Over the border: A growing neighbour presents new opportunities

To many regional investors, Jordan’s neighbour to the north-east – Iraq – has long been a glittering, if elu-sive, prize. With the world’s largest proven oil reserves at 350bn barrels and a population of 33m, Iraq is a major market on Jordan’s doorstep. Yet years of conflict and occupation have made steady nerves a requirement. For many years Iraq has been Jordan’s second-largest export market. The relationship has deep roots; Iraqi oil has long been a staple of Jordan’s energy mix. This trade is receiving a major boost as a new oil pipeline from Basra to Aqaba comes off the drawing board. “There is a huge opportunity for businesses to ben-efit from the growth in Iraq, and we are moving now to anchor Jordan as a major partner in the Iraqi economy. Historic and demographic factors play an important role in making that possible,” Haytham Kamhiyah, the gen-eral manager of Capital Bank, told OBG.

HISTORY OF TRADE: While Iraq and Jordan were orig-inally both Hashemite kingdoms, their ties became strained after Saddam Hussein took over the presiden-cy in Baghdad in 1979. Economic links grew, however, with Aqaba supplying Iraq throughout the Iran-Iraq war. Jordan stood aside during the 1990-91 Gulf War, a deci-sion that had significant economic and political rami-fications for the country. Later on, Jordan became the recipient of Iraqi oil, thanks to a special dispensation from the UN during the years of sanctions. Jordan is both a natural gateway to Iraq for local and global business, and for Iraqi goods destined for world markets. Trade with its troubled neighbour thus devel-oped strongly, as the kingdom provided an outlet for Iraqi businesses affected by years of UN sanctions and Saddam’s domestic policies. Following the coalition invasion in 2003, Jordan continued to provide a safe haven, with many Iraqis moving into the kingdom to escape the violence. Between 750,000 and 1m Iraqis were thought to be living in Jordan by 2007, according to the UN High Commission for Refugees. The economic impact of these movements has been significant. Bank deposits and stock market indices have benefitted from an influx of capital from Iraq. Investors have also targeted real estate, particularly following a 2009 declaration by the Jordanian govern-ment that it would no longer be necessary for Iraqi nationals to acquire security clearance to make a real estate purchase. Indeed, the biggest foreign buyers of local real estate are Iraqis, making up 56% of the non-Jordanian market and spending $354m in 2011, accord-ing to the Department of Land and Surveys.

TRADE: In recent years, trade between the two coun-tries has also begun to pick up again, following a dra-matic fall from 2002-04, when the combined value of imports and exports declined from $1.2bn to $573m. By 2008 this had risen to $880m and by 2012 reached $1.2bn, with imports of $204m and exports of $1bn. By far the most important product shipped from Iraq to Jordan is oil, with the mineral fuels category account-ing for 93% of goods imported in 2011, the last year for which statistics are available. As of early 2013, Jor-dan was importing around 10,000 barrels per day (bpd) of oil from Iraq, but this was expected to rise to 15,000 bpd following the signing of an agreement between Baghdad and Amman in 2012. While Iraq provides this oil at a discount, some of the cost savings are offset by the expense of shipping petroleum via truck.

PIPELINE: However, the price of transport is set to come down, if plans to establish an $18bn pipeline between the southern Iraqi city of Basra and Aqaba are realised. In April 2013 the two governments signed a deal to build a 1700-km link that would carry 850,000 bpd of oil and 258m cu feet of gas each day, accord-ing to Iraqi officials quoted in the local press. Designs and technical studies being conducted by a Canadian firm are expected to be completed by the end of 2013.

For Jordan, the deal potentially brings many bene-fits, starting with job creation during the construction stage. Once completed, the pipeline will generate some $3bn in revenues for the Jordanian government, accord-ing to statements by Khalaf Al Khalaf, the governor of Basra, at an investment conference in February 2013. The link will also help ensure reliable access to oil at discounted prices, which could alleviate Jordan’s ener-gy crisis. Following a disruption of gas supplies from Egypt in 2012, the cost of power generation has jumped and the government has at times had to ration electricity. With Jordan dependent on imports for 95% of its ener-gy needs, a secure source like the new oil pipeline could alleviate many problems. For the Iraqis, the route to Aqa-ba meets a number of strategic imperatives – by avoid-ing the Gulf, transport and insurance risks are reduced, and loading on the Red Sea shortens the route to Europe and beyond. According to Al Khalaf, Jordan rep-resents the “best option” for exporting Basra’s produc-tion, which currently stands at 2.3m bpd and accounts for 70% of Iraq’s total output. Moreover, Baghdad has plans to boost production, with that number expect-ed to reach 8m bpd by 2018 and 10m by 2023, mak-ing it one of the world’s largest oil exporters.

BUYER POWER: Having a petroleum giant next door could certainly help Jordan, which is well-positioned to provide goods and services to its neighbour. “Iraq exports 3.4m barrels of oil per day (bpd). Some expect that number to reach 8m bpd by 2018, and around 10m bpd by 2023, making it one of the biggest oil export-ing countries in the world,” Kamhiyah told OBG. Jordan’s primary exports to Iraq include metal and metal products (such as iron, steel and aluminium), prepared foodstuffs, vegetable products, machinery, electrical equipment, chemical products and plastics. Combined, these goods accounted for 85% of the king-dom’s exports to Iraq in 2011. Metal and metal prod-ucts, the single largest category at 18%, encompasses manufactured goods such as those used in construc-tion, including pipes and wires. The construction sec-tor represents an opportunity as Iraq works to rebuild, creating demand for housing and infrastructure. Jor-danian contractors face challenges in serving the Iraqi market, such as an uncertain security environment and competition from better-funded firms, but they have some advantages as well, such as geographic proxim-ity, deep cultural ties and strong diplomatic relations.

ON THE UP: Another sector set to benefit from a wealth-ier Iraq is transport, with shipping firms carrying Jor-danian-made goods as well as re-exported products that arrive via Aqaba. As Iraq’s port of Umm Qasr often expe-riences delays due to high levels of traffic, Aqaba attracts a large volume of Iraq-bound cargo (see Transport chapter). In 2012 re-exports to Iraq totalled $213m, greater than the value of imports Jordan received from the same country. Further recovery in Iraq will likely drive even more demand for Jordanian goods and services. “Iraq’s government is earning $250m a day from oil and there’s only very basic infrastructure there,” Tarek Yaghmour, vice-president and head of research at Cap-ital Investments, told OBG. “A decade from now, Iraq will likely be a much richer country.” That would give Jordan borders with the world’s two largest oil-produc-ing countries. The opportunities could be impressive.