub has been tarnished recently. Is doing business there at the moment such a good idea?

There are clearly a number of companies that ran regional businesses from Bahrain that had to move their operations very quickly elsewhere. So clearly that is a memory that people will retain for some time and it will cause people to think twice when they are looking to really invest. So yes, there has been some damage to its brand. But we’re absolutely staying there. We’ve been through a number of wars in the region and turmoil — we’ve seen it all before. So we’re very much here to stay and to continue to invest more.

How would you assess potential for Syria and Libya?

In Syria we have a representative office. We applied for a branch license last year, which we didn’t get. In terms of Libya, there’s a tremendous opportunity in terms of the economy and to be part of the economic growth. But I don’t know what’s going to happen in terms of the current conflict; that has to resolve itself one way or another before you can form a view as to where the economy is going and how long it’s going to take to get there. But the potential is absolutely huge. In Syria, I’m sure the economics are strong; but from a banking perspective, as an international bank doing business in Syria, given the US sanctions and everything else, it is too difficult. 

Will the‘Arab Spring’ provide new opportunities for the region?

Look at what’s been the reaction for a number of governments. There’s been an increase in infrastructure spending. There’s a renewed or heightened oil price. Both of those things are economic stimulants for much of this region, and that gives tremendous opportunities for employment, gives opportunities for bankers, for project financing. So, yes, I think there will definitely be some benefits coming from it.

Many of the countries’ infrastructure is not at as high levels as you would expect given these countries’ wealth. So as infrastructure investment comes in, it is a real sustainable investment and a real sustainable benefit to the economy. It’s not just the initial sort of cash injection; it’s what it does to enable businesses going forward.

Who benefited from the capital outflows within the MENA region?

There’s definitely a flow of capital around the region. While there’s been an FDI [foreign direct investment] outflow, some of it has come back into some of the other countries. The UAE [United Arab Emirates] has definitely benefited from some of the unrest that’s taken place around the region. It’s become a safe haven for some direct investors.

It’s also become a safe haven for tourists. Tourism numbers in the UAE have risen dramatically in the last few years…because perhaps people are more concerned than they were about holidaying in some of the other destinations they would have otherwise gone to.

0 comments
0 FacebookTwitterPinterestEmail
Real Estate

Venus towering over Phoenician past

by Karah Byrns
written by Karah Byrns

The threat that cultural heritage faces in Beirut as a result of rising land prices and the scarcity of empty plots is a familiar theme. There seems to be no shortage of fresh cases to highlight and local and international media, as well as local NGOs devoted to preserving national heritage, are doing their part to raise the issue.

Over the last several weeks, Venus Real Estate has been in the spotlight over the discovery of what local news media has claimed is an ancient Phoenician port on “lot 1398”, an approximately 7,000-square-meter sitewhere the company is preparing to construct a luxurious three-tower high rise complex called Venus Towers. 

“I haven’t seen the site; it is closed to the public and even to archaeologists — this is what happens every time there is an important discovery in the Beirut town center,” said Leila Badre, museum director of the Archeological Museum of the American University of Beirut. The Directorate General of Antiquities (DGA) has been carrying out work on the site since the discovery of the ruins by the Ministry of Culture nearly two months ago. At present, the ministry is consulting with local and international experts to determine the value of the site, and as of April 27 five reports had been submitted, signifying that a final decision is coming soon. “We found slopes going down toward the sea that can be interpreted in many ways,” said caretaker Minister of Culture Salim Warde. “It might be a port, a shipyard, or even a quay, but it is surely something very interesting, and we are seeing how we can work with the owners of the land to save this site,” he said.

Over the month of April, An-Nahar criticized Venus Real Estate in two reports that cited numerous experts on the potential archeological value of the site. On April 27, Venus Towers issued an official statement to “clarify” the situation to the general public, threatening media outlets with legal action for making damaging accusations. The statement contends that the plot is too far from the sea to have been used as a port, and too far above sea level, but did not address any historic changes in sea level since the period when the ruins are thought to have originated from.

“The coast of Beirut today is not as it was over 2,000 years ago,” said Warde. “We know for a fact that over the last century this area was covered by stones at least four times. Before then, we don’t know how many times this occurred.” The last time land reclamation like this occurred was by Solidere, whose damage of historic sites was notorious during the post-civil war reconstruction boom. Disturbed by the situation and what he referred to as yet another challenge between the national interest and the private sector, member of Parliament Walid Joumblatt expressed his concern to Executive following the issuance of the Venus Real Estate statement. “I don’t believe a word they say; it’s all rubbish. They will find any excuse for the sake of a few square meters,” he said.

Prior to the publication of the statement from Venus Real Estate, Venus Towers spokesperson Wajih al-Bazri told Executive on April 25 that there was a great difference of professional opinion from archeological experts about the importance of the site. Bazri claimed that while local experts believe the site is important, the international expert brought by Solidere ruled the site unimportant. “The Ministry of Culture and Solidere are working together to get more opinions,” said Bazri. “There is no final opinion yet, but they are working to finalize as soon as possible to be able to go ahead with the project.”  He added that the real estate company will abide by the ruling of the Ministry of Culture, whatever it may be. In the worst case scenario, “we will build around it,” said Bazri, explaining that the ruins only cover about 1,000 square meters of land, then adding: “The newspapers are making a bigger fuss out of this than it really is.”

0 comments
0 FacebookTwitterPinterestEmail
Real Estate

Funding’s new frontier

by Rayya Salem
written by Rayya Salem

Lebanon has all it takes to be a haven for real estate investors; no crash in property prices is known to have ever driven desperate developers to leap off their office balconies.

Even when real estate financing bubbles were bursting in neighboring countries and across the Atlantic, the case for Lebanese real estate remained strong, with compelling fundamentals and more specifically, guaranteed tightness in land supply.

Traditional real estate funding — with cash, help of family, bank loans and some government-subsidized schemes — is as deeply entrenched in Lebanon as is the national preference for real estate as an investment. So far, what remains scarce within Lebanese borders is private equity (PE) real estate funds. But some entrepreneurial minds have placed their bets on fund-type private equity investing in the local real estate scene, arguing that Lebanon’s property boom (most of the $14 billion in FDI inflow since 2008 was funneled into real estate) and ongoing maturation of the sector are signaling opportune times for professional real estate private equity investments, also called REPEs.

Lebanon’s maturing market may have created the need for REPE services, as they also serve as an alternative to (tightening) debt financing. “The 50 million square meters of construction permits obtained since 2008 will drop their final products onto the market within the next three years,” says Ralph Chahine, the head of private equity for MENA Capital, a Beirut-based financial firm. “If we estimate that 70 percent of that number is sold, and that a small portion will remain non-built, the remaining number is large enough to pressure banks to make more calculated decisions.”

Currently managing three real estate private equity (REPE) funds in Lebanon (though registered in the island of Guernsey in the English Channel) and one Lebanese offshore dedicated to investment in Iraq, collectively worth over $225million, MENA Capital is one of Lebanon’s largest managers of REPE investments.

New kids on the block

Recently a new REPE player came to the table and is raising cash for its first project, a 23-story residential tower, Trabaud 1804, in Ashrafieh. The firm’s name is Capstone Investment Group, and its chief executive officer, Ziad Maalouf, states the company’s case in similar terms as MENA Capital’s Chahine. 

Now is the time for REPE in Lebanon, Maalouf says, “Money at the bank has been losing value; there are fears of inflation around the world, so people are looking for solid investments that they can also exit after a definite period of time, especially in a market that has good fundamentals and where real estate prices have not dropped.”

Private equity plays in real estate have emerged as institutional acquisitions of income-generating assets in developed markets, but their relatively aggressive, opportunistic model (which requires high capital investments to be locked in for a period of time) have higher risk-return profiles. Differences between investing in a REPE venture and partnering with a traditional real estate developer include the REPE’s systemic approach with a time-phased payout structure to the investor and a strong profit incentive for the REPE manager.   

 “We have the structure of the fund, without having to call it as a fund… because of the lack of proper fund regulations in Lebanon,” says Capstone’s Maalouf. “There are no ‘Lebanese domiciled’ funds investing in real estate, the ones in Lebanon [regulated by the central bank] are mostly money market funds. The laws, rules, regulations, support, back office and administration necessary to create and manage real estate funds in Lebanon leave much to be desired… so we opt to register outside [of the country].”

Capstone’s development management agreement (with the holding company which owns the land) works the same way as a fund, taking a management fee of 8 percent of construction costs. Carried interest is applied at 20 percent of the profits above a rate of return of 10 percent, meaning the fund manager will be eligible for a substantial share in profits that exceed a baseline return under the agreement with the investors.

The $45 million cost of Capstone’s first project (for land and construction) is financed by an equity-debt combination and the structure projects an internal rate of return of 25 percent or more for investors.

An investor committing a dollar in the fundraising phase (year 0 of a project) will get “back at least two dollars in year three or four; investors would double their investments in a period of three to four years,” claims Maalouf. So far, as half of the apartments (ranging from 290 to 445 square meters) have been pre-sold, revenues exceed $65 million.

PE investments in Lebanese real estate carry little risk as opposed to PE investment in other asset classes, according to Maalouf, because one can foresee an exit after a certain period of time — usually three years. “If I invest with an entrepreneur, I cannot get my money out of this company unless he takes his company public, or he sells his share to another company or liquidates his investments. In real estate’s worst case scenario, if you don’t sell the apartments, you can rent them out, and turn that investment into an income producing asset.”

Maalouf told Executive that Capstone applies “a transparent bidding process for all the tenders, and the decision is taken by [the board of directors] who are the representatives of the major investors in the project and meet monthly or as needed.”

Uphill battle

But there are nonetheless reasons why REPE and comparable schemes may face difficult market entry in Lebanon. As Lebanon does not have mutual funds, insurance companies, or other large players actively investing in PE, around 70 percent of investors in established funds like MENA Capital’s real estate funds are high net worth individuals (HNWI), “unlike developed markets where this percentage is more around 13 percent, or even the region where around 30 to 35 percent are HNWIs,” says Chahine.

Transparency of PE funds, which has been described as underdeveloped across MENA, is not exactly the Lebanese forte. Comparing promised returns or even comparing exit timings of two different funds is difficult anywhere, especially in Lebanon, even if the funds are registered outside.

The main other issue for REPE funds in Lebanon would be the limited exit options. Chahine said REPE may garner a slow and skeptical reception in Lebanon, especially if investors are asked to put their money into a family-owned and managed private equity company.

As Capstone settles into a nascent PE market, the firm is eyeing the central district for future projects. It has set a nearly $50 million budget to acquire land and construct a modern office tower in the vicinity of Solidere, “because we believe there is lack of modern office space in Beirut today,” says Maalouf.

Meanwhile, the changes in real estate demand in Lebanon are weighing on MENA Capital’s pending and future plans; “Certainly, we cannot afford to turn a blind eye on the changes in the market… in some of our projects, we did split some apartments to answer requests for smaller units. We are now working on a couple of projects in Lebanon with apartments ranging from 100 square meters to 250 square meters,” says Chahine.

0 comments
0 FacebookTwitterPinterestEmail
Real Estate

Q&A – Joseph Mouawad

by Rayya Salem
written by Rayya Salem

Joseph Mouawad, chairman of Mouawad Investment Group (MIG), has gradually earned his place among Lebanon’s top developers of residential properties, country clubs and mixed-use offices since the start of Lebanon’s post-civil war reconstruction effort. Two of his major ongoing projects, covering almost 90,000 square meters  in Faqra, will soon put his footprint on the famous Lebanese resort town. Executive chatted to the developer about his latest resort operations and his sway toward hospitality projects in Beirut.

After the success of Park Tower Suites in Ashrafieh, you seem to be gravitating towards more hospitality projects in Gemmayze, Saifi and Monot…

In our new residential project Monot 38 on Monot Street on land we acquired about a year ago, we will also have a boutique hotel, Monot Suites, of about 25 rooms, along with the residential tower of about 20 floors, which will consist of small to medium-sized residential units of 100 to 300 square meters, of which 35 percent is sold.

And in October of this year, Saifi Suites will function as a boutique hotel, offering 70 suites. From our previous experience at Park Towers, we were able to put up a good [internal] management team to manage the new hotels that are coming up.

Why hotels? Is the profit margin higher? Is there a gap in supply?

We believe there is shortage in hotel supply in Beirut. Even before the [civil] war, we had more rooms. We believe that building a hotel will be an added value for a long-term investment, especially when you have a prime location.

You have signed with Rotana to manage an upcoming Gemmayze hotel project, correct?

We are developing a new hotel project with Rotana’s new brand Centro, as the manager, on Rue Pasteur in Gemmayze. It will have a view to the port, and it’s a nice area that allows visitors to walk to trendy shops, bars and pubs. The restaurant in the hotel will cater to both hotel clientele and the Gemmayze crowd.

And why did you choose Rotana to run operations?

I found an opportunity in the new brand they’re putting up: the Centro brand. It is a  trendy budget business hotel that will cater mainly to business people and tourists, and Beirut has few three and four-star hotels so this will garner much demand, and their reservation system will help fill the 170 rooms. [In March, Rotana Hotels became the first Middle East hotel operator to sign an agreement with Google to display Rotana rates and availabilities on Google platforms.]

In Beirut,since [MIG’s]  The Palladium building [near Starco center] was finished three months ago, are there any new tenants?

Bank Audi rented around 7,000 square meters of office space, which will accommodate around 400 employees of the bank. But in terms of retail space, just recently, Santiago [womans clothing boutique] opened [in addition to Lanvin, Balmain, and Isabel Marant, which belong to the same owners, as well as Manasseh, the renowned Silverware store]. In terms of restaurants, in addition to Kampai [Asian restaurant] already open, we will also have Le Cocteau that is expected to open in June 2011. ..We are partners in both of them. We are now in the process of closing some other retail shops.

How much do you want to grow the hospitality wing of your activities?

We want, eventually, 50 percent of our activities to be under the umbrella of hotels and restaurants.

Since the banks are tightening their fists, how has your financing strategy changed overthe last few years?

Our debt-to-equity-ratio will start changing from now on because banks are demanding higher equity in the projects, as they believe the market is saturated. They are requiring 50 percent equity compared to 20 to 25 percent previously. Now we cannot count on presales as much, so we have to put in more equity.

The Oakridge residential resort is probably your largest residential project to date, sitting on about 46,000 square meters of land, 100 meters from Faqra Club. Is this kind of resort setup new to Faqra?

To me, there is nothing similar in the area to what we are delivering. [Oakridge] is different. We saw an opportunity to create a resort, not [just] chalets. The resort will consist of residences, town houses, villas, and it will have about 12,000 square meters of touristic facilities. That includes a spa, club, hotel, furnished apartments, indoor and outdoor pools, a restaurant, bar and children’s playground. We started construction about two years ago after buying the land in August 2008  and plan to deliver at the end of 2012. Today, around 60 percent of the project is already sold.

In a resort project like Oakridge, how do you anticipate how much demand there will be for the different residential facilities — villas, townhomes, chalets?

We try to anticipate demand from the existing market, so we look at the existing demand in the area of Faqra, and we try to meet this demand. But at the same time we bear in mind that we need to cater to all budgets; we don’t want to limit ourselves. In Faqra club, 10 years ago, the demand was only for big chalets and villas, but now the young generation is showing more interest and looking for smaller chalets so we try to cater to both budgets. In Faqra, most people buy a piece of land and then build for their own use. Very few are building commercial projects, the only project that was built in Faqra club is Clouds.

What does the price range look like for units in Oakridge?

We have an increase average price of $3600 per square meter now. There are some villas and townhouses, which we priced by unit not by square meter, so $2.2 million for the townhouse and around $3.2 million for the villas. These are sold on core and shell.

What is the plan for the Silver Rocks plot in Faqra?

Silver Rocks is a land development project, on a plot of about 40,000 square meters that we bought at the same time [as the Oakridge plot], in summer of 2008. It consists of 39 plots for sale and we already sold 60 percent. We decided to have a closed gated community and build a small clubhouse and swimming pool to be used by the residents. We are mainly selling plots to people who will build their own chalets, but of course, the design has to be approved by our company.

What’s the incentive to develop land and sell off plots, instead of building residences and selling them?

Many people prefer to buy a plot instead of a chalet. They consider a land purchase a safer investment for the long term.

What are these two large projects costing?

The total project cost for Oakridge is $45 million including land and construction. Silver Rocks costs around $10 million.

How would you characterize the swelling of supply in Faqra now as around nine residential and hotel projects are underway?

There are still plots of land in Faqra, but there are too many projects being built, so project development will definitely slow down and many projects under planning will be put on hold. The demand will pick up again once the political situation gets better.

Do you think prices will dim?

Cost of construction in Faqra area is high due to the weather conditions that allow only seven months of work per year and also due to higher cost in labor and transportation. The cost is at least 20 percent higher than [the cost of building in] Beirut. Prime lands are limited, which also led to a high land cost, so prices will not decline since the profit margin is not significant.

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

Executive Insight – Welcoming Chinese inflation

by Fabio Scacciavillani
written by Fabio Scacciavillani

The spectacular rebound of emerging markets after the recent recession was driven in no small part by China’s emergency stimulus package in late 2008, arguably the timeliest and the largest in the world (relative to gross domestic product). The pull of Chinese demand was powerful enough to revitalize international trade — severely curtailed by the crunch in trade finance — and to drag out of the hole many of the economies well integrated in the Chinese supply chain, from Malaysia to Korea, and Australia to Germany.

The flip side of this stimulus has been a worrisome boom in real estate prices (which has led many to scream “Bubble!”) and persistent inflationary pressures which have extended across Asia (excluding Japan),complicating the macro picture at the national and global level. Asian central banks (and also Latin American ones) until late last year were reluctant to aggressively raise interest rates, lest they clip the green shoots of recovery. But with the upturn in emerging markets, food and commodities prices world wideresumed their surge; since the beginning of this year this surge has been exacerbated by oil price reaction to the turmoil in North Africa. Amplifying this effect is the premature end, after Japan’s Fukushima disaster, of the much touted “nuclear renaissance” that was supposed to substantially curtail hydrocarbons in the world energy mix.

China remains to-date the epicenter of inflationary pressures, despite the fact that authorities were the first to react decisively by increasing reserve requirements up to 20 percent for top lenders, restricting credit to the real estate sector and hiking interest rates four times since October. Nevertheless, in March, Chinese inflation hit a three-year record of 5.4 percent per annum, while in India, which is also experiencing a generalized price surge, it reached almost 9 percent; across the emerging markets generally, from Korea to Brazil, price levels are overheated.

Conventional wisdom and mainstream policy advice suggests that the Chinese authorities should act even more aggressively to counter further price hikes, and indeed solemn pledges to this effect figure prominently in public statements by senior politicians. But China generally defies conventions and an alternative course of action appears to be gathering consensus within policy circles. The new five-year economic plan sets a 4 percent inflation target for this year, and Chinese authorities have signaled that in the medium term they would be comfortable with inflation between 4 percent and 5 percent, which represents a substantial increase compared to previous years.

Furthermore, national and local governments have enacted a spate of hefty salary increases: since the beginning of the year, 12 Chinese provinces and provincial-level municipal cities have raised their minimum wages. The average adjustment over the 12 provinces was 21 percent with the highest hike, 28 percent, being decreed in Chongqing, in central western China (outside the coastal belt where manufacturing is concentrated). Incidentally, thanks to a 20 percent rise, Shenzhen replaced Shanghai to become the city with the highest minimum monthly wage in China (approximately $203). If we consider a longer horizon, since last year 30 provinces raised the minimum wage, often by double digits.

These measures were justified by the need to attract labor from the inner regions and to improve living standards, an issue that had taken center stage in domestic politics after strikes and workers unrest spread across the country, threatening to become a widespread phenomenon.

Whether by happenstance or by design, it seems that an unorthodox policy recipe is emerging. One of the foremost issues confronting the Group of 20 countries is the rebalancing of the current-account surplus by China and Germany and other mercantilist oriented countries. The most vocal critique of China’s export-led strategy has been the United States, which (stirred by Congress) has used such criticism to push for a revaluation of the yuan.

The Chinese government and central bank are aware that an ever-increasing current-account surplus is not sustainable (the foreign exchange reserves have reached a walloping $3 trillion), but might be contemplating an alternative route; instead of revaluing the nominal exchange rate (as demanded by the US and others) they are increasing the real exchange rate.

By raising domestic wages they boost domestic inflation, thereby losing competitiveness, but Chinese workers feel the benefits more than foreign competitors. In essence, the Chinese government seems to be pursuing a redistributive policy in favor of the domestic population with the aim of boosting internal demand and reducing the current account surplus.

It is hard to say how this policy will turn out; it certainly carries risks, as once a price/wage spiral is triggered it becomes hard to control, but a few implications for the global economy and the Middle East are clear.

 

Over the pastthree decades China has become the world manufacturer and has been the mostpowerful force behind a relentless deflation in traded goods — reveled in bythe rest of the world — thanks to an almost inexhaustible supply of cheaplabor. This process is reverting, and with China’s inflation on the rise it isonly a matter of time before a global reverberation is felt.

If one adds the effects of money printing in the US and the need to monetize at least in part public debts in mature countries, foremost in the Eurozone, the next few years will present serious challenges for monetary policy; the word ‘stagflation’ is likely to make a comeback in everyday parlance. 

This change will not be a temporary adjustment, but will represent a structural shift in the global economic environment, affecting greatly the smaller economies in the Middle East and elsewhere. In particular, the Gulf Cooperation Council countries will find themselves again ensnared, like in 2006-2008, in a monetary policy determined by the US Federal Reserve to serve its domestic goals, but utterly inadequate for the conditions of GCC economies.

Furthermore, the central banks and the sovereign wealth funds that manage the accumulated export revenues are typically exposed to fixed income securities denominated in US dollars. At present, the safe haven status and the anemic credit conditions have held bond prices remarkably stable (excluding of course troubled countries such as Greece or Portugal). But when markets realize that higher inflation is not a blip, the adjustment could be traumatic for fixed income securities. There are no simple solutions to this kind of tectonic shift, but a revamping of the GCC’s common currency project could not be more timely. A degree of flexibility in monetary policy and a new strong international currency would be in the best interests of the oil exporters and also indirectly, those of other countries in the region.

The surge in Chinese wages will also lead domestic consumption to replace exports as an engine of growth. This swing has a long course to run as private consumption represents a remarkably low percentage of China’s GDP. The effects of the Chinese boom have thus far benefited countries and companies embedded in China’s supply chain, but from now on the effects of the stimulus could reach those countries and companies that cater to Chinese consumers, in particular in the provision of durable goods for the expanding middle class — washers, cars, furniture and high end services, such as tourism, healthcare and financials.

A benevolent interpretation posits that, far from being a serious worry, inflation spurred by the loose wage policy tolerated — and often encouraged — by the Chinese authorities could be another step in the long march toward better quality of life within China and the harbinger of a great leap forward for the world economy.

 

Fabio Scacciabillani is chief economist at the Oman Investment Fund

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

Renewable energy and climate change in the region

by Rend Stephan
written by Rend Stephan

BCG

 

Rend Stephan is a partner and managing director of the Boston Consulting Group in Dubai. BCG’s Eduardo Neto, a project leader, and ChristianSchwaerzler, a consultant, contributed to this report

The Middle East is home to one of the world’s largestreserves of fossil fuel, primarily used for what is considered “conventionalenergy.” It also has strong natural advantages in renewable sources of energysuch as solar power. The region may also be well positioned in the climatechange debate through its potential ability to inject carbon gas emissions intooil fields. But the road ahead is not easy — far from it. Both public andprivate sector players need to choose their positioning and investmentstrategies wisely, for the region to play a leading role in this space.

Renewable energy – a global view

The unprecedented interest in alternative energy during thelast decade was driven by two major factors: the increased reliance onfossil-fuel-generated energy with its related political concern over energysecurity, and the drive to curb carbon emissions to combat climate change.Looking ahead, we expect an even more rapid adoption in the next decade thanhas been widely foreseen thus far, especially for solar and to some extent, forwind. But at the same time, we acknowledge that many economic and structuralhurdles stand in the way of a truly smooth growth story.

Over the next decade, few renewable technologies will beable to match traditional energy sources on the cost side, known as “reachinggrid parity.” Photovoltaic (PV) will continue its cost improvement trend, sothat it will reach grid parity in high-priced markets such as California andSpain. New pilot technologies in Concentrated Solar Power (CSP) may also havesome potential. On-shore wind is largely mature and very close to grid parityon the best sites, but growth can be limited by the availability of prime sites(with regular strong winds). Offshore wind is nascent, with high investment andmaintenance costs due to remote locations, and is unlikely to exit thesubsidy-driven phase by 2020.

In addition, the expected improvement in storagetechnologies (such as thermal storage, batteries), and the development of moreflexible grid systems do not seem groundbreaking enough to alleviate theintermittent nature of solar and wind. On the structural side, slow regulatoryframework changes, “subsidy fatigue” and hesitant global climate policies alsopose hindrances to their development. But all in all, the combined share ofsolar and wind energy may reach 20 to 25 percent of the total power generationmix globally in 2020.

A leading role for the Middle East?

Against this backdrop, it is important to explore what rolethe Middle East could play. While wind has some potential here, it is really insolar — where the region has large areas of cheap and available land with highirradiation — that a potential global competitive advantage could be built. Butthree very careful choices have to be made.

The first choice relates to local solar energy productionfor local consumption. Such energy sources will find it more difficult to reachgrid parity, given the direct and cheap availability of fossil fuels in theregion, as well as the existence of substantial power generation subsidies.However, this is an incomplete, simplistic and misleading view, since theopportunity cost of making fossil fuel available for exports needs dramaticallychanges the picture.

Countries in the region with fossil fuel reserves understandthis position and some are starting to investigate and invest in local solarenergy production (plus some nuclear) for local consumption and to preservefossil fuels. This trend has to be articulated, encouraged and sustained.

The second choice relates to solar energy exports. Therecent developments in long distance electricity transmission and the relativeproximity of large solar prime sites to high energy demand areas make solarenergy exports a worthwhile option to investigate. Projects such as theDesertec initiative (North Africa solar energy production for consumptionprimarily in Europe) illustrate this point well. From the “Western”perspective, these projects face many hurdles related to political stabilityand investment risks, as well as governance. Yet they constitute a tremendousopportunity for many of the Middle East countries to position themselves assolar energy exporters, substituting for the inevitable decline in fossil fuelavailability and, hence exports, in the long run.

A well-articulated strategy to position the region in thisspace and to make such solar energy exports a reality has to be defined andinitiated.

The third choice involves local investments in solartechnology or manufacturing — namely, the undertaking of related, value-chaininvestments — has to be generally discouraged, at least initially. Suchinvestments are typically not yet attractive in the broad economic sense, andwould have to compete with research and development (R&D) technology centersin the developed world on the one hand, and production facilities in low-costcountries, on the other.

It is true that while building local solar energyproduction, some related value-chain investments could prove attractive;however, these need to be considered very cautiously and selectively and not asa “grand-scheme” plan. This position may change in the long run if/when theregion can create a sustainable solar energy export market — one that hasenough scale to allow further attractive positioning in the adjacent parts ofthe value chain.

Beyond solar, the Middle East’s strategic pre-occupationwith fossil fuels could promote an emerging alternative energy topic: carboncapture and storage for enhanced oil recovery (CCS–EOR). This complex namerefers to capturing carbon gas emissions from power plants and injecting theminto oil fields. This enhances the recovery of oil reserves while at the sametime reducing carbon emissions and hence climate change impact — a doubleadvantage not to be overlooked. Our research has shown that the proximity ofcarbon emitting plants to suitable and large oil fields in parts of the regioncan make such investments economically viable.

This unique advantage of the region could position it as anincubator of CCS-EOR technology development and use. We estimate the region tobe able to quickly capture more than 20 percent of global market share, plus a‘first-mover’ advantage position.

What next?

The future for alternative energy is closer than commonlyassumed and stakeholders in the Middle East should move sooner rather thanlater. The recommendation is simple: get back to basics, and relentlessly focuson the region’s competitive advantages in this space.

In essence that means: Invest in local solar energy productionfor local consumption where it increases the longevity of current fossil fuelreserves and/or fossil fuel exports, but shy away from making grand-schemeplans to play in technology or manufacturing in the short-to-medium term.Actively position the region for solar energy exports, a critical long-termsubstitute for fossil fuel exports, and align other policy decisionsaccordingly. If done well, and on a large enough scale, this could well openthe option of technology and even manufacturing leadership in themedium-to-long term.

A ‘first mover’ advantage in CCS-EOR should be pursued andefforts should be made to ensure that the potentially conflicting interests ofmultiple players do not distract the region from such a unique leadershipposition.

This strategy is urgent but selective, and needs rapiddetailed articulation of each country’s choices, and a relentless alignment ofleadership, policies, regulations and incentives in energy and other sectorsaccordingly. The private sector and incumbent utilities, as well as nationaloil companies (NOCs), will need to understand and align themselves to thesepriorities while being careful, if not dismissive, about risky ventures thatare not aligned with the overarching strategy.

A lot can be done at a country level in the short-to-mediumterm (such as local solar investments and CCS–EOR), but the maximum potentialfor the region (solar energy exports, leadership in technology andmanufacturing) can only be attained in the medium-to-long term with strong cooperationand alignment between countries .

There is work to do today and tomorrow and no excuse forprocrastination. In the end, it is not a question of if alternative energieswill disrupt our ways of life and doing business, but when, and how can the MiddleEast capture the leadership opportunities available to it.

 

 

0 comments
0 FacebookTwitterPinterestEmail
Society

Smiles from the starting line

by Thomas Schellen
written by Thomas Schellen

Car distributors in the Gulf and Middle East region have seensales bloom in the first quarter of 2011. Whether they are unrestrainedly regalchariots or utterly practical wheels, vehicles made by automotive brandmanufacturers of the Far East, Europe and the United States have enjoyedbroadly improved demand in the Arabian Peninsula and the Levant, as comparedwith the first quarter of 2010.

Rolls Royce, the British luxury brand and proper matrimonialmotorcar maker, reported that regional sales were up 90 percent this springwhen compared with the same quarter in 2010. According to a statement by theRolls Royce dealer for Dubai and the Northern Emirates, AGMC, Dubai was at thefore of Rolls Royce’s regional sales increase with 178 percent first quarter growth.This put Rolls Royce at the top of regional percentage growth among carmanufacturers who provided Executive with first-quarter performance figures forthe Middle East.

A spokesperson for Rolls Royce Middle East told Executivethat the car maker had not only a record first quarter in the Middle East, butalso expects in 2011 to globally outsell the 2,711 motorcars it shipped in2010. That would include another record year in Middle East sales.

Kia, Korea’s easiest-to-pronounce auto brand, said it recordedyear-on-year growth of 19 percent to nearly 45,000 sold vehicles for the MiddleEast region in the first quarter of 2011, including a single-month gain of 29percent March-on-March. In first-quarter statistics for the Gulf CooperationCouncil, the make advanced 6.3 percent year-on-year to 14,444 units.

Kia’s increases notably came from a base of already highunit sales a year ago, as the manufacturer claimed three consecutive years ofgrowth in the Middle East from 2008 to 2010.

Last year, Kia sold 175,369 units in the Middle East for ayear-on-year increase of 48 percent, according to figures provided by thefirm’s head office in Seoul.

United States-based General Motors and Ford also sawimproved demand in the GCC last quarter. In GM’s stable of brands — comprisedof Cadillac, Chevrolet and GMC — just shy of 30,000 vehicles rolled out of theregion’s showrooms, representing 16 percent better unit sales than the yearbefore. 

Without releasing actual sales numbers, Ford Motor Companysaid it achieved a 52 percent increase in GCC sales compared to the same periodlast year. According to Ford Middle East, Saudi Arabia recorded the highestregional growth for the brand, at 75 percent, followed by Kuwait with a 50percent increase. The United Arab Emirates, meanwhile, saw an increase of 32percent.

National trends

‘Full blossom’ was also the assessment for the Germanbrands, which regionally enjoy a strong position among European imports andhave the reputation of doing particularly well in the premium segment. BMW, theBavarian auto smithy whose motto hails driving as enjoyment, sold more than4,600 new BMW and Mini cars in 14 Gulf and Levant markets in the first quarterof 2011, for a 19 percent year-on-year increase, though more than 4,200 ofthese cars were BMWs. Abu Dhabi and Dubai registered year-on-year increases of42 and 38 percent, respectively. 

BMW Middle East confirmed to Executive that the firstquarter of 2011 was the group’s best ever in the region in terms of sales forboth BMW and Mini brand vehicles. This marks a further increase from a 2010performance where group sales of 17,119 vehicles across the region had been thehighest in BMW history. According to BMW, its 2010 sales in the Middle Eastexceeded regional sales of any other European premium manufacturer.

Audi, the German car maker in perennial praise ofengineering, whose hometown is just a 38-minute train ride from BMW’s Munichbase, proved a close competitor in percentage gains, reporting 19 percentgrowth in first quarter unit sales in the Middle East. In the UAE, Audiadvanced 23 percent in the first quarter. The manufacturer’s spokesperson saidgrowth was driven by the marque’s flagship sedan and by its sports utilityvehicles.

The communications head office of Stuttgart-based Mercedestold Executive that first-quarter sales growth in “Arabian markets, includingDubai, Kuwait and Saudi Arabia” amounted to 5.6 percent for total first quartersales of 4,000 Mercedes-Benz vehicles.

UAE distributors of Japanese auto brands, whose marketshares in the Middle East are proportionally higher than Japanese car makers’global market share, continue to appear the least eager to disclose unit saleswhen compared with their Korean, European and American competition. But NissanMiddle East, marking a trend toward transparency, did provide Executive withexact numbers for the first quarter and the company’s fiscal year 2010, whichended March 31. Jebel Ali-based Nissan Middle East Free Zone (NMEF) said thetotal first quarter 2011 sales of Nissan and Infinity vehicles amounted to45,137 units. For the 2010 financial year, the regional total was 166,448units. While both NMEF figures represent drops on a year ago, full-year numberswere down less than one half of 1 percent. First-quarter sales, however, weredown more than 14 percent from 52,938 units in first quarter 2010.

The contraction in unit sales for Nissan vehicles in theMiddle East runs counter to the overall growth trend in sales of cars made bybig name manufacturers. The news is not all bad for NMEF, however, whichinformed Executive that the group’s up-market Infinity brand realized 28.6percent growth in sales during the first quarter of 2011 when compared to thesame period in 2010. 

According to estimates by General Motors, total motorvehicle sales of 1.148 million across the Middle East in 2010 were up 8 percentfrom 2009. Of these, 48 percent were Japanese, 14 percent Korean, 15 percentAmerican and 23 percent European makes, with emerging markets’ automotivebrands — from India, Iran and China — “not on the radar” of local buyers.

Yet, given the lack of confirmed governmental data on exactvehicle numbers for the GCC and for individual member states, all industryfigures include a larger portion of assumptions and estimates than isdesirable. This means for the manufacturers and distributors that market shareassessments are in part guessing games and brand manufacturers have onlythemselves, their own previous performances and their own targets to reliablybenchmark against.

The global picture

In announcing their good performances during recent weeks,the global car makers’ Middle East representatives have broadly attributedtheir sales growth across the region to a mix of economic recovery, notablyincluding easier access to bank loans for prospective buyers, plus increasedefforts by car dealerships, and, more than anything, their new model lineups.

At the same time, the Middle East numbers have to be seen inlonger-term regional and global contexts to provide a fuller picture. While theperiod from January through March 2011 produced absolute unit sales records forseveral manufacturers, the comparison with 2010 is somewhat flattering forothers whose sales results in 2007 or 2008 were substantially higher than 2009and 2010 numbers. When measured against peak sales in 2007 and 2008, firstquarter 2011 numbers are good on an industry level but not as impressive as ayear-on-year comparison with 2010.   

In both the downturn of 2009 and in the upswing now,regional results were moreover co-cyclical with global results announced by bigEast Asian, European and American car manufacturers. Kia, for example, said itsglobal unit sales in first quarter 2011 were 20 percent higher when comparedwith a year ago. Under the same comparison, Germany’s Volkswagen sold 14percent more cars and BMW recorded a global increase of 21 percent.

On the global profits side, big manufacturers have alsodisplayed demonstrative smiles. Daimler AG, maker of Mercedes, posted a firstquarter net interim of $1.75 billion [AED 6.42 billion] — a greater than 90percent improvement on the first quarter of 2010. Ford reported a group-widefirst quarter net gain of $2.55 billion [AED 9.36 billion], its highest in the21st century to date, and even Chrysler spread its feathers in pride at the endof April with a net interim of $116 million [AED 426.08 million].

Chrysler, whose twice-tarnished record in recent yearsentailed a 2007 breakup after a failed marriage with Daimler and then a descentinto Chapter 11 bankruptcy protection in the second quarter of 2009, presentedits first quarterly profit in five years or more.

From Japan, ahead of announcements of 2010 results by Toyotaand Nissan expected in mid-May and covering the 12 months to the end of March2011, analysts published expectations that the leading Japanese car makerscould announce 2010 net profits far above 2009 results.

Profits generated in the Middle East region, which are notdetailed in the interim or full-year financial reports of the manufacturinggroups, will only in the rarest cases translate into very visible improvementsto the overall results profile of the automotive groups.

Caught in traffic

Going forward, the remaining months in 2011 could spell theslowing of automotive business on several fronts globally and, to a lesserextent, regionally.

Balance sheets of Japanese car manufacturers are expected toshow the impact of the Great Tohoku Earthquake and Tsunami, which devastatednortheastern Honshu on March 11, in their results for the first six months oftheir 2011 financial year, which began April 1. According to an average ofanalyst estimates compiled by Bloomberg, Toyota’s six-month losses up toSeptember 30 could reach $4.9 billion [400 billion yen]. While progress reportsfrom the car makers Toyota, Nissan and Honda show gradual restoration ofcapacities to pre-catastrophe levels, production of parts and vehicles in Japanwill still be impacted in various forms throughout much of the remainder of2011.

Statements by Japanese manufacturer Nissan as regards theimpact on the Middle East acknowledged the likelihood of vehicle supplybottlenecks choking the market, but without specific projections. Othermanufacturers said they were observing the markets but by the end of April hadnot been revising sales targets for the region. 

In their estimate of overall sales outlook for the MiddleEast, GM expects 2011 to see industry results of 7 percent growth on 2010.Manufacturers contacted by Executive said that unrest in the region hadtemporarily subdued buying moods in some areas of Saudi Arabia and had a directimpact on showroom visits by prospective buyers in Bahrain and Syria, but thesetwo markets do not contribute large shares to regional volume.

However, as Ford Middle East General Manager Larry Preinsaid, events such as the unrest in North Africa (which is not part of theMiddle East region by the auto industry’s classification) had “an impact oneverybody from a customer confidence point of view. This has a ripple effectthrough the [Arab] countries. We will just have to play it out and manage therisks the best we can.”

On the upside, government measures in the important Saudimarket, such as job creation and the infusion of cash into households, couldhave positive impacts on car sales.

 

 

 

0 comments
0 FacebookTwitterPinterestEmail
Feature

Hail to the shale

by Executive Editors
written by Executive Editors

Lacking oil and gas deposits and eager to scale back its reliance on energy imports, Jordan is taking a chance on one unconventional resource it has in abundance. The kingdom has inked a $1.8 billion concession agreement with Karak International Oil (KIO), which will produce enough oil shale to meet more than half of the country’s fuel needs by 2026. The first of its kind for the Middle East and North Africa, the agreement could provide a model for energy self-sufficiency for countries with oil shale deposits.  

Over the past five years, KIO, a subsidiary of British firm Jordan Energy and Mining Ltd (JEML), has been conducting feasibility studies at the Al Lajjun field, 110 kilometers south of Amman. In March, the company signed a deal with Jordan’s Natural Resources Authority for what will be the country’s largest oil shale extraction project. One of 26 identified deposits, the 35-square-kilometer field represents just a fraction of Jordan’s oil shale reserves — estimated to be the world’s eighth largest at around 34 billion barrels, according to the World Energy Council, while JEML holds that figure to be as high as 70 billion.

In May 2010, Estonia’s Eesti Energia inked a concession agreement to produce 36,000 barrels per day (bpd) at Attarat um Ghudrun, as well as to conduct feasibility studies for a power plant fired by burning oil shale, while Royal Dutch Shell had already signed on to explore shale deposits in 2009. These deals place Jordan at the vanguard of international oil shale exploration, with only three other countries opting to exploit this resource on a commercial scale thus far. Estonia utilises oil shale to meet 90 percent of its power needs, while Brazil and China also produce oil shale.

At the signing of the KIO deal, Khaled Toukan, minister of energy and mineral resources, said the venture would “increase energy from indigenous oil shale resources from 0 percent to 14 percent of the country’s energy requirements by 2020; and thereby reduce our reliance on imported oil and gas products from our neighbors.”

Starting with 15,000 bpd by 2014, the area’s production is slated to reach 30,000 bpd by 2020 and 60,000 bpd by 2026.  Jordan’s oil demand is 110,000 bpd, according to the energy ministry, with the country importing nearly all of its energy needs. In mid-2010, the government announced plans to increase its natural gas purchases from 240 million cubic meters to 330 million cubic meters in 2011. 

Around 80 percent of the kingdom’s gas comes from Egypt. However, political unrest in January caused Egypt to stop gas exports, forcing Jordan to decrease the weight of gas in its energy mix and replace it with more expensive fuel oil. As a result, at $197 milion, Jordan’s oil and electricity import bill for that month was 78.7 percent higher than the same month of the previous year. In March, Egypt announced that it would resume gas exports to Jordan, but at a higher cost. Previously, Egyptian gas had come at a discount of nearly 50 percent off the market price. This, coupled with oil around $100 per barrel, has given further impetus to the kingdom to look to other sources to meet its energy needs.

Until recently, oil shale extraction was prohibitively expensive at up to $95 per barrel. The United States, for example, has the world’s largest oil shale reserves at over 2 trillion barrels, but has declined to begin large-scale production since crude is cheaper to produce. However, new technology has lowered the price of oil shale production to the neighbourhood of $60 to $75 per barrel, with Shell predicting that it can eventually reduce this figure to $25.

In this light, oil shale is looking like an attractive option, and Jordan has sided with that optimism. “The future of Jordan lies in the investment in minerals and oil shale production,” local press reported energy minister Toukan as saying at a parliamentary session in February. Under the deal with KIO, the government will receive 65 percent of net operating profits. If oil prices are $75 per barrel, this means revenues of $2 billion over the next 30 years, according to JEML.  And of course, if oil prices continue to stay high, it will be even clearer that Jordan made the right decision. 

0 comments
0 FacebookTwitterPinterestEmail