Last month Turkish Prime Minister Recep Tayyip Erdogan announced economic stimulus measures designed to put the nation back to work and the economy on the path to recovery. Tax cuts, exemption from social security payments, relocation expenses and subsidies for intern on-the-job training were part of what Erdogan described as turning a “crisis into an opportunity.” On paper, the plan looks sound.

For investment purposes the country has been carved into four zones, from the least developed east to the most developed north-west. As an incentive for new investors to  set up shop in eastern Turkey, start-up businesses will see corporate tax rates cut from 20 percent to 2 percent, social security contributions exempted for seven years, and a subsidy of 5 percentage points on the interest rate for Turkish lira loans for business start-ups, to a maximum of TL500,000 ($325,000). Smaller versions of the same formula will apply to the other three regions.

Sweetening the pie

The textile industry, a chunk of which has been exported to Egypt, is among several areas singled out for special treatment. Any company owner willing to transfer their operations, lock, stock and barrel from either of the two richer zones to either of the two poorer zones will have the corporate tax rate slashed from 20 percent to 5 percent, all relocation expenses paid and be exempted from social security payments for five years.

There are, inevitably, some conditions. The move has to be made before the end of next year and the company has to employ at least 50 people. The name of Erdogan’s game here is to spread the productive economy more evenly around the country. With the state subsidies and lower salaries paid in eastern Turkey, overhead operating costs would be cheaper for those who take the plunge. What they also face in parts of the region is a transport infrastructure in need of a vast overhaul and a local labor pool drawn from the least educated slice of the Turkish population. In any case, no one has explained how creating jobs in one area by making people redundant in another can be counted as a net gain.

Indeed, the unemployment rate has reached a worrisome 15 percent. For that reason, the prime minister included in his announcement an employment package that will pay 200,000 people $9.70 a day to join on-the-job training program, while providing jobs for another 120,000 others in school and health center maintenance, tree planting, erosion control and caring for parks.

“The government is determined to turn around the economy whatever the costs,” Erdogan said.

Perhaps mindful of continuing talks with the International Monetary Fund on a new standby agreement and differences between the two sides on tax and spending policies, he added that none of the measures would involve the “slightest concession to fiscal discipline.”

The IMF appears unconvinced. Later in June, director of the IMF’s European Department, Marek Belka, said Turkey may need to cut its spending levels to achieve financial sustainability. Speaking in Washington, Belka was quoted by the Reuters news agency, saying, “No matter if there is an IMF program or no program, the Turks themselves have to make the necessary adjustments, fiscal cuts if necessary or longer-term reforms both on the expenditure and tax side, so that we can both agree that the fiscal situation is under control in the longer term.” The last agreement expired in May 2008.

Hope makes for happy markets

Belka’s remarks came the day after IMF First Deputy Managing Director John Lipsky held talks with Turkish authorities in Ankara. The agenda was ostensibly preparations for the annual meetings of the World Bank and IMF governors to be held in Turkey in October. Although there were no substantive talks on a new loan agreement, both the Istanbul Stock Exchange and the currency improved simply on the possibility of a deal.

The current talk in Ankara — that an agreement could be signed by August — is reminiscent of the political gossip put out every month since last October. This alternates with suggestions that the Turkish economy is sound enough to survive without an IMF loan anyway. Certainly, the Turkish government appears in no mood to don an IMF straitjacket and abandon its current policies.

Peter Grimsditch is Executive’s correspondent in Istanbul

Jordan is to construct a $1 billion pipeline to transport drinking water from the Disi valley in southern Jordan to thirsty Amman in the north. Most experts welcome the project, yet wonder what will happen to agriculture in Disi, which has depleted its aquifer by almost one third. And, even if agriculture is halted, will there be enough water to make the costly pipeline worthwhile?

First initiated in the late 1990s, the Disi Water Conveyance Project (DWCP) aims to supply Amman with 110 million cubic meters (MCM) of water annually. The project was long regarded as too costly, yet the Jordanian government in 2007 contracted Turkish construction firm GAMA to implement it. Construction will commence in early July 2009 and is due to be completed by 2013.

“The project costs close to $1 billion,” said DWCP manager Othman al-Kurdi at the Ministry of Water and Irrigation in Amman. “It includes drilling some 55 additional wells in the Disi area and the construction of a 325 kilometer long pipeline to Amman, as well as two pumping stations and water reservoirs near Amman.”

The project is funded by low interest loans from Europe and the United States, and some $300 million from the Jordan treasury. Upon completion of the DWCP infrastructure, GAMA is entitled to exploit the system by collecting water tax revenues for some 21 years, after which the government will take over.

“I can say with a high level of confidence that Disi will supply us with 110 MCM of water annually for some 50 years,” said Al-Kurdi. “If all circumstances work in our favor, it may even supply us with water for an additional 10 to 15 years.”

Asked what will happen to the use of Disi water for agriculture, he replied sharply: “No politics. I told you before: no politics. All I can say is that our priority is drinking water.”

Disi’s aquifer

On the main road through Disi, the significance of water in the desert valley becomes clear.  While land on one side of the road is blessed with melons, grapes, olive trees and cypresses, the other side is a barren sandy plain that seems to have fallen straight off the moon.

The striking difference between the two sides of the road is due to irrigation. In the 1960s, a fresh water aquifer with a depth of up to 1,000 meters was found in Disi. The  mixed layer of sand and water measures some 360 square kilometers and stretches well into Saudi Arabia. Since the 1980s, both Jordan and its bigger neighbor have increasingly used the water for agriculture.

“I’ve been growing olives, grapes and potatoes for about 30 years,” said Abu Mohamed, a wrinkled 50-something-year-old with hands the size of spades. “Our products are first sent to Amman and then to markets in Jordan and abroad, mainly Europe and Iraq.”

Not all agriculture is in the hands of local Bedouins. All along the road, signs indicate the presence of the “Rum Agricultural Company.” According to Abu Mohamed, Rum and other firms are owned by people from Amman and Aqaba. “They mainly grow fruits like apples and apricots further inside the valley,” he said.

Deeper inside the valley one also finds the hilltop palace owned by the ruler of Dubai, Sheikh Mohamed bin Rashid al Maktoum, and his wife Princess Haya of Jordan. To liven up the view from the palace, Maktoum created an artificial lake in the valley below, which every winter attracts flocks of migratory birds. The Dubai billionaire has left his mark on Disi in more than one way, as he revived the ancient tradition of camel racing. Every Friday, animals, jockeys and spectators gather on a dirt track outside Disi village.

Next to the race track, surrounded by a layer of red mud, one of the valley’s 55 wells is under repair.

“There is a lot of sand in the water, which harms the pumping installation,” one worker explained, adding that he had heard about the upcoming pipeline to Amman. “We’ve seen the pipes along the road, but so far we have not been told anything.”

In 1946, every Jordanian had access to some 3,600 cubic meters of drinking water per year. Today that amount has dropped to 160

More people with less to drink

Water is a scarce commodity in Jordan and, consequently, a highly political one. Not only is Jordan one of the world’s poorest countries in terms of water resources, it also has one of the world’s highest population growth rates. What’s more, throughout its history, the kingdom has had to absorb wave after wave of refugees. While in 1946 every Jordanian had access to some 3,600 cubic meters of water per year, today the water per capita ratio has decreased to a meager 160 cubic meters per year.

Due to the presence of illegal wells, exact figures are hard to come by. It is estimated however, that current demand is some 1,350 MCM per year, while annual water supply amounts to but 1,000 MCM per year. An estimated half of Jordan’s supply stems from groundwater extraction, which takes place at twice the rate of what is regarded as ecologically sustainable. At least 65 percent of Jordan’s water goes to agriculture, while the remainder is used for drinking water, industry and tourism.

“Disi water is good quality water from a non-renewable source and therefore should be used as wisely as possible,” said Elias Salameh, professor of hydrogeology and hydrochemistry at the University of Jordan, who has long been a vocal critic of agricultural practices in Disi and welcomes the pipeline to Amman.

“The wisest way is to first use it as drinking water and then collect and treat the wastewater to reuse it for agriculture and industry. Of every 100 MCM some 80 MCM can be used again.”

A quarter century drained away

According to Salameh, the past 25 years have been extremely wasteful. The Disi aquifer contains an estimated 7 billion cubic meters (BCM), up to a third of which has so far been used for agriculture. The problem with growing crops in Disi, where summer temperatures may soar well above 40 degrees, is that the evaporation rate in southern Jordan is twice as high as in north Jordan. In addition, most agricultural products are exported, which means Jordan is virtually exporting water. 

Currently, some 80 MCM of Disi water a year is used for agriculture, while some 16 MCM is used as drinking water in the rapidly growing city of Aqaba. The government has pledged to get rid of agriculture in Disi, yet that may be easier said than done. Certainly the local Bedouins will not want to give up their new-found agricultural wealth, for Disi does not exactly offer a wide range of alternative sources of income.

According to Salameh however, most agricultural production in Disi is in the hands of four agricultural firms owned by a group of very influential Jordanians, among them one of the richest businessmen in the kingdom and a former prime minister.

“Their agricultural licenses have a validity of 25 years and are set to expire in 2010 or 2011,” Salameh said. “Let’s see if the government will keep its promise.”

If it can keep its promise, Salameh said, the Disi project will help to temporarily fill the gap between water demand and supply, and relieve the immense pressure on Jordan’s northern aquifers, which all suffer from over-extraction. However, seeing that Jordan’s current population of some 6 million is set to double by 2025, the Disi pipeline is no long-term solution.

According to Salameh, there is only one long-term solution for Jordan: the Red Dead Canal. “A desalination plant combined with a canal from the Red to the Dead Sea is the only way to save the Dead Sea, and provide Jordan with drinking water.”

Mainly due to the overexploitation of the Jordan River by both Israel and Jordan, the Dead Sea evaporates quicker than it is replenished. As a consequence, the Dead Sea’s water line is receding by an average of one meter per year.

Although Salameh welcomes the construction of the pipeline, given that agriculture in the desert is halted, he still wonders if Jordan’s water and money could not have been spent in an even wiser way.

“I am no urban planner, but sometimes I ask myself: instead of bringing water to the people, why not bring the people to the water?” he said. “With the money spent on the pipeline, we could build a city and industrial zone near Disi and Aqaba, which would relieve the immense urban pressure on Amman.”

With Jordan’s population of 6 million set to double by 2025, the Disi pipeline is no long term solution

It is a quirk of history that the Middle East was better interconnected 50 years ago than it is now. Train tracks laid down during the Ottoman era made that possible, with direct lines running from Istanbul to Medina in the South, and to Baghdad in the East.

Syria is now re-starting these train lines as part of a bid to become the transport hub of the region, connecting the Mediterranean with the Arabian Gulf and the Red Sea.

On May 30, following decades of inaction, a cargo train carrying 800 tons of steel left the Syrian port of Tartous on a 36-hour trip to Baghdad, running 894 kilometers through Syria and a further 429 km in Iraq. This route has now been supplemented by passenger train services to Mosul, and cargo transited from the Syrian ports of Lattakia and Tartous to the Iraqi Gulf port of Umm Qasr, via Iraq’s rail network.

“Syria has been talking more with the Turks, the Iranians and the Iraqis to develop this network,” said Nabil Sukkar, managing director of the Syrian Consulting Bureau for Development and Investment. “Syria is trying to see itself as a hub for the region, so it is working now towards developing a road and railway network, plus there is gas passing through Syria and up to Europe,” he added.

With bilateral trade surging between Syria and Iraq — estimated at $800 million annually — and more than 1 million Iraqi refugees living in Syria, the link is expected to bolster ties between the two neighbors.

Syrian Minister of Economy and Trade, Amer Hosni Lutfi, recently said on a trip to Baghdad that he hopes that bilateral trade will triple in coming years to make Iraq as important a trading partner as China or Turkey. Each countries’ trade with Syria amounts to $2 billion annually.

The railway has a competitive cost advantage over road transportation for the same route. According to the Syrian Railway Organization (SRO), transport costs for one ton of freight from Tartous to Baghdad are $37, compared to $69-$83 by road.

The SRO has been gradually upgrading Syria’s aging fleet of Eastern European-made trains, while signing cross-border agreements with neighboring countries for passenger trains and cargo. Cargo links to Turkey, and on to Eastern Europe, have increased, with the SRO saying some five million tons of goods are to be transported annually on the route from Aleppo to the Turkish city of Gaziantep.

In 2002, the Tehran-Damascus line was restarted, and twice weekly service primarily transports Iranian and Syrian tourists (the trip takes about 50 hours). Trade between Iran and Syria was estimated at $340 million and joint economic activities at $1.5 billion in 2008, according to the Iranian Chamber of Commerce.

Regional railways

“There is more and more talk among Arab countries that trains are the best way to link countries together,” said the Syrian Consulting Bureau’s Sukkar. “This came up at the Kuwait Economic Summit in January, with one recommendation to develop the road and railroad network among Arab countries; the lack of this has been a main deterrent to an effective, unified Arab economic scheme.”

Iraq is planning billions of dollars in upgrades and to expand its domestic rail network from 1,995 km to as much as 4,988 km.

Iran is also planning to double the size of its 8,300 km rail network, making the country a transit route for cargo heading to Pakistan and Central Asian countries.

Jordan plans to launch a $6.4 billion rail network, with a 564 km line from the Red Sea port of Aqaba to the Syrian border, where it would then connect to the Syrian network and transit on to Turkey and Europe. An East-West railway is also planned, slated to run 482 kilometers from the northwestern Jordanian city of Irbid to the Iraqi border, with a potential additional line to the Saudi Arabian border.

Saudi Arabia meanwhile is investing billions of dollars to expand its network, including the $6 billion high-speed line between Mecca and Medina via Jeddah.

Egypt and Syria need gas to meet burgeoning domestic consumption and to increase their hard currency reserves. Jordan and Lebanon need it to fuel their electricity plants.

Europe also needs more gas, and from new sources. Reliance on Russia for 40 percent of Europe’s natural gas left thousands in the cold early this year when Moscow stopped the flow of gas westwards, after a spat with Ukraine over gas prices.

Both regions are now hedging on two pipeline projects that center around the Eastern Mediterranean, what is being dubbed the “Southern Corridor,” to meet demand.

The lynch pin of this “new Silk Road” is Turkey, the conduit for gas to flow through pipelines from Central Asia and the Middle East to Europe. The $10.6 billion Nabucco pipeline is the centerpiece, drawing gas from the Caspian region — Azerbaijan, Turkmenistan and Kazakhstan — as well as Georgia and Iraq. From the point where it plugs into Turkey’s pipeline network, the Nabucco pipeline will run 3,300 kilometers to a distribution hub in Baumgarten, Austria, potentially delivering up to 31 billion cubic meters (BCM) of natural gas a year to Europe.

Tying into the Nabucco project is the Euro-Arab Mashreq gas pipeline (EAM). Once completed, the 1,200 km pipeline will transport Egyptian gas through Jordan and Syria to Turkey. Lebanon will also tap into the network, having signed an agreement with Egypt for 600 million cubic meters (MCM) per year, while Iraq will be pivotal in keeping supplies of gas flowing into the network whenever a pipeline comes online.

That, at least, is the plan. Currently, the EAM pipeline is just beyond Homs in western Syria, awaiting a new tender to complete the final leg to Turkey, while Nabucco’s future remains uncertain. As always with such grandiose plans that span borders, jurisdictions and the interests of multiple energy players, the pipelines’ futures are hinged on political relations, finances and, crucially, gas supplies.

“Neither the Mashreq pipeline or the Nabucco pipeline are in a position to be realized, and neither has received enough financial backing,” said Graham Coop, general counsel at the Energy Charter Secretariat in Brussels.

The path of the Euro-Arab Mashreq gas pipeline

Pipe dreams

Plans to develop the Southern Corridor began in 2002, after talks between Austrian energy company OMV, Turkey’s BOTAS, Hungary’s MOL and Romania’s TRANSGAZ. After the initial meeting, board members spent a night at the opera listening to Verdi’s Nabucco.

While the opera provided the name for the project, the signatories must be hoping that the pipeline won’t reflect the opera’s tragic plot, which recounts the plight and subsequent expulsion of the Jews under King Nebuchadnezzar. Yet the Nabucco project has faced numerous obstacles from the onset, with costs doubling and countries using the proposed pipeline for political leverage.

Last year, Georgia’s ill-advised move into Ossetia brought on the wrath of Russia. But with Georgia to be linked into Nabucco, the conflict provoked concerns over regional security risks and further shook the already fragile financial confidence in the project. The United States also threw a wrench in the works when it pressured the European Union to focus on Central Asia as a gas supplier for Nabucco rather than Iran due to the US-Iran standoff over Tehran’s nuclear aspirations.

Then this January, the country where half the pipeline is located, Turkey, said it may withdraw from the project if the country’s EU accession remains blocked. Coming at the same time as the Kiev-Moscow spat and the EU desperate to wean itself off Russian gas, Prime Minister Recep Erdogan’s comments did not go down well in Brussels.

Such incidents did, however, spark renewed interest in the project after a year of deadlock, and by the end of January the European Investment Bank and the European Bank for Reconstruction and Development said they were prepared to bankroll the pipeline. By May, Turkey caved in, dropping its demands for a “transit tax” and 15 percent of the gas at discount prices at a summit in Prague. The final agreement between the EU, six gas companies and Turkey is expected to be signed in early July.

But while the agreement is expected to finally see pipes being laid, question marks still hang over the project. Gas rich Turkmenistan — which exports 68 BCM of gas per year — attended the Prague summit but declined to comment, seemingly to play the Russians against the Europeans. Meanwhile, Azerbaijan has stated that it does not have enough gas to be the sole provider for Nabucco, while Russia has offered to buy all Azeri gas at market prices — an offer apparently still on the table.

Iran wants to build a ‘Persian pipeline’ to connect to Nabucco, but the EU has not figured Iran into its plans. Even if Tehran did get the green light from the EU, Iran lacks the infrastructure to export gas, last year importing 6.1 BCM from Turkmenistan.

Further adding to Nabucco being a literal ‘pipe dream’ is Moscow’s attempts to dominate all supply routes to the west by pressuring Central Asian states to side with the Kremlin. Additionally, there is a joint project between Russia’s Gazprom and Italy’s Eni, inked in 2007, to develop a rival pipeline to Nabucco. Called South Stream, gas would be piped from Russia via Bulgaria to Italy and Austria.

Adding insult to injury, Gazprom in May urged the EU to embrace South Stream and warned that if Europe does not want Russian gas, Gazprom will turn to the energy hungry Asian markets instead. Bulgaria however has backed both pipelines, saying the projects are necessary to meet European demand. And while the Europeans  seem wary of Russia, some analysts think such concerns are unjustified, with imports of Russian gas having halved from the 80 percent they were in 1980s.

Syria’s estimated gas supply and demand

The success of the E.A.M pipeline hinges on Egypt being able to ramp up gas output to meet demand

Is there enough gas?

It is not just Europe that is keen to see Nabucco get underway. The finalization of the Nabucco pipeline would have added value for the Levant. With Nabucco in place, gas from the Euro Arab Mashreq pipeline could feed into the Nabucco network, and vice versa. “The link up would have added value for both projects,” said Coop.

The EAM is not dependent on Nabucco to start pumping into Turkey, as once the final stage is complete, the pipeline will connect to the current Turkish grid. But down the line as demand spikes and the supply gap widens, the Levant will need more gas.

“Nabucco is not a must have, at least initially,” said Richard Kupisz, team leader of the Euro-Arab Mashreq Gas Co-operation Centre (EAMGCC) in Damascus.

For Syria and Jordan, being linked to Nabucco would have added value sooner rather than later.

The importance of the extra gas flowing into Turkey, and from there south, is that Egypt may be unable to provide adequate supplies of gas to the Levant through the EAM pipeline.

“There is enough gas [for Egypt] to meet current commitments, but for the major projects, these need to be underpinned by further discoveries,” said Craig McMahon, a North Africa analyst at energy consultants Wood Mackenzie.

Nabucco could also be a lifeline for Syria if there are potential spats with Amman or Cairo, either of which could easily stop the flow of gas. After all, Jordan and Syria have had their falling outs, at one point leaving the completion of a tiny 200 meters section of the pipeline in limbo until an unrelated political issue was resolved.

Furthermore, Jordan’s demand is spiking, and there is the very real possibility that by the time the EAM pipeline reaches Syria there will be insufficient supplies to meet the country’s needs. At present, Egypt exports 2.5 million cubic meters per day (MCM/D) through the EAM, with 2 million MCM/D to Jordan and 0.5 MCM/D to Syria.

“Officially this should be increased to 6 MCM/D and afterwards to 9 MCM/D, but nobody knows [if this will happen],” said Kupisz.

While Syria produces 21 to 22 MCM/D of gas, some 4 to 5 MCM/D is used for gas injection into fields or as burn off, leaving around 16 MCM/D for electricity generation and industrial use. At present this is sufficient, but with power plants to come online in the next few years and electricity demand growing by 10 percent per year, Syria will need to offset the supply gap (see chart). Syria could therefore easily consume more than it receives from Egypt.

“Syria can consume 3 MCM/D, but Egypt is not exporting more,” said Ziad Ayoub Arbahe, an energy consultant in Damascus.

For Turkey and Europe to access gas from EAM, the Egyptian gas Syria uses would have to be topped up with Syrian gas.

“For the pipeline to be viable, Syria would need to export 3 MCM/D to Turkey,” added Arbahe.

The success of the EAM hinges on Egypt being able to ramp up gas output to meet rising domestic demand, other export commitments, and provide to the EAM. It is currently a matter of what Cairo considers more of a priority: using energy as a political tool within the Levant, or exporting liquefied natural gas (LNG) to Europe according to seasonal demand and for higher prices.

“For Egypt the pipeline is one option, but could equally expand LNG infrastructure, so there are a number of competing actors,” said McMahon.

Cost preferential agreements have been signed between Egypt and Jordan, Syria and Israel. But with Cairo keen to access hard currency, such markets might not be always economically preferential. Adding to this is the geological complexity and depth of Egypt’s gas fields, which seriously raise extraction costs.

“If Egypt has the potential to sell gas through LNG and at international gas prices, why not do it?” said McMahon.

Jordan’s gas network structure

Untapped supplies

While the success of the EAM is in doubt, certain developments could secure gas volumes, namely ramped up production from Egypt’s gas fields, and if the countries involved become full members of the Energy Charter Secretariat. The Energy Charter administers the treaty ratified by all 27 EU states, Russia, Central Asian states and Turkey. The charter treaty promotes four main areas: trade on World Trade Organization principles, freedom of transit, energy efficiency and investment protection. If countries violate the treaty, sanctions can be imposed. Asked what it would mean if current observers Jordan and Egypt signed up as full members of the Euro-Arab Mashreq pipline, Coop said: “it would certainly add security to the project and for the EU.”

While some analysts question Egypt’s ability to extract enough gas, McMahon is upbeat.

“There is every reason to be optimistic, although we need further exploration success and to see those wells drilled,” he said. “But it is hard to imagine increases from Egypt in the shorter term.”

All may not be lost, however, if Egypt is neither legally required to pump gas via the pipeline nor able to meet demand. Syria could come to the rescue, with an estimated 40 percent of the country not drilled or prospected for gas.

“Potentially we could find huge reserves,” said Arbahe.

The only other options are to transport gas from Qatar and Iraq, or Iran via the Nabucco network.

“If a pipeline comes from Iraq or Qatar, there would be a principle pipeline, and a viable network,” said Arbahe. “But for Iran to join the network, [they] would need to solve political problems and technical issues first.”

Iraq is considered the most viable option, with the Akss field in the west of the country only 50 kilometers from the Syrian network.

“They have spare capacity, and the Akss region is not a big market, so it is logical to go to Syria,” said Kupisz. “A contract has been done for 1.5 MCM/D to be processed in Syria and exported or used here, but it is under a new licensing round in Iraq.”

Longer term, the pipeline could also connect central Iraq to the Euro-Arab Mashreq pipeline, potentially able to provide 30 MCM/D over time.

“International oil companies are looking at it, and attracting great interest, although Iraq’s infrastructure is not developed,” said Naeem Danhash, project director of the EAMG CC. “But the medium to long term prospects for Syria to become a gas hub are excellent.”

Whether Syria and Turkey will attain the coveted positions of regional gas hubs is still up in the air, given the questionable viability of either the Euro-Arab Mashreq pipeline or Nabucco.

McMahon, however, has his own thoughts: “The Iraqi supply could ultimately be the answer.”

“The medium to long term prospects for Syria to become a gas hub are excellent”